UNITED
STATES


SECURITIESANDEXCHANGECOMMISSION


WASHINGTON,
DC 20549





FORM10-K





(Mark
one)





xANNUALREPORTPURSUANTTO SECTION13 OR 15(d)OFTHESECURITIESEXCHANGEACTOF


1934





For the
fiscal year ended September 30, 2008





 ̈TRANSITIONREPORTPURSUANTTO SECTI ON13 OR15(d)OFTHESECURITIESEXCHANGEACT


OF 1934





For the
transition period from ______________ to _____________





Commission File Number:0-10999





COMPOSITETECHNOLOGYCORPORATION





(Exact
name of registrant as specified in its charter)




Nevada
            59-2025386(State
      or other jurisdiction
            (I.R.S.
      Employerof
      incorporation or organization)
            Identification
      No.)





2026
McGaw Avenue, Irvine, California 92614





(Address
of principal executive offices) (Zip Code)





(949)
428-8500





(Registrant's
telephone number, including area code)





Securities
registered under Section 12 (b) of the Act: None





Securities
registered under Section 12(g) of the Act: Common Stock:


$0.001
par value





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





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes  ̈ No x




Indicate
by check mark whether the registrant has (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes x No
 ̈





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





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check
One):





Large
accelerated filer   ̈ Accelerated filer  x Non-accelerated filer   ̈




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





The
aggregate market value of the registrant's common stock held by non-affiliates
of the registrant on March 31, 2008, the last business day of the registrant's
most recently completed second fiscal quarter was $187,992,314 (based on the
closing sales price of the registrant's common stock on that date). Shares of
the registrant's common stock held by each officer and director and each person
who owns more than 5% or more of the outstanding common stock of the registrant
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.





Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes x No  ̈





As of
November 30, 2008 there were 287,988,370 shares of Common Stock issued and
outstanding.













COMPOSITETECHNOLOGYCORPORATION





TABLE OF
CONTENTS





Part
      IItem
      1
                        Business
                        1Item
      1A
                        Risk
      Factors
                        21Item
      1B
                        Unresolved
      Staff Comments
                        33Item
      2
                        Properties
                        33Item
      3
                        Legal
      Proceedings
                        33Item
      4
                        Submission
      of Matters to a Vote of Security Holders
                        36Part
      IIItem
      5
                        Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                        36Item
      6
                        Selected
      Financial Data
                        37Item
      7
                        Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
                        37Item
      7A
                        Quantitative
      and Qualitative Disclosures About Market Risk
                        55Item
      8
                        Financial
      Statements and Supplementary Data
                        55Item
      9
                        Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
                        100Item
      9A
                        Controls
      and Procedures
                        100Item
      9B
                        Other
      Information
                        103Part
      IIIItem
      10
                        Directors
      and Executive Officers of the Registrant
                        104Item
      11
                        Executive
      Compensation
                        104Item
      12
                        Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                        104Item
      13
                        Certain
      Relationships and Related Transactions, and Director
      Independence
                        104Item
      14
                        Principal
      Accounting Fees and Services
                        104Part
      IVItem
      15
                        Index
      to Exhibits, Financial Statement Schedules
                        104Signatures
                        105Index
      to Exhibits
                        106





CAUTIONREGARDINGFORWARD-LOOKINGINFORMATION





In
addition to historical information, this Annual Report on Form 10-K contains
forward-looking statements that involve risks and uncertainties that could cause
our actual results to differ materially. Factors that might cause or contribute
to such differences include, but are not limited to, risks related to the
following: uncertain cash flows, the need to collect accounts receivable, our
need for additional capital, demand for our products, decrease in energy demand
and corresponding decrease in energy prices, costs related to restructuring our
corporate structure, competition, our need to protect and maintain intellectual
property, litigation, raw material costs and unavailability, changing government
regulations, the loss of significant customers or suppliers, the limited market
for our common stock, the volatility of our stock price, negative perceptions
from our Title 11 filing, and other factors referenced in this and previous
filings. When used in this report, the words "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates" and similar expressions are
generally intended to identify forward-looking statements. You should not place
undue reliance on these forward-looking statements, which reflect our opinions
only as of the date of this Annual Report. We undertake no obligation to
publicly release any revisions to the forward-looking statements after the date
of this document. You should carefully review the risk factors described in this
report and other documents we will file from time to time with the Securities
and Exchange Commission, including our Quarterly Reports on Form 10-Q to be
filed by us in our 2008 fiscal year, which runs from October 1, 2007 to
September 30, 2008.





As used
in this Form 10-K, unless the context requires otherwise, "we", "us," the
"Company" or "CTC" means Composite Technology Corporation and its
subsidiaries.










PARTI





Item
1-BUSINESS





I.
Overview





Composite
Technology Corporation (“CTC” or the “Company”) develops, produces, and markets
innovative energy efficient products and renewable energy products for the
electrical utility industry.  CTC’s products incorporate advanced composite
materials and innovative design solutions that result in energy efficient
conductors for electrical transmission systems and advanced wind turbines which
offer a simple grid synchronization and a more reliable renewable energy
solution.  The Company’s products benefit from proprietary and patented
technologies which create products that we believe have substantial economic
benefits over similar, more traditional products.  The Company was
incorporated in Florida on February 26, 1980 as El Dorado Gold &
Exploration, Inc. and reincorporated in Nevada on June 27, 2001 and renamed
Composite Technology Corporation.  In July, 2006, the Company acquired
its wind turbine business through the acquisition of EU Energy plc, a U.K.
corporation, subsequently renamed DeWind.  Our fiscal year begins on
October 1 and ends the following year on September 30. We maintain our principal
corporate offices at 2026 McGaw Avenue, Irvine, California 92614.  Our
telephone number at that address is (949) 428-8500.  We maintain a website
at www.compositetechcorp.com. 
On our website, we also publish information relating to CTC’s corporate
governance and responsibility.  The content on any web site referred to in
this filing is not incorporated by reference into this filing unless expressly
noted otherwise.




It has
been widely recognized by both the media and governmental agencies that
there is a global need to increase the supply of clean renewable energy sources
as well as improving the efficiency of the electrical grid system.  The
demand for energy from developing nations coupled with the increased usage of
energy per capita in developed countries has resulted in fully loaded electrical
transmission grids that have higher losses and lower reliability.  Coupling
that with volatile energy costs due to increasingly scarce fossil fuels and the
demand to reduce greenhouse gas emissions, there is unprecedented demand for
more renewable energy with better economics, and a more efficient transmission
grid to deliver the power.  Historically low electrical transmission grid
investment has created grid constraints that result in well-publicized
electricity shortages such as “brownouts” or “rolling blackouts.”  Such
shortages can cause significant and measurable impacts to an affected region’s
economy.  The combination of volatile energy costs have led to increased
investments in renewable energy and efficiency efforts by corporations driven in
part by global, national, and local governmental pressure through treaties, tax
incentives, governmental subsidies and renewable energy portfolio
standards.




Statement
of Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information (SFAS 131), establishes standards for
reporting information regarding operating segments in annual financial
statements and requires selected information of those segments to be presented
in interim financial statements.  Operating segments are identified as
components of an enterprise for which separate discrete financial information is
available for evaluation by the chief operating decision-maker in making
decisions on how to allocate resources and assess performance and should be
consistent with the management structure.  Under the criteria of SFAS
131, the Company has two operating and reporting segments based on product
lines:  (1) The cable segment operated as CTC Cable and (2) the wind
turbine segment operated as DeWind. Our primary products consist of ACCCTM
conductor (Aluminum Conductor Composite Core) sold under the CTC Cable segment
(“Cable”) and the DeWind brand wind powered electricity-generating turbines sold
under the DeWind segment (“Wind”).





The CTC
Cable segment sells ACCCTM
(Aluminum Conductor Composite Core) conductor, an advanced composite core
overhead electrical transmission conductor, as well as manufactures and sells
ACCCTM core,
the composite core component of the ACCCTM
conductor, along with hardware connector accessories.  We sell ACCCTM
conductor and core directly and through distribution agreements both
internationally and in North America.  We also sell ACCCTM
conductor hardware and assist with engineering design services.  ACCCTM
conductor has been available for commercial sale since June, 2005.  We have
marketed ACCCTM
conductor as the most energy efficient, highest performance and overall cost
efficient alternative to traditional ACSR (Aluminum Conductor Steel Reinforced),
newer variant ACSS (Aluminum Conductor Support Steel), new technology ACCR
(Aluminum Conductor Composite Reinforced), AAAC (All Aluminum Alloy Conductor),
and AAC (All Aluminum Conductor).  Our
revenue from our CTC cable products for the 2008, 2007 and 2006 fiscal years
were $32.7 million, $16.0 million and $3.0 million
respectively.





1





The
DeWind segment sells wind turbines that produce electricity and intends to
develop wind farms incorporating these turbines.  The DeWind segment
represents the successor operations of the EU Energy, Ltd., acquisition
completed in July 2006.  DeWind sells wind turbines in the US, Europe, and
South America directly to utilities and wind farm developers as a turnkey wind
turbine unit, currently in 1.25 megawatt and 2.0 megawatt models.  DeWind
has sold wind turbines commercially since 1996 and has over 580 wind turbines
installed worldwide, principally in Germany and Austria.   We are now
selling new models of DeWind turbines as a better and more reliable wind turbine
using an innovative drive train/generator combination as compared to other wind
turbines.  Our
revenue from DeWind products for the 2008, 2007 and 2006 fiscal years were $40.1
million, $16.9 million and $3.3 million respectively





We
believe that the combination of CTC Cable and DeWind can provide substantial
synergies and benefits to each business unit.  One of the key issues to
building wind farms in the U.S. and elsewhere is the capacity of the electrical
transmission grid and the connection to the grid.  We believe that sales of
our wind turbines to wind farm developers will result in additional ACCCTM sales
through demand for more efficient electrical transmission to the grid and
necessary increased grid capacity investment.  For the wind turbines, we
are in the process of incorporating  our composite materials design
experience into new blade designs and making improvements to the drive train
that we believe should further improve their performance, which we believe
will result in a lower cost of energy for wind farm developers and
operators.





II.Our Solutions
and Competitive Advantages:





Our
strengths are derived from our ability to identify and address problems inherent
in existing electrical utilities which the industry considers normal operating
constraints.  We then develop and market products that are designed to
be innovative and economically superior solutions to the underlying problems and
to provide a superior return on investments in transmission and generation
assets.  We protect our competitive advantages through a worldwide
intellectual property strategy on our products.





CTC
Cable:





Worldwide,
electrical transmission grids are becoming increasingly constrained due to the
greater demand for electricity.  Traditional transmission grid
improvement options are limited and expensive.  Traditional electrical
transmission bare overhead conductors have been in existence for over 100 years
with the industry standard known as ACSR, which consists of a steel wire core
stranded with aluminum wire.  The aluminum wire functions to conduct
electricity while the steel functions as the strength component required for the
tension between the support structures. Increasing grid capacity expansion is
typically expensive due to the necessity of increasing the size of the towers
required to handle the increased weight of larger sized ACSR and the additional
height required to overcome sag created by thermal overloads as well as the
increased weight of the conductor.




Cutaway
diagram of our ACCCTM
conductor compared with a traditional ACSR Conductor:







2




Solution:  Increase
the amount of conductive aluminum and reduce sag by using a carbon fiber
technology core.


For
ACCCTM
conductor, we have replaced the heavy steel wire strength component with a
lightweight composite carbon fiber core. This allows us to strand more
conductive aluminum around the ACCCTM core,
as compared to ACSR, resulting in a conductor that is the same diameter and
weight of an ACSR conductor.   Depending on the specific
conductor size, ACCCTM has
approximately 28% more conductive aluminum than ACSR equivalent diameter. The
additional aluminum provides for a more efficient conductor which allows our
conductor to transmit the same electricity with approximately 33% less line
losses than traditional ACSR.  Replacing an existing transmission
corridor with ACCC conductor provides greater efficiency, through lower power
losses from reduced resistance, as well as the ability to transmit considerably
more power at peak load requirements without the need for expensive and lengthy
tower upgrades.  Building new corridors with ACCC conductor results in
lower overall capital costs due to fewer or lower cost towers, less construction
time, fewer tower modifications, and retrofit upgrade capabilities versus new
line corridor necessity. Additionally, there is greater energy efficiency which
should result in savings from reduced line losses throughout the life of the
power line.





The
intellectual property used in our ACCCTM
conductor has been developed internally and is aggressively protected through
our intellectual property strategy, which has achieved several issued patents
and filings in over 70 countries.




Additional
information on the product value propositions is provided in greater detail in
the respective business sections below.





DeWind:





Traditional
wind turbines use  generators operating at variable speeds which all
require power conversion electronics to convert the variable frequency to the
fixed frequency required by the electrical grid   These
conventional systems typically create harmonics that require additional
electronic filtration in addition to consuming reactive power from the grid when
they startup.  Grid instability is a result of too much demand for
reactive power, which causes many wind farm operators to acquire dynamic
volt-ampere reactive control or “DVAR” units which provide the necessary voltage
mix required by electrical grid codes for electricity grid stability for power
generated by conventional wind turbines.  The International Energy
Association estimates that the cost to provide reactive power and power
conditioning for traditional wind turbines can be as high as $12 per megawatt
generated.





Solution:  Eliminate
DVAR units and power conversion electronics. Our DeWind D8.2 model
eliminates the need for power conversion electronics and DVAR units by using a
synchronous generator that operates at synchronous speed. To eliminate the
rotational speed variability, we have inserted a key turbine drive train
innovation, the WinDrive® hydro-dynamic torque converter, manufactured by Voith
Turbo, which provides constant rotational speed of the shaft to the
generator.  This allows the D8.2 to use a fixed speed synchronous
generator with high voltage output that connects directly to the
grid.  Therefore, we have eliminated the need for the power conversion
electronics and other power conditioning equipment, many of which are covered by
patents owned by other turbine companies, which are expensive and problematic to
maintain. The DeWind D8.2 produces power with the same electrical signature as
nearly all other non-wind power generation units including gas turbine, nuclear
steam powered generators, hydropower, and fossil fuel generated power.





We
protect our competitive advantage through exclusive rights to the Voith
WinDrive® for use in specific wind related applications and through our DeWind
innovations and co-development with Voith for the wind turbine drive-train
system.





Beginning
in fiscal 2009, we expect to begin the development of wind farms using DeWind
D8.2 turbines on the first phase of a wind farm that is projected to have 620
megawatts over several locations in the Panhandle area of Texas.  We
believe that such developments will enhance DeWind’s value by taking advantage
of our turbine availability.





Additional
information on our product value propositions is provided in greater detail in
the respective business sections below.





III.Our
Strategy:





Our
strategy is to penetrate the electrical transmission and generation markets with
products that are more energy efficient, that provide solutions to long-standing
problems endemic in our transmission and generation systems, and that provide
distinct economic advantages. We incorporate our composite materials knowledge
into our wind and conductor products to improve existing energy products and
solutions.  We focus on development of products that, once adopted,
will have substantial technical, efficiency, and economic advantages over
existing energy products.  Our approach:




3




·
            We
      carefully choose the businesses we are in, focusing primarily on the
      electrical utility industry and identifying opportunities that we feel are
      underserved or which have a large, underserved market opportunity where we
      believe that our products, properly introduced, will have a strategic and
      durable advantage to produce long-term profitable
  growth.





·
            We
      strive to develop and modify technologies, to protect our developed
      technologies, and to introduce these new technologies into markets
      with mature technologies that represent significant potential improvements
      and opportunities.





·
            We
      use operational disciplines and process methodologies, tools, and
      resources to execute more effectively to provide our customers with
      reliable and quality products.





·
            We
      seek relationships with industry leaders when necessary to achieve our
      strategic goals and emphasize initial sales to industry leaders so that we
      can best leverage our sales and marketing
  efforts.




IV.MarketsandIndustry
Background




Our two
business segments place the company into two somewhat distinct energy markets,
but each help make CTC an energy technology company that is environmentally
consciouswith significant commercial opportunities worldwide.   As
described in greater detail below, CTC Cable products use a technological
solution to provide a highly energy efficient transmission conductor that saves
on energy losses while allowing for potentially significant reductions in
greenhouse gas emissions by electric utilities as a result of lower fossil fuel
electricity generation.  The DeWind products capitalize on the current
energy markets push towards clean and renewable electricity generation through
the sale of our technologically efficient wind turbines, reducing the need for
fossil fuel generation and decreasing the resulting greenhouse gas emissions
with clean energy.





Cable
Segment:





CTC Cable ConductorProducts:





Our
ACCCTM
conductor product was developed in response to the California energy crisis
during the early to mid 2000's and the new found public awareness that the
crisis was not due to a shortage of power generation, which was the conventional
wisdom at the time, but rather due, in part, to constraints in certain
transmission corridors.  The Company founders determined that a more
efficient and effective solution would be to replace the heavy steel wire core
used in traditional “bare overhead” conductors with a light weight composite
core. Our ACCCTM
conductor product is a high performance transmission conductor designed to
increase electrical transmission capacity and energy efficiency as compared to
same diameter and weight competing transmission conductor products.





Traditional
bare overhead conductor is “Aluminum Conductor Steel Reinforced”, known as
ACSR.  Under electrical power load the steel strength component in
ACSR heats and, due to metallic thermal expansion, the steel stretches which
results in the ACSR sagging closer to the ground, called “sag” in the electrical
transmission industry.  Grid and safety regulations require minimum
ground clearances for conductors. Consequently, traditional conductor projects
use expensive heavy duty tower structures spaced close enough together in order
to hang ACSR at such heights so as to allow for high enough operational power
loads.





4





For our
ACCCTM
conductor, we have replaced the heavy steel wire strength component with a
lightweight composite carbon fiber core. This allows us to strand more
conductive aluminum around the ACCCTM core,
as compared to ACSR, resulting in a conductor that is the same diameter and
weight of an ACSR conductor.   Depending on the model there is
approximately 28% more conductive aluminum than ACSR. The additional aluminum
provides for a more efficient conductor which allows our conductor to transmit
the same electricity with approximately 33% less line losses than traditional
ACSR. Replacing an existing transmission corridor with ACCCTM
conductor provides greater efficiency, through lower power losses from reduced
resistance, as well as the ability to transmit considerably more power at peak
load requirements without the need for expensive and lengthy tower
upgrades.  Building new corridors with ACCCTM
conductor results in lower overall capital costs due to fewer or lower cost
towers, less construction time, fewer tower modifications, and retrofit upgrade
capabilities versus new line corridor necessity. Additionally there is greater
energy efficiency which should result in savings from reduced line losses
throughout the life of the power line.





The
ACCCTM core
consists of aerospace grade carbon fiber and industrial glass fibers, infused
with a proprietary resin mixture, and pulled through a heated die in a
proprietary pultrusion process.  The ACCCTMcore is
then shipped to an outsourced licensed contract manufacturer where it is
stranded with trapezoidal aluminum wire around the core.  We sell ACCCTMconductor either as a
completed conductor ready for installation on the grid or as ACCCTMcore to licensed aluminum
stranding manufacturers, which then strand the ACCCTMcore and sell the
finished ACCCTMconductor to their
customers.As part of our product offering, we also design and
manufacture the hardware required to connect ACCCTM
conductor to the tower structures and for splicing lines together.  We
deliberately designed ACCCTMhardware to be installed in a manner consistent with
ACSR.  While ACCCTM
conductor does require attention to certain differences in handling than ACSR,
ACCCTM
conductor installations do not require special tools and are installed in the
same amount of time on the same transmission tower structures.




ConductorMarket:





The
market for transmission infrastructure is massive.  According to the
2008 World Energy Outlook published by the International Energy Agency (IEA),
the worldwide demand for electricity is expected to grow at an annual rate of
3.2% between 2006 and 2015 decreasing to a 2% growth rate from 2016 to 2030 with
most of the growth occurring outside the 30 “developed” countries comprising the
OECD, consisting of North America, Western Europe, Australia, South Korea, and
Japan.  Demand within the OECD is expected to increase an average 1.1%
while the developing world economies are expected to grow by 3.8% per
year.  Transmission infrastructure required to support this growth is
projected to be $2.1 trillion between 2007 and 2030 of which $1.4 trillion is in
developing countries and $700 billion in the OECD.  Distribution
infrastructure required over the same time frame is expected to total $2.7
trillion.  The expected annual average spending for transmission and
distribution infrastructure combined averages over $300 billion per year between
2007 and 2015, approximately one-third of which is transmission.  The
largest growth market is China, which alone is expected to spend nearly $68
billion per year on transmission and distribution projects on average for the
next eight years according to the IEA.  A recent announcement by the
Chinese Central Government accelerated the planned electrical transmission
infrastructure spending to a level of $161 billion in 2009 and
2010.





According
to the Department of Energy’s 2008 Annual Energy Outlook reference case, the
U.S. electricity demand is expected to grow 29% between 2007 and
2030.  The 2002 DOE National Transmission Grid Study identifies
157,800 miles of transmission line and cites that “the U.S. Electricity
Transmission system is under stress and identified key transmission
bottlenecks.” According to the Edison Electric Institute bulletin entitled,
"Meeting U.S. Transmission Needs" (July 2005), investment in transmission has
averaged $3.6 billion per year over the last 10 years, and in 2003 through 2004,
increased to $5 billion per year.




5




Our
ACCCTM
products serve the transmission and the reputable distribution
markets.  Our analysis, based on market figures provided by the
International Energy Associations’ 2008 World Energy Outlook indicates a
worldwide market for transmission and reputable distribution conductors of $45
billion per year.  We see China as the largest market with over 30% of
the spending, followed by the US at 11% and Europe at 10%. With the exception of
the United States, a regulatory body such as a state grid or a state utility
controls most individual country or regional markets
worldwide.  Technical approvals of the regulatory body are required
prior to obtaining the right to sell product within the
region.  Examples of this would be the state grids of China, Poland,
or Mexico.  In the United States, most independent utilities have
their own technical requirements, resulting in a much more fragmented market in
the United States.





Within
each market, bare overhead conductor is sold in one of three general
ways:





“Green
field” – the term for new construction of a new transmission corridor or the
addition of another circuit pathway to an existing corridor. ACCCTM
conductor is a solution for green field construction in most cases where the
reduction in the number of towers required is cost effective versus the
additional cost of ACCCTM
conductor.





“Retrofit”
– where a transmission conductor is at, or approaching
capacity.  Additional transmission capacity can be obtained by
installing a larger sized ACSR or ACSS conductor, which usually requires a tower
structure upgrade construction, or a conductor with greater aluminum content
such as ACCCTM
conductor which can usually be installed on the same tower system and providing
greater efficiency; or in certain instances by installing a same size conductor
that has higher temperature, low sag characteristics such as ACCCTM, ACSS,
or GAP, if peak demand is all that is needed.  Larger sized
conductors, by weight, would require transmission tower upgrades and
retrofits.





“Replacement”
– occurs when an ACSR conductor has aged and requires replacement of the same
sized ACSR conductor.  Due to the higher price per linear meter vs.
ACSR, ACCCTM
conductor typically is not a solution for replacement installations unless some
of the aging towers would otherwise require tower weight load de-rating and
ACCCTM would
provide a cost effective solution to expensive tower repairs.





We are
focusing our efforts on green field and retrofit applications.





Competition:





The
competition for ACCCTM
conductor depends somewhat on the application of the conductor.  In
general, we believe that ACSR is our primary competition.  Thus far in
this document, we have focused our description of our products and product
advantages by comparing ACCCTMconductor to ACSR conductor since it is the industry standard and
represents our greatest opportunity for market
penetration.   ACSR is made using 100-year-old technology without
patent protection and is sold by weight as a commodity product by a multitude of
conductor manufacturers including General Cable, Southwire, and Alcan in the
U.S., all of whom we are looking to as U.S. licensees for ACCCTMcore
stranding.





During
our analysis, we also compared ACCCTMconductor with other conductor product innovations.  We compete
with the following products either on a high temperature, low sag (HTLS) basis
or on an efficiency of transmission basis:





·
            ACSS
      or Aluminum Conductor Support Steel is an annealed aluminum conductor
      using a similar design as ACSR but which uses a higher strength steel
      alloy as its core.  ACSS can operate at a higher temperature
      than ACSR and has similar weight to ACSR. ACCCTM
      conductor is superior to ACSS both on the basis of reduced high
      temperature sag, as well as the efficiency of
      transmission.  ACSS is less expensive than ACCCTM
      conductor on a price per linear
meter.





·
            GAP
      conductor is a modified version of ACSR using higher strength, heat
      resistant steel, a proprietary “grease material” barrier between the steel
      core and the heat resistant aluminum alloy that serves as the primary
      conductor.  GAP is marketed as HTLS and provides no efficiency
      gain.





·
            ACCR
      or Aluminum Conductor Composite Reinforced is a composite conductor
      composed of aluminum-zirconium alloy stranded wire around a metal-ceramic
      matrix composite wire core and is manufactured by 3M
      Corporation.   We do not consider ACCR in its current state
      to be a competitive product with ACCCTM
      conductor since it is prone to brittle fracture and is difficult to handle
      and install.  It does not have the amount of reduced sag that
      our conductor has and has less performance per price point. ACCR has been
      on the market for a number of years, marketed by 3M with more resources
      than we have had, yet appears to have a more limited commercial
      installation base to date as compared to the installation base of
      ACCCTM
      conductor.




6




·
            AAAC
      or All Aluminum Alloy Conductors and AAC or All Aluminum Conductors are
      designed to eliminate the strength component and make the entire conductor
      from aluminum using alloying elements for AAAC to render the aluminum
      stronger and increase its operating temperature.  Both
      conductors are very soft and prone to high levels of thermal sag which
      requires shorter spans between towers, resulting in a more expensive total
      system installation cost.  Both conductors have very limited
      maximum operating temperature ranges, which limits capacity significantly.
      AAAC and AAC conductors have gained commercial adoption in Europe,
      however, our ACCCTM
      conductor of the same diameter has approximately the same conductivity and
      allows a much higher capacity and can be easily retrofitted on such
      systems.





·
            Superconductors
      and underground cables.  We do not consider superconductors or
      underground cables to be competitive products to ACCCTM
      conductor.  Buried cables cost over ten times the total
      installation costs and are typically not used for transmission lines due
      to high voltage insulation, maintenance and cooling
      issues.  Superconductors are even more prohibitively expensive
      to install, in the multiple millions of dollars per mile and consequently
      have had very limited government sponsored short trial installations,
      primarily in extremely congested city
  areas.





We
believe ACCCTM
conductor has two disadvantages compared to the competition. First, our
ACCCTMconductor is a relatively new product that incorporates technology that,
while well proven in aerospace and other applications, has limited installations
in the utility markets and has only been in commercial applications for three
years.  At present, over 5,500 kilometers of ACCCTM
conductor have been installed worldwide, primarily in China. However, the ACSR
product we anticipate replacing has been in existence for 100 years, is familiar
to utility management and utility engineers and is proven to work in real world
conditions. Our product does not have this legacy in the utility markets.
Second, our product is more expensive than the ACSR conductor for the same sized
conductor when analyzed by the foot or meter as a commodity. While we believe
that installation of our product results in capital cost savings of the overall
project since tower construction or upgrading costs should more than offset the
higher cost per foot of conductor, we sometimes have difficulty in convincing
traditional utility buyers, who are not accustomed to analyzing costs of a total
system.  While we also believe that there are additional yearly cost
savings from the increased efficiency of electrical transmission due to lower
line losses, it is often difficult for the typical decision maker to incorporate
that in his analysis, since that falls in a different department and is
considered a normal line loss cost that is usually built into the rate
base.





ACCCTMConductor Marketing
Message:





Our
ACCCTM
conductor marketing message describes the problems of the constrained existing
transmission grid as well as the efficiency improvements of ACCCTM
conductor over ACSR and other conductors.





The
constraints in transmission are manifested through several identifiable economic
impacts.  In total, the estimated economic cost to the U.S. economy caused
by increased transmission constraints above the initially designed loss levels
is between $10 billion and $11 billion per year, not including economic losses
due to transmission related blackouts or brownouts.  We see the following
“macro level” costs of transmission constraints in the US
market.  Similar costs exist in other international
markets:




Line losses increase as the
grid nears maximum capacity which has increased significantly over the past
twenty years.  Line losses are caused by resistance of a transmission
conductor resulting in power loss through heat radiation.  Under power load
and above a certain operating temperature range a conductor becomes much less
efficient due to line resistance resulting in power losses.  For a
typical U.S. grid, line losses currently average approximately 8 to 10%, up from
the approximately 4-5% expected when the transmission corridor was originally
designed, of the total power generation meaning that for every 100 MW of power
generated, 90-92 MW of power is delivered to consumers.  Line losses in the
U.S. are paid for by consumers through higher rates and at an 8-10% rate
represent between $25 and $30 billion in annual economic losses.  The
increase from the 4% baseline losses to the current day 9% losses represents an
increased efficiency loss of approximately $15 billion – or 5% of the
approximately $325 billion generated value of the approximately 3.6 billion KWh
generated in the U.S. in 2007 at an average price of 8.9 cents/KWh according to
the US Department of Energy’s June, 2008 energy report.  If we further
quantify the additional greenhouse gas emissions required to be emitted through
fossil fuel generation, calculated at the national average, the additional CO2
generated to cover U.S. line losses is 22.7 million metric tons of which 12.6
million metric tons is due to the increased line constraints.   The
market value of 12.6 million metric tons on the European spot markets is
approximately $315 million of greenhouse gas values.




7




Congestion costs result when
constrained transmission lines require a consumer to buy more expensive or more
environmentally damaging power because the power cannot be obtained from a
cheaper, more renewable source.  This can also be manifested by
generation curtailment requirements, resulting in the requirement to purchase
more expensive power or requiring producers of renewable energy to reduce their
output due to grid constraints.    The 2002 National grid survey
cites conservative estimates of congestion costs of $447 million which represent
increased electricity costs paid by consumers in excess of what market prices
would be, assuming no constraints due to transmission line
bottlenecks.   More recently we are seeing congestion costs
through curtailment of wind power in Texas due to transmission line constraints
and which the State of Texas is addressing through a massive $5 billion
transmission upgrade proposal.





Rolling blackouts and
brownouts result when transmission lines at peak capacity load heat up to the
point where they require them to be shut down or risk either failure of the line
or if they get too close to objects below their minimum ground clearance levels
due to excessive line sag.  Sag occurs when electrical resistance heats the
conductor and the metals expand due to their thermal expansion.  If the
conductor runs hot enough, the conductor will sag below minimum ground
clearances dictated by safety standards and the transmission line will be
required to be shut down.   Traditional ACSR conductor is much more
prone to sag due to the metallic expansion properties of its steel strength
core.  By comparison, ACCCTM
conductor does not suffer from thermal metallic expansion due to its composite
core and is therefore able to operate at higher peak
capacity.   This also allows ACCCTM
conductor to be installed on fewer towers than ACSR to meet the same ground
clearances.





To
address the ACSR sag issue, operators have spent considerable sums on current
line monitoring systems to better measure reserve capacity and to monitor
operating temperatures, thereby squeezing the most capacity out of the existing
infrastructure. Despite improved monitoring and increasing linkage of the grid
systems so that they can use every available route to deliver power up to the
limits of operational capabilities, there are still physical constraints that
can only be fixed by adding new lines or increasing the capacity of existing
lines.  A real example of the manifestation of such a capacity issue
in the U.S., are the seasonal rolling blackouts in Southern
California.  Rolling blackouts and brownouts cost worldwide economies
billions of dollars per year in lost productivity.




Market
Approach:





Our
ACCCTM
conductor targets an industry that is mature in most industrialized countries
such as those in North America and Europe but developing in various other
countries around the world, such as China and those in South America. Each
market is characterized by long purchasing lead times due to the necessity of
planning large infrastructure projects often many years in advance. In addition
most organizations operating in accordance with strict budgeting requirements
make it imperative that planned purchases are put into a budget at least a year
in advance. We have made several important commercial sales in the United
States, Europe and China.   Our U.S. sales are made both as
finished ACCCTM
conductor directly to the customer and as ACCCTM core
sales directly to our stranding licensee who in turn sells ACCCTM
conductor to the end user customer. In 2007, we sold ACCCTMconductor internationally as a product ready to be installed, however, in
2008 we had more ACCCTM core
sales to licensed conductor stranders..





We supply
a product that is sold, often indirectly, to transmission or distribution
customers. Electricity transmission and distribution is a service considered
both critical and vital to a nation’s economy and is often highly regulated by
one or more governmental or private agencies.  Developed countries’
transmission grids were designed and built decades ago based on much lower
demand loads than exist today.  The age of these grids and the lower
design specifications are now resulting in significant inefficiencies in
developed countries’ grids.  The transmission grid constraints can
only be solved through grid expansion requiring either an increase in capacity
through new transmission corridors or enhancements to existing corridors with
“upgrading retrofit” projects.  For developed countries such as the
US, most transmission projects are expected to be retrofit projects due to the
difficulty in obtaining permits and environmental approvals for green field new
corridor construction.  Elsewhere in the world, for developing
countries the transmission consists of both green field builds and upgrading
retrofits.




8




The cost
of new transmission corridors vary widely, depending on land acquisition costs
and permitting costs but is typically between $500,000 and $1.5 million per
transmission corridor mile or more and often takes years to obtain the necessary
permits and environmental studies prior to breaking ground on a
project.  By comparison, it is considerably less expensive and takes a
much shorter amount of time to replace or “reconductor” existing transmission
corridors.  The cost and time to market for a reconductoring of a
transmission corridor is dependent on the number of tower replacements or
retrofits to existing towers but can range between $90,000 to $800,000 or more
per transmission corridor mile.  Potential ACCCTM
conductor revenue per corridor mile ranges between $30,000 and $150,000 per
3-conductor cable circuit replaced.





We have
reviewed the top markets worldwide and during 2008 we focused on expanding our
market penetration worldwide.  We have penetrated the three top
worldwide markets in the US, China, and several of the European countries and
have commercial sales in those regions. In China, we have a multi-year
distribution agreement that is projected to be worth in excess of $25 million
for 2009. In the U.S. market, we have spent the past five years working through
and completing the technical sales requirements necessary to allow our conductor
to be considered for larger scale installations.  In addition, we now
have nearly three years of problem-free commercial installations and five years
of trial installations.  In Europe, we have made sales to Poland,
Spain, and Belgium with additional proposals and quotes outstanding in Portugal,
France, Germany, the Scandinavian countries, and the UK.  We are also
beginning to penetrate the Latin and South American markets with orders from
Mexico and Chile with quotes and tenders in Brazil and Argentina. We are
currently qualified to sell and market conductor into the US and China, parts of
Europe, as well as India, Indonesia, Mexico, Canada, Chile, Saudi Arabia,
Bahrain, and the UAE.  We are technically certified to sell ACCCTM
conductor in approximately 60% of the estimated worldwide transmission
markets.





Our
approach to market penetration in any given market is to initially present
ACCCTM
conductor for regulatory trials in advance of obtaining trial sales of several
kilometers of product.   Concurrent with this technical review,
we identify and attempt to build relationships with conductor stranding
contractors and distributors.  These relationships are crucial
elements to our go to market strategy since it provides a local
presence.  The local presence helps to facilitate sales and reduce
tariffs, in addition to providing a local source for the finished stranded
ACCCTMproducts.  In most cases, the value of the low-tech stranding
of aluminum around the ACCCTM core
allows for the product to be stamped as made locally as
well.  Finally, by co-locating stranding locally, it results in
reduced costs and improved profits.  Our goal is to eventually have a
worldwide network of ACCCTM
conductor manufacturers/distributors and sell these entities ACCCTM
core.





ACCCTMConductor Value
Proposition:





The
ACCCTM
conductor value proposition is that our composite core technology allows for a
greater quantity of more conductive aluminum to be installed on existing or new
transmission towers than the current industry standard transmission
conductor.  Since the transmission towers are rated by strength, a
lighter and stronger conductor is superior.  More conductive aluminum
means that for all voltages and power delivery, less electricity is lost due to
heat resistance, which allows for greater delivery throughput.  Lower
losses through improved transmission means that utilities can operate their
generating plants more efficiently, delivering more power per kilowatt
produced.  More efficient generation means that utilities can optimize
the use of less expensive power, optimize renewable hydro, wind, or solar power,
and reduce the need to purchase expensive “peak” power on the open market during
high demand periods. We believe our backlog of firm orders for 2009 is $12.0
million.





Two
projects have provided us with examples that illustrate the benefits of
ACCCTMconductor:




The first
example is an installation from 2006 for an ACCCTM
conductor installed next to the same sized ACSR conductor.  The
increased aluminum content of the ACCCTM
conductor resulted in a 35% reduction in line losses over the six month measured
time period.  The utility would not disclose the monetary impact of
this reduction, citing confidentiality.




9




The
second example involves the demonstration of the reduced cost to
install.  For a retrofit project in Mexico, for a 55 KM circuit, the
cost to improve the circuit using ACSR would have required an investment of
$12.3 million including tower retrofit costs of $10.1 million.  By
comparison, the retrofit of ACCCTM
conductor requires minimal tower retrofit costs for a $3.1 million investment
resulting in a $9.2 million capital cost savings – or approximately $165,000 per
circuit kilometer.  The ACCCTM
conductor had the added benefit of being able to transmit 65% more electricity
at peak capacity than the original ACSR conductor and 20% more peak electricity
than the upgraded ACSR conductor as well as a similar 30-40% reduction in system
losses.





We
believe that our ACCCTM
conductor represents a significant technological advantage to the existing
transmission grid infrastructure, which will result in significant economic and
environmental savings throughout the world
economies.





Sales and
Marketing:





We sell
our conductor in the U.S. and internationally through a direct sales force with
operations in Irvine, California, through regional sales representative
organizations and through distribution agreements with our conductor
stranders.    Our international strategy is to obtain
product certification from the local regulatory bodies and entering into
strategic manufacturing and distribution agreements in those geographies with
well-known transmission conductor suppliers and manufacturers around the
world.  We expect to make initial sales into those geographies as
finished ACCCTM
conductor sales and then to transition those sales to selling ACCCTM core to
our stranding and distribution relationships.  We believe this
strategy has several advantages to the product acceptance of ACCCTMconductor within these geographies:




10




·
            By
      allowing ACCCTM
      conductor to be stranded within a local market, the total value content of
      the ACCCTM
      conductor will allow the product to be sold as a local product, rather
      than as a product imported from the
U.S.





·
            Sales
      of primarily ACCCTM
      core will result in a higher per unit product margin but a lower per unit
      revenue level.





·
            By
      eliminating the necessity of stranding of ACCCTM
      core with aluminum, the sales order to cash cycle will decrease, and the
      working capital required to purchase aluminum will be eliminated resulting
      in a more efficient and accelerated cash
flow.





·
            ACCCTM
      conductor sales will be made using the existing relationships within those
      markets, resulting in a more effective and lower cost
  sale.





As of
September 30, 2008, we had agreements with four manufacturers: General Cable in
La Malbaie, Canada; Lamifil, NV in Belgium; Midal Cable in Bahrain; and Far East
Composite Cable Co. in Jiangsu, China.  Our initial agreement was with
General Cable Industries, Inc., the principal U.S. operating subsidiary of
General Cable Corporation signed in October 2004. The strategy behind the
distribution agreement was to launch the ACCCTM
conductor product without incurring substantial marketing and sales expense and
to provide us with a well-respected selling partner.  This agreement
terminated as of December 31, 2007, however we maintain a transaction-based
relationship with General Cable while we complete discussions for a more formal
and long-term non-exclusive relationship with General Cable.  In
November 2008 we signed agreements with PT KMI
Wire and Cable Tbk and PT GT
Kabel Indonesia Tbk to qualify as stranding and distribution sources for
the Indonesian market. We are currently negotiating for additional or local
stranding contractors to serve the South American, Australian, Asian, and North
American markets.





In
January, 2007 we announced a three year manufacturing and distribution agreement
with Far East Composite Cable Co., a subsidiary of Jiangsu New Far East Cable
Company, where they agreed to the purchase of a minimum of 600 kilometers of
ACCCTMconductor per quarter for year one with increases to 900 kilometers and
1,200 kilometers per quarter in years two and three.  The signing of
this contract was a significant milestone for the CTC Cable segment in that the
contract allows for more efficient planning and operation of our ACCCTM core
manufacturing facilities and allows for longer production lead time commitments
for our conductor stranding suppliers in addition to providing us with a more
reliable revenue stream and cash flows. The contract also called for Far East
Composite Cable Co. to become certified to strand ACCCTMcore at
their plant in China. Jiangsu passed the required certifications in September
2007 and we began selling them ACCCTM core
for stranding in China for local
distribution.





Our
agreements with Lamifil and Midal have been primarily stranding manufacturing
agreements resulting in these companies stranding ACCCTM core
with aluminum on a contract basis for shipments to our
customers.   We recently expanded the relationship with Lamifil
to include the distribution of ACCCTMconductor as well.  We are also in discussion with other
potential stranding and distribution parties in geographies we see as having
significant market potential including South America, Asia, and Eastern
Europe.





Conductors
are currently considered and sold to the industry as commodity items with little
or no distinction between the products offered from one manufacturer to the
next. To communicate the value proposition of the ACCCTM
conductor solution effectively, we must speak to and educate various
participants in the decision making process regarding the ACCCTMconductor's ability to solve line problems including the technical staff.
In this respect, CTC Cable focuses its sales and marketing message on selling
solutions instead of simply one component of a solution. This approach is
necessary for promoting a dramatically improved product into a mature
environment. To help illustrate and quantify this solution-based message, CTC
Cable has created sales and engineering tools.  Principally, the tool
known as Conductor Comparison Calculator, performs electrical throughput,
structural calculations and financial cost benefit analysis on ACCCTM
conductors. This analysis of ACCCTM
conductors, when viewed in terms of “cost per delivered kilowatt” presents a
compelling value proposition under most operating conditions.




11




To
overcome the risk averse, conservative barriers to the adoption of a new
conductor by the market, we provide through a third-party insurance company a
three-year Original Equipment Manufacturer Warranty (parts and labor) on all
ACCCTM
conductor products currently produced by CTC Cable, General Cable, Far East
Composite Cable Co. and Lamifil sold worldwide. The warranty covers the repair
or replacement of the ACCCTM
conductor and connectors, plus a limited labor expense reimbursement. We also
provide through the same third-party insurance company the option to extend the
warranty period to five, seven or ten years. The program covers ACCCTM
conductor for the following: (1) sag and creep; (2) wind generated Aeolian
vibration; (3) composite core failure; (4) breakage; (5) corrosion rust; and (6)
unwinding. We believe that the program makes our
products more attractive because it reduces
much of the risk and uncertainty of adopting the new product.




Customers


Our customers purchase
stranded ACCC conductors and ACCC hardware and consist of electric utilities,
our stranding manufacturers and our distributors. During the 2008 fiscal year,
33.2% of our consolidated revenue was derived from Jiang-su Far East, our cable
manufacturer located in China.




We
produce the composite core component of the ACCCTMconductor through CTC Cable Corporation in Irvine, for sale to conductor
manufacturers that strand and distribute the finished conductor in their
particular markets. The manufacture of the core uses a proprietary continuous
process, which allows numerous glass and carbon filaments to be pre-tensioned,
impregnated with high performance resin systems, and then rapidly cured as the
product emerges through a heated die. The proprietary resin formulations we use
are highly resistant to temperature, impact, tensile and bending stresses, as
well as to the harsh environmental conditions encountered in the field.
Primarily for quality control reasons, core manufacture is carried out at our
facilities in Irvine, California. The production facilities in Irvine were
certified under ISO 9001:2000 in November, 2006, and re-certified in November
2007 and November 2008 per the annual audit. We have formulated plans to
increase capacity ahead of commercial orders to manufacture our product to meet
delivery times and these plans include new core production facilities at some
point of time in the future but no earlier than 2009 as presently envisioned. We
currently have 18 pultruder machines in production, capable of producing
approximately 18,000 km of ACCCTM core
per year representing potential revenues of between $100 million and $250
million, depending on the size of the ACCCTM
conductor and whether the final product is ACCCTM core or
stranded higher value ACCCTM
conductor. We currently have sufficient capacity with our existing machinery to
handle our anticipated production needs for the next year but we are preparing
plans to open additional ACCCTM core
manufacturing plants outside of California to allow for additional expansion and
to mitigate the risk of overreliance on one plant.  We also produce
parts for and license the production of the special hardware accessories
required to hang ACCCTM
conductor and ensure that the hardware supply will match conductor sales
requirements.




RawMaterials





The
principal raw materials in the production of the ACCCTMcore
are glass and carbon fibers, combined with specific polymer resins. Our
conductor stranding manufacturers use aluminum rod materials typical in the
production of bare overhead conductor. Accessories require primarily high-grade
aluminum tube and special steel alloys. The prices for these raw materials are
subject to market variations. We can acquire glass and resins from several
sources and we have two qualified suppliers for carbon fiber.





DeWind
Segment:





WindMarket:





The wind
industry is the world's fastest growing energy sector and offers an
excellentopportunity to begin the transition to a global economy based
on sustainable energy. A report published by The Global Wind Energy Council
(GWEC) and Greenpeace in October 2008 references multiple studies that indicate
that the long-term potential supply using existing technology could be double
the current worldwide electricity demand.  Prior GWEC reports indicate
that there are no technical, economic or resource barriers to supplying 12% of
the world's electricity needs with wind power alone by 2020, as compared to the
challenging projection of a projected two thirds increase of electricity demand
by 2020. According to the GWEC by the end of 2007 (2008 figures not currently
available), the capacity of global wind energy installations had reached a
generation capacity level of over nearly 94,000 MW (megawatt), an increase of
nearly 20,000 MW over 2006 figures and representing a worldwide investment of
over $50 billion. Europe accounts for 56,500 MW or 60% of the total installed
capacity followed by the U.S. with 17.9% or 16,800 MW.  The fastest
growing market is China with 145% growth or 3,304 MW added in 2007 to over 5,900
MW by the end of 2007.  Each of these markets is expected to continue
to drive the worldwide growth of wind turbine installations.  The total
value of installed equipment worldwide in 2007 was approximately $1.8 million
per megawatt for a turbine equipment market size of $36 billion on a total
investment of $50 billion.




12




U.S.
growth is driven by the demand for clean and safe domestic energy and the
extension of the U.S. production tax credit.  U.S. installations in 2007
were 5,249 MW and are projected to be 7,500 MW for 2008 according to the
American Wind Energy Association’s (AWEA) October 22, 2008 third quarter report.
A major driver of the growth of wind turbine installation in the U.S. is a
Federal Production Tax Credit (PTC), which guarantees a tax credit of 2.0 cents
per kWh for U.S. wind projects over the first ten years of their life. The tax
credit was renewed in October 2008 to a one year extension through the end of
2009.  AWEA estimates that by 2020, wind power could provide 6% of
U.S. electricity, from 100GW of wind, a share similar to today’s contribution
from hydro-electric plants.  The U.S. Department of Energy predicts
under their more conservative models that wind energy will provide 2.4% of all
generation by 2030 up from 0.6% today.  In addition to federal
incentives, 27 states and the District of Columbia set renewable portfolio
standards to mandate minimum renewable source levels.




International
markets offer similar opportunities.  The 1997 Kyoto Protocol has
driven a “strong market” approach for greenhouse gases which in turn creates
incentives for renewable energy generation.  Under the “Clean
Development Mechanism” (CDM), projects receive certified emissions reductions or
CERs.  Under the CDM, as of October, 2008 a total of 538 wind energy
projects amounting to 20,434 Megawatts of generation were under development in
21 countries under the CDM program, the majority of which were in China and
India but including the Mexico and Brazil opportunities described
below.  Selected markets where our turbines have been sold or are
being marketed include:





·
            The
      European market continues to be strong increasing 8,500 MW to 56,535 MW in
      2007 with growth driven by expansions of markets outside of the
      traditional markets of Germany, Spain, and Denmark underwritten by the
      2001 EU Renewables Directive which allows for market premium prices for
      renewable energy.





·
            The
      Chinese market saw significant growth in 2007 due to the country’s new
      Renewable Energy Law, effective January 1, 2006. Over 3,300 MW were
      installed in 2007 and an additional total of 13,000 MW are in the project
      approval stage for installation by 2010 and by 2020 it is estimated that,
      in order to satisfy growing demand, the total power capacity in China will
      need to reach 1,000 GW.





·
            Canada
      increased total wind capacity by 26% in 2007 or 386 Megawatts to 1,856
      Megawatts.  The Canadian Wind Energy Association forecasts an
      additional 750 megawatts in 2008 to 2,600 megawatts and if government
      targets and objectives are met, an additional 9,400 megawatts would be
      commissioned by 2016.





·
            Mexico
      has excellent wind potential and the Mexican Wind Energy Association
      estimates the development of over 3,000 MW by 2014.  Investment is
      being driven in part by a change in the Mexican tax code that allows for
      100% depreciation on capital investment in the first year for all
      renewable energy investments.    Currently, there are
      over 1,200 MW of projects underway.





·
            Brazil
      has a total installed capacity of 247 MW at the end of 2007, and has
      governmental programs for preferential power contracts for 3,300 MW of
      projects, has registered projects totaling 5,000 MW and has total wind
      potential of 143,000 MW.  The Brazilian state-controlled
      electricity utility buys power produced by renewable energy under 20 year
      power purchase agreements at pre-set preferential
      prices.  Brazil has a total of 436 MW under
      development.





Market
Approach:





We
reviewed the world’s fastest growing markets of China, India, and North America
at the beginning of the year and developed our strategy
accordingly.  During the year, we revisited our strategy to take
advantage of successes and to leverage our potential market strength as a
leading provider of wind turbines and highly efficient transmission
conductors.




13




·
            For
      North America and for other geographies outside of China and India, we are
      taking a direct sales approach. We are using a solution selling
      approach to include the wind turbine coupled with ACCCTM
      conductor to deliver efficient renewable energy to the grid. The goal of
      the solution is to provide best of breed technology for the long-term
      profitability of the wind farm and to more efficiently link the wind farm
      to the existing grid. This unique, cost effective solution-based approach
      is being well received by wind farm developers since their power purchase
      agreements typically pay them based on power delivery at the grid, rather
      than power generation at the wind
  farm.





·
            For
      certain of our customers in North and South America, we are also
      investigating taking an ownership position in sizable wind farm
      developments to leverage our ability to supply turbines into those
      developments.  In the North and South American markets, there is
      a marked shortage of the supply of turbines and we believe this represents
      an opportunity to leverage the supply of our turbines into a share in the
      long term revenue stream of the wind farm.  Subsequent to our
      2008 fiscal year end, we announced that a new subsidiary of DeWind has
      obtained an option to develop 620 Megawatts of wind farms in the Panhandle
      region of Texas.





·
            In
      China, we licensed two manufacturers to produce the existing 50Hz models
      of our D6 and D8 turbines for sale to the Chinese market.  We
      have also sold turbine parts to our Chinese licensees for certain key
      components that are difficult to source in
  China.





·
            In
      India, we recognized that much of the wind opportunity there is with
      smaller wind turbines and is dominated by one major manufacturer.
      Additionally the lack of necessary infrastructure required to transport
      larger D6 and D8 turbines, has caused us to delay consideration of that
      market place even though we have had discussions with several interested
      parties about licensing or selling our D6 model in
  India.





We are
focusing our marketing efforts for our new DeWind D8.2 turbine in the U.S. and
Canada primarily due to the rapid growth and high demand for wind turbines and
renewable energy in that geography.  We are also targeting certain
other international markets with similar growth characteristics to the U.S. such
as Eastern Europe and which have government incentives for renewable energy
including certain Latin American and South American countries such as Mexico and
Brazil.





We serve
all of these markets through a direct sales force with personnel located in
Lübeck, Germany, Dallas, Texas, and Irvine, California. We market our turbines
through advertising in trade publications, direct mail, through our website, and
through industry trade shows, primarily in Europe and the U.S. The sales process
for turbine sales is lengthy and due to the capital cost of the turbines sold
and the technical nature of the product, each sale typically is a team effort
involving multiple personnel within DeWind and the customer including
engineering, sales, production, and supply chain with the final negotiations
conducted by senior executives.





We
targeted wind farm opportunities in the U.S., Latin, and South America altering
the selling strategy of the business away from wind farms sales in the mature
markets of Continental Europe to wind farm developments with 10-100 or more
turbines in areas with rapidly growing wind energy needs and the geographic
space to accommodate them.  We also targeted utilities with sufficient
capital so as to not require traditional wind farm financing.  We
entered 2008 with the belief that customers would be able to find financing for
our wind turbines and that we had sufficient interest in multiple parties
outside of the traditional wind farm developers during the introductory period
that might take more time for traditional developers to obtain financing for the
D8.2 turbine.





During
fiscal 2008, our sales efforts were hampered by several factors, all of which
were barriers for our customers to obtaining financing for our
turbines.  First, we lacked certification of our D8.2 60 hertz unit
until April, 2008.  Second, we realized that developers and their
financing sources were concerned with the thin capitalization of
DeWind.  We mitigated this fear in June, 2008 with an equity
investment from Credit Suisse.  Third, we realized that developers and
their financing sources required an extended warranty, in particular for the new
drive-train components in the D8.2.  This was obtained in May,
2008.   The delay in commissioning of the 60Hz prototype turbine
in Sweetwater, Texas, which was previously expected in November, 2007, delayed
the collection of a sufficient number of operating hours on our new turbine to
qualify for traditional turbine financing.  By November 2008, we
expected to have sufficient operating hours on our D8.2 models to qualify for
traditional bank financing.  However, in September, 2008, the
worldwide credit crisis began which significantly reduced the availability of
debt financing for wind turbines and the bankruptcy of Lehman Brothers in
September, 2008 reduced the availability of “tax equity” investors who take
ownership stakes in wind farm investments in exchange for utilization of the
accelerated depreciation and production tax credit tax benefits currently
codified in the U.S.




14




Our
primary focus in fiscal 2009 will be to create a financing package for our D8.2
turbine in order to both sell the D8.2 to wind farm developers and utilities and
to develop our own wind farm sites, such as the 620 megawatts currently under
development agreement and located in the Panhandle region of Texas.




DeWindWindEnergyTurbineGeneratorProducts and Competitive
Advantages:


The
current wind turbine market is principally addressed by wind turbine designs
that have been in existence for nearly thirty years.  The design
incorporates a set of heavy fiberglass wind capture “blades” that have variable
pitch to adjust to different wind speeds, which are attached to a rotor shaft
that turns at low rotational rates that change with the variation in wind
speeds.  The rotor shaft connects to a heavy-duty gearbox to increase the
rotational speed, which then turns an electrical generator at variable
speeds.  The power generated by the variable speed generators, that are
typically doubly-fed induction generators (DFIG) has variable frequencies, and
as such is then required to be modified through power conversion electronics in
order to be able to synchronize with the steady frequency of either 60 hertz or
50 hertz of an electrical transmission grid.  DeWind has developed an
alternative model that does not require power conversion electronics as it uses
a synchronous generator with high voltage output which turns at a fixed speed
that synchronizes directly with the grid.





The
current DeWind turbine products are the culmination of ten years of research and
development. Including an older D4 turbine class that is no longer produced;
DeWind has over 580 turbines installed worldwide. We currently sell three
turbine models consisting of the 1.25-megawatt D6 in 50 Hz, the 2.0-megawatt D8
in 50 Hz, and our new 2.0-megawatt D8.2 turbine in 60 Hz and 50Hz.





DeWind D6
SeriesTurbines: The D6 wind turbines are
available with 1.25 megawatt rated power output in 50 Hz. The D6 product line is
supplied with hub heights from 65 meters to 91.5 meters with rotor diameters
offered of 62 or 64 meters. There are 114 D6 1.25 megawatt turbines installed
and 136 installed of an earlier 1.0 megawatt version known as the D6 1000. Most
of the installed D6 turbines are deployed in Europe.  We have also
licensed the production of the D6 under the SeWind name in China for which we
receive a license amount for each turbine sold.  We have the rights to
purchase completed D6 nacelles from our Chinese licensee at preferred prices
should we receive orders for D6 turbines for delivery in Europe or other 50 Hz
markets.





DeWind D8
SeriesTurbines: The D8 series has a rated
power output of 2.0 megawatts in 50 Hz. The turbine has a rotor diameter of 80
meters and is available with a hub height of 80 meters. The D8 is
pitch-controlled and can operate at variable speeds. The D8 series is equipped
with state-of-the-art system control technology. There are 56 installations of
the D8, primarily in Germany, Austria and Belgium.  We have also
licensed the rights of the D8 to a licensee in China.





The D6
and D8 series use variable speed generators with power conversion electronics to
convert the variable frequency power generated to a fixed frequency of 50 Hz in
order to synchronize the power to the electricity grid. GE owns patents for some
power conversion electronics in many locations outside of Europe including the
United States market, which does not allow these turbine models to be sold in
those markets without obtaining a license from GE.





DeWind D8.2Turbine:


The D8.2
series has a rated power output of 2.0 megawatts in 50 Hz or 60Hz.  It
incorporates the chassis and many of the components of the D8 turbine, which was
first deployed in 2002, but significantly modifies the turbine’s drive system
and generator.  Our DeWind D8.2 eliminates the need for power
conversion electronics and DVAR units by using a synchronous generator operating
at synchronous speed. To eliminate the rotational energy variability, we have
inserted a key turbine drive train innovation, the WinDrive® a hydro-dynamic
torque converter, to modulate the rotational energy. The WinDrive® torque
converter manufactured by Voith Turbo provides constant rotational speed of the
rotor shaft into the generator and allows the D8.2 to use a fixed speed
synchronous generator with high voltage output that can be sent directly to the
grid.  By doing so, we are able to replace the traditional wind
variable frequency generator with a constant frequency synchronous generator.
The grid-friendly synchronous electricity generator is of the type used by
nearly all non-wind generation systems such as steam, or gas, or hydro driven
turbines.




15




Synchronous
power is well known in the power industry and it typically has a lower service
cost for the generators.  Synchronous power allows the production of
reactive power, when needed, to provide additional electrical grid stability.
Other generator systems require reactive power from the grid during startup as
well as the conversion to direct current and re-conversion to alternating
current at a fixed frequency before attempting to synchronize with the
electrical grid. Traditional turbines also generate additional electronic
harmonics that require filtration before connecting to the grid. Such electronic
equipment is complicated and prone to failure and extensive
maintenance.  It is also often subject to licensing requirements from
various patent holders in certain markets.





The D8.2
is the first commercial utility scale turbine in the industry to use a
mechanical variable speed hydro-dynamic drive, manufactured by Voith AG, coupled
to a fixed speed conventional synchronous generator. This system uses the
WinDrive® unit that is based on the Vorecon technology of Voith Turbo AG.
Vorecon is a hydro-dynamically adjustable drive that has been extensively used
in large gas compressors and boiler feed pumps for many years but until now has
not been incorporated into wind energy turbines. Voith was established in
Germany over 157 years ago and is known for their highly engineered products.
Over the past 58 years, Voith has experienced in excess of 38 years “mean time
between failure” on their Vorecon technology.  Cutaway
diagram of D8.2 wind Turbine:








We
currently have four D8.2 units deployed as of November 30, 2008.  At
the end of 2006, DeWind deployed its first D8.2 turbine at a test site in
Cuxhaven, Germany. Since that time there has been one D8.2 installed at 13,600
feet in the Andes in Argentina to supply power to a mining operation, the first
60 hertz D8.2 has been installed at the Texas State Technical College in
Sweetwater, Texas, and the first commercially sold D8.2 was recently erected in
Minnesota.  At the present time there are over 9,000 hours of
operation of the D8.2 model. As a result of previous D8 historical data, DeWind
has secured an extended warranty program from Voith and Cummins as well as a
complete mechanical breakdown insurancepolicy from Zurich American Insurance.





DeWindTurbine Competition:


The
buying decision for a wind farm developer is driven by a combination of price,
availability and reliability. Our competition consists of wind turbine
manufacturers including General Electric’s Wind division, Vestas, Gamesa,
Suzlon, Siemens, RePower, and Mitsubishi. GE is the largest wind turbine
supplier in North America.




As
compared to the GE-1.5MW asynchronous type turbine, the DeWind D8.2 has the
following advantages:





1)
            Cost
      advantages:


·
            The
      D8.2 allows for direct synchronization with the grid with a synchronous
      generator operating at synchronous speed providing the greatest amount of
      MVAR reactive power to the grid in addition to the MW output. MVAR’s are
      necessary to stabilize most grid systems, which are usually achieved by
      buying various reactors, sometimes known as DVAR
  systems.


·
            The
      D8.2 does not require any additional harmonic filtration, since the output
      is the same as most hydro-generation systems as well as most gas turbine
      and steam turbine systems.


·
            The
      synchronous generator has no power electronics to maintain, eliminating a
      major contributor to turbine
downtime.




16




·
            Reduced
      maintenance allows an increased uptime for the synchronous generator,
      since unlike the asynchronous Double Fed Induction Generator (DFIG) there
      are no slip-rings or carbon brushes to replace or fail, and there is no
      conductive carbon dust issue to enable generator
  failure.





These
additional costs are referenced in the IEA’s World Energy Outlook 2008 study as
a significant problem with traditional wind energy.  This same study
quantifies the extra costs associated with the additional equipment and
maintenance to be as high as $13 per MWHr generated.  For our
additional value described below, we estimated a cost savings of approximately
$6.70 per MWHr generated.





2)
            Revenue
      advantages:




·
            The
      D8.2 high voltage AC output (13.8 kilovolts) uses a more efficient
      transformer to convert to the farm collector circuit that is usually 34.5
      kV or higher.  We believe that the efficiency gains by using
      this more efficient transformer will gain as much as 1-2% and which will
      result in a greater capacity factor for each wind
  farm.




Our
meetings with utilities both in the US and internationally show significant
interest for the ability of our synchronous generator to solve the MVAR problem
inherent with traditional wind generation.  Our data indicates that
MVAR’s could be sold to the grid for a higher price than MW’s since the grid
owner does not have to add and maintain MVAR reactors to the
system.  We intend to pursue MVAR sales in future power purchase
agreements.




In
combination, our estimate of the total of the additional value provided by the
cost savings and revenue advantages of the D8.2’s synchronous generator over an
asynchronous DFIG unit represent an additional value that could be as much as
$500,000 per turbine.  The use of a synchronous
generator and a mechanical device instead of an electronics package represents
what we believe will evolve into a significant competitive
advantage.





We
believe that our D8.2 model should result in lower component failure rate
compared to our competition’s products. We believe that our competitive
advantages for this turbine will eventually come to fruition, however we are
still collecting operating history to support our modeled results or to support
our beliefs for the advantages over existing induction fed asynchronous wind
powered turbines.





Turbine Product
Development:


We are
developing an upgraded version of the D8.2 currently called the
D9.  The D9 series 2 megawatt wind turbine is planned to build upon
the value provided in the D8.2 and to utilize the following innovative
technologies to achieve higher capacity factors.





Central
to the improvements include a re-engineered and larger rotor using an improved
blade design.  This design should allow one of the highest energy
outputs of any 2 megawatt turbine.  Our engineering studies have shown
that the use of the new blade design should allow for greater capture of lower
speed wind and increase the capacity factor by approximately
5%.   The additional capacity factor expected over a 20-year life
of the turbine results in a significant increase in expected
revenue.  On a discounted cash flow analysis, we believe this could
add as much as an additional $600,000 in value per turbine.





Product
Service and Warranties:


Most of
our turbines are sold with a warranty for key parts and services, typically two
years in length, along with a mechanical availability guarantee with an option
to extend the warranty to five years.  We record a liability for the
expected cost to service this warranty and for any expected losses due to
turbine availability shortfalls that are caused by technical or mechanical
issues with our turbines.




Turbine
Service: DeWind turbines are controlled by a 24-hour remote monitoring center.
Automatic checks at regular intervals are performed of all wind turbines to
ensure optimal performance and to allow operators to take action when a fault is
detected. As a result, DeWind is constantly aware of the condition of each wind
turbine and can rapidly respond to any service needs.




17




In
October, 2006 our European turbine service company, EU Energy Service &
Maintenance GmbH, entered into a joint venture agreement with Enertrag AG.
In January, 2007 we sold an additional 25% ownership of EU Energy Service and
sold the remaining 25% in April, 2008.   We now use a consortium
of service providers to service the remaining turbines under service contract or
under warranty.





Customers:


Our
customers for our existing installed base of 580 turbines consist primarily of
wind farm owners and operators in Europe, our licensees of our D6 and D8
technology in China, and the operators of the three D8.2 units installed at
customer sites, the Sweetwater, Texas D8.2 60 Hz prototype location the D8.2
installed at a mine site in Argentina and a
D8.2 unit erected in Minnesota.  We currently have orders for
10 D9 units to one customer in Canada, 2 additional D8.2 units for a
customer in Minnesota, 10 D8 units for delivery into Chile, 40 D8 units for
delivery into the Czech Republic, and 7 D6 units for deliveries to two customers
in the UK and the Czech Republic. For fiscal year 2008, 13.4%, 13.8% and 10.3%
of our consolidated revenue was derived from three customers, S&M/Zipotin,
Shanghai Electric and BZD respectively. We believe our backlog of DeWind orders
for 2009 is approximately $50 million.





We made
the strategic decision to move into the wind farm development in order to
maximize our profit per turbine sold, to increase the return on invested
capital, to provide for a smoother and more steady production of our turbines,
and to provide for locations to implement our new turbine models in a commercial
setting, starting with the D9 turbine and for future turbine designs currently
on the drawing board.  Our first wind farm development agreement
was executed
inOctober, 2008 regarding
an area in the Panhandle region of Texas. We are currently seeking
investors and financing for our DeWind Development wind farm sites, that
could comprise up to620 Megawatts or 310 units.  Once
financed, we expect the DeWind Development sites to purchase a significant
portion of our total available turbine supply for the next two
years.





Manufacturing:


DeWind
turbines: In November, 2006, we announced an agreement with TECO Westinghouse
Motor Company (TECO) in Round Rock, Texas to assist us in the assembly,
component supply, and servicing of our turbines.  The agreement
consists of three parts: a) TECO will assemble our turbine units at their plant
in Texas.  At full production, we expect that this plant will be able
to produce two production lines of 5 turbine units per week for an estimated
capacity of approximately 500 turbines per year;   b) TECO will
assist us in servicing our D8.2 units by leveraging their existing service
teams.  TECO services large electrical generators worldwide and
already has the infrastructure to service similar wind generators in the US; c)
TECO will assist us in developing and optimizing our turbine supply
chain.  During 2007 and until June, 2008, we assembled our DeWind
Turbines in limited quantities in our Lübeck, Germany facilities, primarily for
D6 turbines sold in Europe.  In July, 2008 we closed our Lübeck
production facility.  Future manufacturing for D6 units will be
fulfilled out of a Chinese licensee.  TECO Westinghouse will complete
manufacturing fulfillment for the D8 and D8.2 units.










RawMaterials


DeWind:
The principal raw materials for the production of DeWind turbines are piece
parts that are purchased from third party vendors under purchasing contracts and
supply agreements. These parts have a high degree of product engineering and
specifications, which require lengthy lead times for production and include our
torque converter, gear boxes, generators, bearings, rotor parts, and blades. We
currently have a supply agreement with Voith for our torque converters and we
have component supply agreements for several of key turbine components. Many
component parts for our turbines require a substantial down payment to reserve
the capacity resulting in additional requirements for working capital. We are in
the process of transitioning the turbine supply chain for all but certain key
components to TECO in order to leverage the TECO supply chain management system,
to decrease our need for working capital, and to obtain the lowest possible
component price. With the tight credit and financing markets, it is difficult to
obtain inventory financing in the absence of a large and expensive capital raise
either into DeWind or the Company.  As such, and in the absence of
cash down payments for turbine orders, we have been unable to provide vendors
with sufficient down payments to source enough scarce parts beyond 80 D8 or D8.2
turbine units in 2009.


18




VII.CONNECTIVITYANDACCCTMCONDUCTORSYNERGIESWITHDEWINDWINDTURBINES


All wind
energy farms must connect to the electric transmission grid. With the increasing
demands placed on the grid, connection often represents a substantial investment
by a wind farm operator in electrical towers, conductor, and installation costs
to guarantee that the energy production capacity can be utilized and sold. There
are already examples of wind farms that have to limit generation due to the
capacity of the infrastructure to carry the energy from the wind farm. The
reality is that for some wind farms to succeed, the grid interconnects may need
to be improved and enhanced. These interconnects can benefit from ACCCTM
conductor and CTC is well placed to take advantage of the opportunity to provide
these benefits. In addition, the increased efficiencies due to lower line losses
of ACCCTM
conductor as compared to ACSR results in an increase in total power delivered to
the purchasing utility. This in turn results in either increased revenues to the
wind farm operators or the requirement to have fewer turbines installed to
provide the required power deliveries. Either way, the use of ACCCTM
conductor provides a significant economic incentive either through higher
revenues or lower capital costs, or both.  For example, when we
modeled one of our prospective wind farms in Texas we
calculated significant revenue opportunities for our customer through the use of
ACCCTM
conductors.  By adding approximately $15 million of
transmission corridor retrofit to a total projected cost of nearly $1 billion,
the project internal rate of return increased by nearly 1.5% through increased
power purchase prices expected through power export.  We intend to
cross market this project improvement aspect to additional renewable energy and
generation projects worldwide.





In
addition, many of the areas with the highest potential for wind power are remote
and lack grid connection. There are opportunities to open up more wind
productive areas by putting in new transmission lines or upgrading transmission
lines using ACCCTMconductor,
in particular in the high potential areas of the Northern Plains of the U.S .and
Canada as well as West Texas. These areas, while highly promising do not have
enough transmission-infrastructure to support large wind farms and will require
large transmission investments. The combination of our wind turbines along with
ACCCTMconductor is a powerful solution to fundamental wind industry needs.





IX.  INTELLECTUAL
PROPERTY


We are
aggressively pursuing patent protection for all aspects of our CTC Cable
conductor composite materials, products, and processing as well as our DeWind
wind turbine advances.





In
connection with our ACCCTM
conductor business, CTC Cable Corporation currently has seven issued U.S.
patents, two pending U.S. continuation-in-part applications, two pending U.S.
applications each claiming priority to a PCT international application, and a
number of pending provisional U.S. applications. In addition, three PCT
international applications have entered the national phase and are currently
pending in over 70 strategic countries world-wide. Of these pending
applications, thirteen applications have been granted. These patent applications
cover subjects including composite materials as applied to electrical
transmission conductors and related structural apparatus and accessories,
manufacturing processing techniques, cross sectional composite core designs for
electrical transmission cables and methods and designs for splicing composite
core reinforced cables. CTC Cable Corporation plans to continue filing and
supplementing these patent applications with new information as it is developed.
The issued, pending patents, and provisional U.S. applications, if issued and if
the provisional U.S. applications are converted to regular utility filings, have
patent terms that will end within the period of 2023 to 2029, depending on the
filing dates of each of the applications. Based on available information and
after prior art searches by our patent strategists, we believe that the pending
and issued patent applications provide the basis for us to, over time, be issued
a number of separate and distinct patents. If CTC Cable Corporation continues to
be successful in being granted patent protection consistent with the disclosures
in these applications, we anticipate that we could have a dominant position in
the field of composite-based electrical conductors.





DeWind,
Inc. is currently pursuing patent protection for a number of developments.
DeWind Inc. currently holds eight issued and pending patent applications in
select countries, which depending upon the patent or application, include the
United States, Spain, Germany, Austria, Belgium, France, and Great Britain.
Generally, these patents and applications are directed toward wind energy
systems and methods of operation and towers for wind power installations.
DeWind, Inc. intends to aggressively pursue patent protection for all novel
aspects of its wind energy and turbine businesses including our drive train and
blade design development efforts.


19




Our
business and competitive position are dependent upon our ability to protect our
proprietary technologies. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to obtain and use information that we regard as
proprietary.
 
 There can
be no assurance that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
our proprietary information, that such information will not be disclosed or that
we can effectively protect our rights to unpatented trade secrets or other
proprietary information.
 
 There can
be no assurance that others will not obtain patents or other legal rights that
would prevent us from commercializing our technologies in the United States or
other jurisdictions.


From time
to time, we may encounter disputes over rights and obligations concerning
intellectual property. Also, the efforts we have taken to protect our
proprietary rights may not be sufficient or effective. Any significant
impairment of our intellectual property rights could harm our business, our
reputation, or our ability to compete. Also, protecting our intellectual
property rights could be costly and time consuming.





X.RESEARCHAND
DEVELOPMENT


Historically,
DeWind and the previous owners EU Energy and FKI have spent considerable funds
to develop the existing wind energy turbine product suite. We expect that our
development in the near future will be to improve upon existing designs for the
D8.2 drive train and increased rotor diameter, since increased blade length
translates into increased wind energy input to the system. A development project
is currently underway to add a 90 meter rotor options to the D8.2 turbine using
a new blade design.  We expect to utilize our composite materials
knowledge to increase the blade span without significantly increasing the weight
of the blade. The blade length increase will also provide wind energy
alternatives to lower level wind locations that while marginal with today’s
products, represent substantial market potential in North America and
Europe.





We
continue to enhance upon the innovative drive train that we created with the
Voith torque converter.  We expect to continue to refine the interface
between our gearbox, the torque converter, and the synchronous generator to
ensure that the unit has the highest possible and most efficient energy
generation.  We also expect to modify certain parts that are
susceptible to temperature variations allowing us to sell a “cold weather
package” that will allow us to expand our potential market into those locations
subject to extreme cold temperatures.





We have
spent considerable funds on research and development of our proprietary, patent
pending ACCCTM
conductor and related component technologies. We continue to invest in the
further development of this product with a view to accelerating and
lowering the cost of production, using less expensive and more readily available
material sources, as well as enhancing the product's properties and
characteristics. We also anticipate the need to continue spending significant
funds to protect the ACCCTM
conductor technologies worldwide





We spent
$14,916,000, $6,954,000, and $4,854,000 on research and development activities
in fiscal years 2008, 2007 and 2006, respectively.





XII.GOVERNMENTALREGULATION


While
there are a number of certification agencies for wind turbines, we are not aware
of any specific government regulations governing the design and specifications
of wind turbines or for bare overhead conductors in the United States or in
Europe. We do not believe the manufacture of wind turbines or ACCCTM
conductor is subject to any specific government regulations other than those
regulations that traditionally apply to manufacturing activities such as the
Occupational Safety and Health Act of 1970 or similar occupational safety
regulations in our other manufacturing locations.





Our
intended operations are generally subject to various governmental laws and
regulations relating to the protection of the environment. These environmental
laws and regulations, which have become increasingly stringent, are implemented
principally by the Environmental Protection Agency in the United States and
comparable European and U.S. state agencies, and govern the management of
hazardous wastes, the discharge of pollutants into the air and into surface and
underground waters, and the manufacture and disposal of certain substances. We
believe that we comply completely with any such laws or
regulations.




A
majority of the international markets require government or type registration
approvals from leading companies or public or semi-private bodies or
associations for both our wind turbines and our ACCCTM
conductor. Certain markets also require conductor and turbine manufacturers to
be audited and production methods and raw material supplies
approved.


20





XIII.BANKRUPTCYPROCEEDINGSAND
SUMMARYOFREORGANIZATIONPLAN


On May 5,
2005 we filed a litigation driven voluntary reorganization plan and disclosure
statement under the provisions of Title 11 of the Federal Bankruptcy Code in the
United States Bankruptcy Court for the Central District of California under case
number SA 05-13107 JR. Our disclosure statement was approved by the bankruptcy
court on July 6, 2005 and a hearing was held resulting in the confirmation of
our bankruptcy plan October 31, 2005. The order approving our bankruptcy plan
was entered November 18, 2005 and concurrently notice was given that the plan
effective date was established as November 18, 2005. We formally emerged from
bankruptcy on August 2, 2006 after all claims had been resolved and paid. See
also Form 10-K for fiscal year ending September 30, 2005 and for fiscal year
ending September 30, 2006.





XIV.EMPLOYEES


As of
November 15, 2008, we had a total of 186 full time employees including 113
employees in the United States and 73 employees in Europe. We also used the
services of 10 consultants on a regular basis for a variety of tasks and
responsibilities. Additional consultants are employed as required for specific
tasks. Our German employees are represented by the German National Labor Works
Council.  None of our US based employees are currently represented by
a labor organization. We believe that relations with our employees are
good.





XV.AVAILABLEINFORMATION


We file
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, proxy statements and other reports, and amendments to these reports,
required of public companies with the Securities and Exchange Commission (SEC).
The public may read and copy the materials we file with the SEC at the SEC’s
Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may
obtain information on the operation of the Public Reference Room by calling the
SEC at 202-551-8090. The SEC also maintains a web site at www.sec.gov that contains reports,
proxy and information statements and other information regarding issuers that
file electronically with the SEC. We also make available free of charge on the
Investor Relations section of our corporate web site all of the reports we file
with the SEC as soon as reasonably practicable after the reports are filed.
Copies of CTC’s fiscal 2008 Annual Report on Form 10-K may also be obtained
without charge by contacting Investor Relations, Composite Technology
Corporation 2026 McGaw Ave Irvine, CA 92614.




ITEM1A.RISKFACTORS





Our
business is subject to a number of risks. You should carefully consider the
following risk factors, together with all of the other information included or
incorporated by reference in this report, before you decide whether to purchase
our common stock. The risks set out below are not the only risks we face. If any
of the following risks occur, our business, financial condition and results of
operations could be materially adversely affected. In such case, the trading
price of our common stock could decline, and you may lose all or part of your
investment.





WE EXPECT
FUTURE LOSSES AND OUR FUTURE PROFITABILITY IS UNCERTAIN.





Prior to
acquiring Transmission Technology Corporation, or TTC, in November 2001, we were
a shell corporation having no operating history, revenues from operations, or
assets since December 31, 1989. We have recorded approximately $53 million in
ACCCTM product
sales since inception and we have $74 million in wind turbine and related
services revenues as a result of and since the acquisition on July 3, 2006.
Historically, we have incurred substantial losses and we may experience
significant quarterly and annual losses for the foreseeable future. We may never
become profitable. If we do achieve profitability, we may not be able to sustain
or increase profitability on a quarterly or annual basis. We expect the need to
significantly increase our general administrative and product prototype and
equipment prototype production expenses, as necessary. As a result, we will need
to generate significant revenues and earnings to achieve and maintain
profitability.





THE
WORLDWIDE CREDIT CRISIS HAS MADE IT DIFFICULT TO OBTAIN NECESSARY DEBT AND
EQUITY FINANCING FOR OUR COMPANY.  OUR INABILITY TO RAISE A SUFFICIENT
AMOUNT OF ADDITIONAL WORKING CAPITAL OR TO RAISE IT IN A TIMELY MANNER
COULD NEGATIVELY IMPACT OUR ABILITY TO FUND OUR OPERATIONS, TO GENERATE
REVENUES, AND TO OTHERWISE EXECUTE OUR BUSINESS PLAN, LEADING TO THE REDUCTION
OR SUSPENSION OF OUR OPERATIONS AND ULTIMATELY LIQUIDATION OF OUR
BUSINESS.


21





The
recent failure of financial institutions and the credit crunch has
significantly reduced our financing options for our CTC Cable and DeWind
projects.  While we have raised significant capital in the past
through our debt offerings and private equity placements, we anticipate that the
sales of our ACCCTM
conductor and DeWind turbines may not be sufficient enough to sustain our
operations, and further anticipate that we will continue to incur net losses due
to our costs exceeding our revenues for an indefinite period of time. For these
reasons, we believe that we may need to raise additional capital until such
time, if any, as we become cash-flow positive. It is likely that we will
continue to seek to raise money through public or private sales of our
securities, debt financing or short-term loans, corporate collaborations or a
combination of the foregoing. Our ability to raise additional  funds has
been adversely affected by the recent downturn in the stock market, which
has affected our stock price and trading volume. Our ability to raise additional
funds in the public or private markets will be further adversely affected if the
results of our business operations are not favorable, if any products developed
are not well-received or if our stock price or trading volume decreases from
current levels. Moreover, additional funding may not be available on favorable
terms to us, or at all. To the extent that money is raised through the sale of
our securities, the issuance of those securities could result in dilution to our
existing shareholders. If we raise money through debt financing, we may be
required to secure the financing with all of our business assets, which could be
sold or retained by the creditor should we default in our payment obligations.
Should the financing we require to sustain our working capital needs be
unavailable or prohibitively expensive when we require it, we may not be able to
complete the commercialization of any products that we may have developed. As a
result, we may be required to discontinue our operations without obtaining any
value for our products under development, which could eliminate shareholder
equity, or we could be forced to relinquish rights to some or all of our
products in return for an amount substantially less than we expended to develop
such products.





WE RELY
HEAVILY ON EQUITY COMPENSATION TO INCENTIVIZE OUR SENIOR MANAGEMENT AND KEY
EMPLOYEES.  THE RECENT SELL OFF OF EQUITY SECURITIES IN THE MARKET,
INCLUDING THE COMPANY’S SHARES MAY IMPACT OUR ABILITY TO RECRUIT AND MOTIVATE
OUR CURRENT AND FUTURE EMPLOYEES.





Our
Company share price has decreased from a 52 week high of $2.16 per share to a
recent 52 week low of $0.18 per share.  As a result, most of the stock
options used to motivate and incentivize our employees have decreased to a point
where their exercise prices are well in excess of the prevailing market
price.  If we hire new employees and provide grants at current
depressed market prices this may result in disappointment for our existing
employees without such grants.  We may lose certain key employees if
we are unable to provide for proper compensation including either new option
grants or a re-pricing of existing option grants.  If we provide for
additional compensation in this manner, we may incur significant and substantial
expense related to any such issuance or re-pricing.





THE
WORLDWIDE ECONOMIC SLOWDOWN MAY HAVE SIGNIFICANT IMPACTS TO OUR GROWTH
STRATEGY.





The long
term nature of our sales cycle often requires long lead times between order
booking and product fulfillment.  For this, we often require
substantial cash down payments in advance of delivery.  Our growth
strategy assumes that debt and equity financing will be available for our
customers to provide for such down payments and to pay for our
products.  The worldwide credit crisis has delayed, cancelled or
restricted the construction budgets and funds available to our customers that we
expect to be the ultimate purchasers of our products and
services.  Both wind farm projects and conductor installations are, in
part, financed by the commercial and governmental debt markets as well as
tax-beneficial equity investors, and equity investors.  The recent
significant declines in the US and international stock markets, coupled with the
failure of several large financial institutions has caused significant
uncertainty and has resulted in an increase in the return required by investors
in relation to the risk of such projects.   This in turn has
increased the cost of capital to the point where new projects or projects in
their early or planning stages may not receive funding or may have the project
delayed or cancelled.  If we, or our customers, cannot find
alternative financing sources or should the financial crisis worsen, we may lose
sales and incur losses.


22





OUR
INDEPENDENT AUDITORS HAVE ISSUED A QUALIFIED REPORT AS OF AND FOR THE YEAR ENDED
SEPTEMBER 30, 2008 WITH RESPECT TO OUR ABILITY TO CONTINUE AS A GOING CONCERN,
AND WE MAY NEVER ACHIEVE PROFITABILITY.





For the
year ended September 30, 2008, our accountants have issued a report relating to
our audited financial statements which contains a qualification with respect to
our ability to continue as a going concern because, among other things, our
ability to continue as a going concern is dependent upon our ability to generate
profitable operations in the future or to obtain the necessary financing to meet
our obligations and repay our liabilities from normal business operations when
they come due. There is no guarantee that the products will be accepted or
provide a marketable advantage, and therefore, no guarantee that the
commercialization will ever be profitable. For the fiscal year ended September
30, 2008, we had a net loss of $45,553,000 and negative cash flows from
continuing operations of $51,360,000. For the year ended September 30, 2007, we
had a net loss of $44,484,000 and negative cash flows from continuing operations
of $22,179,000. For the year ended September 30, 2006, we had a net loss of
$28,523,000 and negative cash flows from continuing operations of $6,477,000. As
of September 30, 2008, our accumulated deficit was $185,163,000.





BECAUSE
WE ARE IN AN EARLY STAGE OF COMMERCIALIZATION, OUR LIMITED HISTORY OF CABLE
OPERATIONS AND OUR EARLY STAGE OF COMMERCIALIZATION FOR OUR NEW WIND PRODUCTS
MAKES EVALUATION OF OUR BUSINESS AND FUTURE GROWTH PROSPECTS
DIFFICULT.





Since our
reorganization in 2001, we have had a limited operating history and are at an
early stage of commercialization of a new technology product to a market unused
to using new technologies. We made ACCCTM
conductor available and entered into our first commercial agreement in 2003. We
acquired the wind energy division in July 2006.





Our
electric cable technology is a relatively new advance for the electrical utility
industry technology and has not yet achieved widespread adoption. Our wind
turbine technology for our next generation of wind turbines is commercially
unproven and has not achieved commercial adoption.  We do not have
enough experience in selling our products at a level consistent with broad
market acceptance and do not know whether we can do so and generate a profit. As
a result of these factors, it is difficult to evaluate our prospects, and our
future success is more uncertain than if we had a longer or more proven history
of operations.





OUR WIND
TURBINES HAVE VERY LONG SALES AND PRODUCTION CYCLES AND OUR TURBINES ARE
TYPICALLY FINANCED BY BANKS AND OTHER LENDING INSTITUTIONS. THE RECENT CREDIT
CRISIS MAY SIGNIFICANTLY IMPACT THE ABILITY TO OBTAIN FINANCING FOR OUR WIND
TURBINES AND OUR BUSINESS COULD BE ADVERSELY AFFECTED FOR GLOBAL CHANGES TO THE
WORLD WIND ENERGY, REGULATORY, OR WORLD FINANCIAL MARKETS.





Our wind
turbines require the sourcing of turbine parts as much as eight months in
advance of production and the cycle from turbine sale to commissioning in the
field is typically a twelve to eighteen month cycle. Our turbines are sold under
long-term contracts that typically require financing from banks or other
lending institutions. These institutions often have a worldwide presence and may
be subject to international risks, which may limit their ability to issue
additional financing.  The geographical market for our turbines is limited
to those locations where sufficient, consistent winds exist to make a wind
turbine farm an economically viable endeavor. Such locations may cross political
boundaries including national, state/province, or local government involving a
variety of regulations and regulatory oversight. While we are currently focusing
our near term efforts in geographies with stable governments, future growth will
depend on sales into less stable governments where it may be difficult to obtain
the necessary financing or regulatory approvals. Our future business may be
negatively impacted by the geo-political uncertainties inherent in current sales
prospects such as Eastern Europe, South America, and Asia.


23





IF OUR
POTENTIAL CUSTOMERS DO NOT ACCEPT OUR CONDUCTOR AND TURBINE PRODUCTS, IT IS
UNLIKELY THAT WE WILL EVER BECOME PROFITABLE.





The
electrical utility industry has historically used a variety of technologies,
which have been proven over time to be reliable. Compared to these conventional
technologies, our technology is relatively new and unproven, and the number of
companies using our technology is limited. The commercial success of our
conductor product will depend upon the widespread adoption of our technology as
a preferred method by major utility companies to transmit electricity and the
commercial success of our turbine products will depend on our ability to
convince wind farm operators that our new turbine design will result in a
reliable wind turbine. In order to be successful, our products must meet the
technical and cost requirements for electric generation and transmission within
the electric utility industry. Market acceptance will depend on many factors,
including:




(i) the
willingness and ability of customers to adopt new technologies;




(ii) our
ability to convince prospective strategic relationships and customers that our
technology is an attractive alternative to conventional methods used by the
electric utility industry;




(iii) our
ability to convince wind farm operators and designers of wind farms to use
our wind energy turbines that incorporate our WinDrive® power train
solution;





(iv) our
ability to change our customers' evaluation of the economics of power line
construction, changing their focus on limiting initial capital costs to
evaluating the cost and benefit of the full life of a line; and




(v) our
ability to sell sufficient quantities of our products.




Because
of these and other factors, our product may not gain market acceptance or become
the industry standard for the electrical utility industry. The failure of
utility and wind farm companies to purchase our products would have a material
adverse effect on our business, results of operations and financial
condition.




OUR NEW
DEWIND D8.2 MODEL HAS LIMITED OPERATIONAL HISTORY IN REAL WORLD WIND GENERATION.
THE WINDRIVE TM
DRIVETRAIN IS UNPROVEN IN LONG TERM, FULLY COMMERCIAL WIND GENERATION
APPLICATIONS.





The
DeWind D8.2 model incorporates the Voith WinDrive® component as a key
modification to our existing turbine technology. We have obtained certification
of our turbine through the German Offshore Wind Institute (DEWI), however, we
have not completed the power curve tests required to complement certification.
Certification involves erecting the turbine on a test location site and
conducting and evaluating the results of tests under real world conditions. If
the certification is not obtained, is delayed due to product performance issues
or regulatory concerns, we may be required to perform additional re-engineering
or redesign work resulting in additional product delays. Such delays may require
additional investment in product development. If we are not certified in a
timely manner, our current and potential customers may cancel their orders and
require the refund of any advance payments they may have made. Finally, any
business decisions made based on the assumption of cash flows from these
turbines will have to be re-evaluated, our forecasted revenues forecast may not
be attained, additional costs may be incurred, and our business may be
significantly impacted.





ALTHOUGH
OUR DEWIND SUBSIDIARY HAS SUCCESSFULLY PRODUCED WIND TURBINES IN THE PAST, WE
RELY UPON OUTSOURCED CONTRACT MANUFACTURERS TO PROVIDE KEY SUB ASSEMBLIES OF OUR
TURBINES.




As a
result of strategic management decisions and direct marketing efforts related to
our new D8.2 turbines, DeWind has not produced wind turbines at commercially
viable levels since 2005 and the first commercial shipments of wind turbines has
resumed in late calendar year 2008. This lack of production experience and
know-how may result in additional costs or delays when broad based commercial
production is resumed. We currently outsource our commercial production options
including the use of contract facilities at various locations around the
world.   These facilities may have production interruptions or
supply problems resulting in sub assembly delays of our commercial shipments
which may in turn result in revenue delays or penalties.  We have
limited experience contracting out for such facilities, which may involve
additional expenditures or product issues including inadequate product quality
or product shipment delays. We may also not adequately transition the required
production knowledge resulting in additional costs or delays until such time as
the contractor solutions are sufficiently efficient, or if quality is not
sufficiently high for our turbine products.


24





OUR
DEWIND PRODUCTS UTILIZE INTELLECTUAL PROPERTY OWNED BY OTHER ENTITIES AND WE MAY
BE REQUIRED TO LICENSE THIS TECHNOLOGY OR BE PREVENTED FROM SELLING OUR PRODUCTS
BY OTHERS.





For
legacy turbine installations and the D6 and D8 commercial turbine models, we may
be subject to the licensing requirements of General Electric Corporation, and
potentially others, for the conversion of rotational power into usable
electricity and for connection of the turbine to the power grid. In addition,
General Electric has prohibited the sale of certain of our turbines that utilize
their technology into territories such as the United States and Canada and
requires us to pay a royalty on turbines using their technology in other
territories. In the future, we may be subject to additional restrictions on or
license fees payable for our turbines which may negatively impact our business.
Further, other wind energy manufacturers, including without
limitation, General Electric, may file intellectual property infringement
claims on our new turbines, file injunctions against their sale or delivery, or
attempt to impose additional licensing requirements which, even if adjudicated
in our favor, may result in the delay of payments or deliveries which could
significantly impact our business.


ONE OF
OUR LEGACY DEWIND EUROPEAN SUBSIDIARIES HAS BEEN DECLARED
INSOLVENT.  THIS INSOLVENCY MAY CAUSE UNFORESEEN PROBLEMS TO THE
OPERATIONS OF OUR DEWIND BUSINESS OR OF THE RIGHTS TO CERTAIN INTELLECTUAL
PROPERTY OWNED BY DEWIND.
 
 The
operations of this subsidiary prior to its insolvency was limited to warranty
related activities in existence prior to our acquisition of the DeWind
business.  While we do not believe that the insolvency will cause
operational issues to our existing businesses, this subsidiary formerly owned
intellectual property developed prior to our acquisition of DeWind in
2006.   The subsidiary is now under the control of a receiver in
Germany. We have purchased all pertinent intellectual property rights prior to
the declaration of insolvency under the terms and conditions of contractual
agreements in effect prior to our acquisition of the DeWind
business.   While we believe these transactions to be valid and
binding, under German law, for a subsidiary in insolvency, the receiver may look
back and attempt to void those acquired contracts and
agreements.   If our acquired rights to this technology are
impaired or diminished, it may affect our ability to sell and market our wind
turbines.
  WE HAVE
EXPOSURE TO FOREIGN CURRENCY RISK AND WE ARE NOT ADEQUATELY HEDGED AGAINST SUCH
FOREIGN CURRENCY EXPOSURE.





With the
acquisition of DeWind, we now have operations in Germany and sales opportunities
around the world denominated in the Euro and other currencies. In addition, for
turbines sold into the US, we expect that for the foreseeable future, we will
purchase a substantial quantity of parts from European suppliers in Euro
denominations for delivery into the US and elsewhere. Our current sales
contracts have the revenue payments denominated in the local currencies and at
contracted amounts. We currently do not have a foreign exchange hedging strategy
in place and the recent depreciation of the dollar against the Euro has caused
additional foreign currency losses.    If the local currency
value depreciates against the Euro, we may incur substantial foreign currency
losses or incur additional expenses.





IF WE
FAIL TO PROPERLY MANAGE OUR GROWTH EFFECTIVELY, OUR BUSINESS COULD BE ADVERSELY
AFFECTED.





The
transition from a small company focused on research and development of our
products to a company with the additional focus on commercial production,
marketing, and sales has placed and will continue to place a significant strain
on our managerial, operational, and financial resources. The failure to manage
our sales and growth effectively could have a material adverse effect on our
business, results of operations and financial condition. Significant additional
growth will be necessary for us to achieve our plan of
operation.


25





WE MUST
PROTECT OUR PROPRIETARY RIGHTS AND PREVENT THIRD PARTIES FROM USING OUR
TECHNOLOGY OR VERY SIMILAR TECHNOLOGY; PROPRIETARY RIGHTS LITIGATION COULD BE
TIME-CONSUMING AND EXPENSIVE.





Failure
to adequately protect our proprietary rights could enable third parties to use
our technology, or very similar technology, and could reduce our ability to
compete in the market, and any proprietary rights litigation could be time
consuming and expensive to prosecute and defend. Due to the importance of
proprietary technology in the electrical utility and wind energy industries,
establishment of patents and other proprietary rights is important to our
success and our competitive position. Performance in the electrical utility and
wind energy industries can depend, among other factors, on patent protection.
Accordingly, we have filed patent applications in the U.S. and internationally
for all aspects of our composite materials, conductor and wind energy turbine
products and processes, including aspects of our product other than the
conductor core, and intend to devote substantial resources to the establishment
and protection of patents and other proprietary rights. Despite our efforts to
establish and protect our patents or other proprietary rights, unauthorized
parties may attempt to copy aspects of our technology or to obtain and use
information that we regard as proprietary. In addition, the laws of some foreign
countries do not protect our proprietary rights to as great an extent as do the
laws of the United States. Our means of establishing and protecting our
proprietary rights may not be adequate and our competitors may independently
develop similar technology, duplicate our products or design around our patents
or our other proprietary rights. As a result, our business involves a risk of
overlap with third party patents and subsequent litigation with competitors or
patent-holders. Any claims, with or without merit, could be time-consuming,
result in costly litigation, or cause us to enter into licensing
agreements.





WE
OCCASIONALLY MAY BECOME SUBJECT TO LEGAL DISPUTES THAT COULD HARM OUR
BUSINESS.





We have
from time to time become engaged in, legal disputes such as claims by
consultants or other third parties. These disputes could result in monetary
damages or other remedies that could adversely impact our financial position or
operations. We believe these claims are without merit and intend to vigorously
defend against them. However, even if we prevail in disputes such as this, the
defense of these disputes will be expensive and time-consuming and may distract
our management from operating our business. As described in Item 3 below, we
have filed suit against the Mercury group for breach of contract, unfair
competition, fraud, intentional interference with contract, and injunctive
relief.  We believe our claims to be valid although the outcome is not
known and we may incur significant legal expenses related to this claim that we
may never recover.





WE DEPEND
ON KEY PERSONNEL IN A COMPETITIVE MARKET FOR SKILLED EMPLOYEES AND FAILURE TO
ATTRACT AND RETAIN QUALIFIED EMPLOYEES COULD SUBSTANTIALLY HARM OUR
BUSINESS.





We rely
to a substantial extent on the management, marketing and product development
skills of our key employees, particularly Benton H Wilcoxon, our Chief Executive
Officer, Marv Sepe, our Chief Operating Officer, D J Carney, our Chief Financial
Officer and Robert Rugh, DeWind President. If Messrs. Wilcoxon, Sepe, Carney or
Rugh were unable to provide services to us for whatever reason, our business
would be adversely affected. Neither Mr. Wilcoxon, Mr. Sepe, Mr. Carney, nor Mr.
Rugh has entered into an employment agreement with the Company. In addition, our
ability to develop and market our products and to achieve profitability will
depend on our ability to attract and retain highly talented personnel. We face
intense competition for personnel from other companies in the electrical utility
industry. The loss of the services of our key personnel or the inability to
attract and retain the additional, highly-talented employees required for the
development and commercialization of our products, may significantly delay or
prevent the achievement of product development and could have a material adverse
effect on us.


26





A
FAILURE TO ESTABLISH AND MAINTAIN RELATIONSHIPS WITH STRATEGIC PARTNERS MAY HARM
OUR BUSINESS.




Our
success is dependent upon establishing and maintaining relationships with
strategic partners, such as our relationships with General Cable, Lamifil,
Midal, and Far East Composite Cable Co, as our conductor stranders with TECO as
our wind turbine assembly contractor and with Voith as our WinDrive® torque
converter supplier. We face numerous risks in successfully obtaining suitable
partners on terms consistent with our business model, including, among
others:




(i) we
must typically undergo a lengthy and expensive process of building a
relationship with a potential partner before there is any assurance of an
agreement with such party;




(ii) we
must persuade conductor manufacturers with significant resources to rely on us
for critical technology on an ongoing and continuous basis rather than trying to
develop similar technology internally;




(iii) we
must persuade potential partners to bear retooling costs associated with
producing our products; and




(iv) we
must successfully transfer technical know-how to our partners.




Moreover,
the success of our business model also depends on the acceptance of our products
by the utility companies who have historically been conservative in their
adoption of new products and technologies into their infrastructure. Further,
our partners will be selling our products that may compete with their existing
or future conductor products. Our partners are not required to sell our products
and they are not prohibited from discounting the prices of their products below
our prices.




Our
business could be seriously harmed if: (i) we cannot obtain suitable partners;
(ii) our cable partners fail to achieve significant sales of ACCCTM
conductor or products incorporating our technology; (iii) we fail to
successfully transfer the supply chain management and knowledge transfer to our
TECO turbine assembly relationship, (iv) we fail to maintain our relationship
with Voith for our WinDrive® supply, or (v) we otherwise fail to implement our
business strategy successfully.





WE
CANNOT CONTROL THE COST OF OUR RAW MATERIALS, WHICH MAY ADVERSELY AFFECT OUR
BUSINESS.





The
principal ACCCTM
conductor raw materials are glass and carbon fibers, plus various polymer resins
and aluminum.  The wind turbine products use industrial metals such as
steel and aluminum along with carbon and glass fiber.   The
prices for these raw materials are subject to market forces largely beyond our
control, including energy costs, organic chemical feed stocks, market demand,
and freight costs. The prices for these raw materials have varied significantly
and may vary significantly in the future. We may not be able to adjust our
product prices, especially in the short-term, to recover the costs of increases
in these raw materials. Our future profitability may be adversely affected to
the extent we are unable to pass on higher raw material and energy costs to our
customers.





INTERRUPTIONS
OF SUPPLIES FROM OUR KEY SUPPLIERS MAY AFFECT OUR RESULTS OF OPERATIONS AND
FINANCIAL PERFORMANCE.





Certain
turbine components including high quality bearings used in our gearboxes and the
Voith torque converter are produced by a few suppliers worldwide and are subject
to delivery allocation.  Interruptions or shortages of supplies from
our key suppliers of raw materials or turbine parts suppliers could disrupt
production or impact our ability to increase production and sales. We use a
limited number of sources for most of the other raw materials and turbine parts. For
example, it has been difficult to obtain inventory financing in the absence of
substantial capital financings for DeWind or the Company. As a result, in the
absence of additional down payments for turbine orders, we have been unable to
provide vendors with sufficient down payments to source enough parts for more
than 80 D8 or D8.2 turbine units in 2009.




We do not
have long-term or volume purchase agreements with most of our suppliers, and may
have limited options in the short-term for alternative supply if these suppliers
fail, for any reason, including their business failure or financial
difficulties, to continue the supply of materials or components. Moreover,
identifying and accessing alternative sources may increase our costs, extend the
advance purchase time prior to delivery, or both.


27





WE
ARE CONTROLLED BY A SMALL NUMBER OF SHAREHOLDERS, WHOSE INTERESTS MAY DIFFER
FROM OTHER SHAREHOLDERS.





As of
November 30, 2008, Benton H Wilcoxon, our Chairman of the Board, and Credit
Suisse control 30% of the Company’s outstanding common stock. As a result, these
persons have significant influence in determining the outcome of any corporate
matters submitted to our shareholders for approval, including mergers,
consolidations and the sale of all or substantially all of our assets, election
of directors and other significant corporate actions. They could potentially
have the power to prevent a change in control. The interests of these
shareholders may differ from the interests of the other shareholders, and may
limit the ability of other shareholders to affect our management and
affairs.





WE
HAVE AND WILL LIKELY CONTINUE TO EXPERIENCE CUSTOMER CONCENTRATION, WHICH MAY
EXPOSE US TO ALL OF THE RISKS FACED BY OUR POTENTIAL MATERIAL
CUSTOMERS.





For our
Cable business segment, for the year ended September 30, 2008, one customer in
China represented approximately 76% of our recorded revenues and one customer in
Europe represented 20% of our recorded cable business.  For the year
ended September 30, 2007, one customer in China represented approximately 80% of
our recorded revenues and one customer represented 13% of our recorded cable
business.  The customer in China is expected to represent in excess of
50% of our cable revenue for the next two fiscal quarters.





For our
turbine business segment, for the year ended September 30, 2008, one customer in
Europe amounted to 22% of 2008 revenues and two customers in China amounted to
25% and 19% of 2008 revenues.  For the year ended September 30, 2007,
three customers in Europe amounted to 22%, 17%, and 17% of 2007 revenues and two
customers in China amounted to 21% and 18% of 2007 revenues.  We
announced in March, 2007 that we had signed a contract with one customer
representing an approximate $40 million order for delivery in fiscal
2008.  In June, 2007 we announced that due to non-payment of the
required progress payments that this contract was declared in default by the
Company.  In January, 2007 we announced an order from one turbine
customer in South America representing approximately 35% of our September 30,
2007 backlog and between June and August, 2007 we announced orders from one
turbine customer that represents approximately 40% of our September, 2007
backlog.  The current turbine backlog is represented by one turbine
customer in North America for 55% and another turbine customer in Europe for
33%.





Until and
unless we secure multiple customer relationships, it is likely that we will
experience periods during which we will be highly dependent on one or a limited
number of customers. Dependence on a single or a few customers will make it
difficult to satisfactorily negotiate attractive prices for our products and
will expose us to the risk of substantial losses if a single dominant customer
stops conducting business with us. Moreover, to the extent that we may be
dependent on any single customer, we could be subject to the risks faced by that
customer to the extent that such risks impede the customer's ability to stay in
business and make timely payments to us.





OUR
BUSINESS MAY BE SUBJECT TO INTERNATIONAL RISKS.




We are
pursuing international business opportunities, including in Europe, India,
China, Mexico, Brazil the Middle East, Indonesia, certain far eastern countries
and Africa. As to international business in the Middle East, our current target
markets include Saudi Arabia, Qatar, United Arab Emirates, Oman, Bahrain, Libya,
and Jordan. In Africa we are actively pursuing South Africa and Kenya as well as
engaging in discussions with engineering companies that bid on trans-African
projects. There are no special additional risks related to these countries that
are not disclosed in the list of risks affecting most international business. To
date, except for our manufacturing arrangement in Bahrain, we have not engaged
in any transactions on these countries. Our wind segment has historically
operated only in Western Europe, primarily Germany and Austria prior to 2007
when we began to expand our production to the United States. Our Cable business
model has been implemented in the United States, Canada, Europe, Bahrain, and
China.  We produce the ACCCTM core in
the United States for delivery to our stranding partners under manufacturing and
distribution agreements for ACCCTM
deliveries made to date in the United States and China. Expansion
internationally will depend on our adaptation of this model to other
international markets and may be costly and time consuming. Risks inherent in
international operations in general include:




(i)
unexpected changes in regulatory requirements, export restrictions, tariffs and
other trade barriers;


28





(ii)
challenges in staffing and managing foreign operations;




(iii)
differences in technology standards, employment laws and business
practices;




(iv)
longer payment cycles and problems in collecting accounts
receivable;




(v)
political instability;




(vi)
changes in currency exchange rates;




(vii)
currency exchange controls; and




(viii)
potentially adverse tax consequences.




In
particular, certain of our target markets in the Middle East include Iraq and
Afghanistan in which there is considerable violent instability that may affect
our ability to operate in those markets.





COMPLIANCE
WITH ENVIRONMENTAL REGULATIONS COULD INCREASE OUR OPERATING COSTS, WHICH WOULD
ADVERSELY AFFECT THE COMMERCIALIZATION OF OUR TECHNOLOGY.





Our
intended operations are subject to various federal, state, and local laws and
regulations relating to the protection of the environment. These environmental
laws and regulations, which have become increasingly stringent, are implemented
principally by the Environmental Protection Agency and comparable state
agencies, and govern the management of hazardous wastes, the discharge of
pollutants into the air and into surface and underground waters, and the
manufacture and disposal of certain substances. There are no material
environmental claims currently pending or, to our knowledge, threatened against
us. In addition, we believe our planned operations will be implemented in
compliance with the current laws and regulations. We estimate that any expenses
incurred in maintaining compliance with current laws and regulations will not
have a material effect on our earnings or capital expenditures. However, there
can be no assurance that current regulatory requirements will not change, that
currently unforeseen environmental incidents will not occur, or that past
non-compliance with environmental laws will not be discovered.




CHANGES
IN INDUSTRY STANDARDS AND REGULATORY REQUIREMENTS MAY ADVERSELY AFFECT OUR
BUSINESS.





As a
manufacturer and distributor of wire and conductor products we are subject to a
number of industry standard-setting authorities, such as the Institute of
Electrical and Electronic Engineers, the Europe based International Council on
Large Electric Systems, the American Society of Testing and Materials and the
Canadian Standards Association. In addition, many of our products may become
subject to the requirements of federal, state and local or foreign regulatory
authorities. Changes in the standards and requirements imposed by such
authorities could have an adverse effect on us. In the event we are unable to
meet any such standards when adopted our business could be adversely affected.
In addition, changes in the legislative environment could affect the growth and
other aspects of important markets served by us. While certain legislative bills
and regulatory rulings are pending in the energy and telecommunications sectors
which could improve our markets, any delay or failure to pass such legislation
and regulatory rulings could adversely affect our opportunities and anticipated
prospects may not arise. It is not possible at this time to predict the impact
that any such legislation or regulation or failure to enact any such legislation
or regulation, or other changes in laws or industry standards that may be
adopted in the future, could have on our financial results, cash flows or
financial position.





Our
turbines are subject to regulatory approval and certification as described
above. Our turbine customers also often rely upon tax credits as incentives to
build wind turbine farms. These tax credits may lapse or expire prior to the
installation of turbines or delays in shipments of turbines as the result of
production issues may result in the loss of such credits to the developer In the
U.S. and elsewhere around the world, there are alternative energy tax credits
and tax advantages that have been enacted that are designed to promote the
building of renewable and alternative energy including wind turbine farms. These
tax credits may be significant enough to swing the difference as to whether a
wind farm is economically feasible or not. Currently in the U.S., such tax
credits are set to expire at the end of 2008. While we believe that the credits
will be extended in substantially the same form as today, changes to the tax law
structure may result in the reduction or elimination of these tax
credits.


29





WE
EXPERIENCE COMPETITION FROM OTHER COMPANIES, WHICH COULD RENDER OUR PRODUCTS
OBSOLETE OR SUBSTANTIALLY LIMIT THE VOLUME OF PRODUCTS THAT WE SELL. THIS WOULD
LIMIT OUR ABILITY TO COMPETE AND ACHIEVE PROFITABILITY.




The
market in which we compete is competitive. Our conductor competitors include
makers of traditional bare overhead wire and other companies with
developmental-stage products that may be marketing or developing products that
compete with our products or would compete with them if developed. Our wind
competitors include several established and much better capitalized companies
such as General Electric and Vestas who could exert downward pricing pressure
which could be catastrophic for our wind energy turbine business plan. Our
competitors will be able to better access capital. They may also achieve
unique technological advances that render our products obsolete. We believe our
competitors will continue to improve the design and performance of their
products and to introduce new products with competitive price and performance
characteristics. We expect that we will be required to continue to invest in
product development, productivity improvements and customer service and support
in order to compete in our markets. Such competitors could develop a more
efficient product or undertake more aggressive and costly marketing campaigns
than us which may adversely affect our marketing strategies and could have a
material adverse effect on our business, results of operations or financial
condition. In addition, as we introduce new products, we will compete directly
with a greater number of companies. There is no assurance that we will compete
successfully against current or future competitors nor can there be any
assurance that competitive pressures faced by us will not result in increased
marketing costs, loss of market share or otherwise will not materially adversely
affect our business, results of operations and financial condition.





THE
COMPANY IS INVOLVED IN LITIGATION WITH FKI PLC RELATED TO THE STRUCTURE OF THE
CAPITAL ACCOUNTS OF SEVERAL OF THE GERMAN AND UK SUBSIDIARIES OF THE COMPANY
WHICH MAY FORCE THESE SUBSIDIARIES INTO INSOLVENCY PROCEEDINGS.  SUCH
PROCEEDINGS MAY IMPACT THE ABILITY OF DEWIND TO OPERATE.





The
Company has filed suit with FKI, plc, a prior owner of DeWind, and has claimed
that FKI improperly repaid loans made between DeWind and FKI prior to the
acquisition of DeWind by EU Energy in 2005 and seeks to recover the
funds.  FKI has filed suit against two of the subsidiaries for
reimbursement of bond guarantees claimed by DeWind customers in 2005 and has
successfully obtained judgments against these subsidiaries.  In August
2008 one of the subsidiaries was declared insolvent and insolvency proceedings
were underway in the second.   A third subsidiary has a
substantial loan payable to one of the insolvent subsidiaries that could be
called by the insolvency receiver.  In this event, certain key assets
of the Company may be at risk primarily the D8.2 50 hertz prototype, certain
portions of the acquired intellectual property and rights to payments under our
turbine licensing agreements with our turbine partners in China.  The
Company has recorded liabilities for the adjudicated amounts but has not
recorded a receivable for the funds that are claimed to be owed by
FKI.  The Company believes that it has maintained ownership of the
intellectual property rights for its current and future turbine models and that
no significant intellectual property is owned by any of the insolvent or
threatened subsidiaries.





THE
COMPANY HAS HAD A HISTORY OF MATERIAL WEAKNESSES IN THE ACCOUNTING, FINANCIAL,
AND BUSINESS CONTROL STRUCTURE AND THE ACQUISITION OF EU ENERGY/DEWIND HAS
RESULTED IN ADDITIONAL SARBANES-OXLEY ISSUES AND MATERIAL WEAKNESSES IN THE
CONTROL STRUCTURE.





The
Company has determined that the internal control structure of the consolidated
entity has material weaknesses that will require the investment of additional
resources to mitigate and resolve.  The prior owner of the DeWind
business, EU Energy, was a UK company that was not previously subject to the
requirements of the Sarbanes-Oxley Act of 2002. The operations of EU Energy are
material to the results of the post-acquisition combined entity and management’s
initial assessment of the EU Energy control structure has identified several
additional key material control weaknesses that may require the investment of
additional resources.  The Company may be required to hire additional
employees, consult with expert advisors, invest in Informational Technology, and
provide for additional Board oversight including additional independent
directors, and audit committee, and an internal audit function.  These
remediation efforts may consume additional financial resources resulting in
additional expense to the company.


30





RisksRelated To Our Securities





THERE
IS CURRENTLY A LIMITED TRADING MARKET FOR OUR COMMON STOCK, SO YOU MAY BE UNABLE
TO LIQUIDATE YOUR SHARES IF YOU NEED MONEY.





Our
common stock is traded in the Over-the-Counter market through the OTC
Bulletin Board. There is currently an active trading market for the common
stock; however there can be no assurance that an active trading market will be
maintained. Trading of securities on the OTC Bulletin Board is generally limited
and is effected on a less regular basis than that effected on other exchanges or
quotation systems, such as the NASDAQ Stock Market, and accordingly investors
who own or purchase common stock will find that the liquidity or transferability
of the common stock is limited. Additionally, a shareholder may find it more
difficult to dispose of, or obtain accurate quotations as to the market value,
of common stock. There can be no assurance that the common stock will ever be
included for trading on any stock exchange or through any other quotation
system, including, without limitation, the NASDAQ Stock Market.





THE
APPLICATION OF THE PENNY STOCK RULES COULD ADVERSELY AFFECT THE MARKET PRICE OF
OUR COMMON STOCK.





As long
as the trading price of our common stock is below $5.00 per share, the open
market trading of our common stock will be subject to the penny stock rules. The
penny stock rules impose additional sales practice requirements on
broker-dealers who sell securities to persons other than established customers
and accredited investors, generally those with assets in excess of $1,000,000 or
annual income exceeding $200,000 or $300,000 together with their spouse. For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of securities and have received the
purchaser's written consent to the transaction before the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
broker-dealer must deliver, before the transaction, a disclosure schedule
prescribed by the Securities and Exchange Commission relating to the penny stock
market. The broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements must be sent disclosing recent price
information on the limited market in penny stocks. These additional burdens
imposed on broker-dealers may restrict the ability of broker-dealers to sell the
common stock and may affect a shareholder's ability to resell the common stock.
Shareholders should be aware that, according to Securities and Exchange
Commission Release No. 34-29093, dated April 17, 1991, the market for penny
stocks has suffered in recent years from patterns of fraud and abuse. Such
patterns include: (i) control of the market for the security by one or a few
broker-dealers that are often related to the promoter or issuer; (ii)
manipulation of prices through prearranged matching of purchases and sales and
false and misleading press releases; (iii) boiler room practices involving
high-pressure sales tactics and unrealistic price projections by inexperienced
sales persons; (iv) excessive and undisclosed bid-ask differential and markups
by selling broker-dealers; and (v) the wholesale dumping of the same securities
by promoters and broker-dealers after prices have been manipulated to a desired
level, along with the resulting inevitable collapse of those prices and with
consequent investor losses.




THE
PRICE OF OUR COMMON STOCK IS VOLATILE. VOLATILITY MAY INCREASE IN THE FUTURE,
WHICH COULD AFFECT OUR ABILITY TO RAISE CAPITAL IN THE FUTURE OR MAKE IT
DIFFICULT FOR INVESTORS TO SELL THEIR SHARES.





The
market price of our common stock may be subject to significant fluctuations in
response to our operating results, announcements of new products or market
expansions by us or our competitors, changes in general conditions in the
economy, the financial markets, the electrical power transmission and
distribution industry, or other developments and activities affecting us, our
customers, or our competitors, some of which may be unrelated to our
performance. The sale or attempted sale of a large amount of common stock into
the market may also have a significant impact on the trading price of our common
stock. During the last 12 months, the closing bid prices for our common stock
have fluctuated from a high of $2.16 to a low of $0.18. Fluctuations in the
trading price or liquidity of our common stock may adversely affect our ability
to raise capital through future equity financings.


31





WE
DO NOT ANTICIPATE PAYING DIVIDENDS IN THE FORESEEABLE FUTURE. THE LACK OF
DIVIDENDS MAY REDUCE YOUR RETURN ON AN INVESTMENT IN OUR COMMON
STOCK.




To the
extent we have earnings; we plan to use them to fund our operations. We have not
paid dividends on the common stock and do not anticipate paying such dividends
in the foreseeable future. We cannot guarantee that we will, at any time,
generate sufficient surplus cash that would be available for distribution as a
dividend to the holders of our common stock. Therefore, any return on your
investment would derive from an increase in the price of our stock, which may or
may not occur. In the past, following periods of volatility in the market price
of a company's securities, securities class action litigation has often been
instituted. If a securities class action suit is filed against us, we would
incur substantial legal fees and our management's attention and resources would
be diverted from operating our business in order to respond to the
litigation.





The
exercise price or conversion price of outstanding options, warrants and
convertible notes may be less than the current market price for our common
shares. In the event of the exercise of these securities, a shareholder could
suffer substantial dilution of his, her or its investment in terms of the
percentage ownership in us as well as the value of the common shares
held.





As of
November 30, 2008, 1,363,216 Common Shares are issuable upon exercise of all
outstanding options, warrants and conversion of convertible notes for less than
the market price of $0.33 per share. Full exercise and conversion of these below
market shares would result in us receiving cash proceeds of
$404,326.  Historically, and prior to the recent market sell off, we
had a substantial number of additional options, warrants, and shares issuable
from convertible debt.  The number of shares issuable at below market
prices is approximately 1.2% up to a market price of $0.95 per share but
increases significantly if a market price were to approach $1.30 per share as
happened as recently as July, 2008.  If the market price were to
increase significantly, as of November 30, 2008 the full exercise and conversion
of these convertible shares would result in us receiving cash proceeds of
$57,550,282 and would increase the outstanding common shares by 20.2% to
approximately 346,250,000 shares.  The sale in the public market of a
large amount of common shares receivable upon exercise of these options,
warrants, or conversion of the convertible debt to finance the exercise price or
to pay associated income taxes, or the perception that such sales could occur,
could substantially limit price appreciation to the current market prices for
our shares.





OUR
FUTURE REVENUE IS UNPREDICTABLE AND COULD CAUSE OUR OPERATING RESULTS TO
FLUCTUATE SIGNIFICANTLY FROM QUARTER TO QUARTER.





Our
quarterly revenue and operating results are difficult to predict and may
fluctuate significantly from quarter to quarter.  Our CTC Cable
business has a significant portion of its revenue sourced from one customer in
China and revenue recognition is determined by shipment of products to this
customer subject to their delivery schedules.  Our DeWind business has
historically had a significant portion of its revenue sourced from a small
number of customers and is subject to delivery schedules determined by these
customers.  Since our revenues may fluctuate and are difficult to
predict, and our expenses are largely independent of revenues in any particular
period, it is difficult for us to accurately forecast revenues and
profitability.





OUR
BUSINESS IS SUBJECT TO A VARIETY OF ADDITIONAL RISKS, WHICH COULD MATERIALLY
ADVERSELY AFFECT QUARTERLY AND ANNUAL OPERATING RESULTS, INCLUDING:




(i)
market acceptance of our composite technologies by utility companies and our
technologically improved wind turbine by wind farm operators;




(ii)
significant delays in sales that could adversely impact our cash flow relating
to turbine purchase delays or additional potential lengthy lead times for the
implementation of new lines or the reconductoring of existing
lines;




(iii) the
loss of a strategic relationship or termination of a relationship with a
conductor partner;


32




(iv)
announcements or introductions of new technologies or products by us or our
competitors;




(v)
delays or problems in the introduction or performance of enhancements or of
future generations of our technology;




(vi)
failures or problems in our utility conductor product, particularly during the
early stages of the introduction of the product;




(vii)
delays in the adoption of new industry standards or changes in market perception
of the value of new or existing standards;




(viii)
competitive pressures resulting in lower revenues;




(ix)
personnel changes, particularly those involving engineering and technical
personnel;




(x) costs
associated with protecting our intellectual property;




(xi)
potential failures by customers to make payments under their
contracts;




(xii)
market-related issues, including lower ACCCTMconductor demand brought on by excess conductor inventory and lower
average selling prices for ACCCTM
conductor as a result of market surpluses and lower market demand for wind
turbines;




(xiii)
increased costs or shortages of key raw materials including aluminum, carbon
fiber and glass fiber and turbine components;




(xiv)
regulatory developments; and




(xv)
general economic trends and other factors.





ITEM1B.UNRESOLVED STAFFCOMMENTS




None.





ITEM2-PROPERTIES





We do not
own any real estate. We lease operations facilities in Irvine, California
and Lubeck, Germany.  We have a wind turbine located in Cuxhaven,
Germany owned by a subsidiary of DeWind and which generates wind energy revenue
and which pays the city of Cuxhaven a lease fee based on revenue
generated.





On
January 1, 2004 we commenced leasing a combination manufacturing and office
facility in Irvine, California with approximately 105,120 square feet, including
21,180 square feet in the office area with the remaining 83,940 manufacturing,
storage and other areas. The lease is for seven years with rent starting at
$73,584 per month for the first year with each monthly rent increasing each
subsequent January 1 by $3,154 per month.





With the
acquisition of DeWind, we assumed leases for manufacturing, service, and office
facilities in Lubeck, Germany with approximately 103,440 square feet, of which
we currently only have office facilities of 5,774 square feet.




ITEM
3 - LEGAL PROCEEDINGS





Below we
describe the legal proceedings we are currently involved in or resolved during
the fiscal year ended September 30, 2008 through the date we prepared this
report:




33




FKI
Engineering Ltd., FKI plc, and Brush Electrical Machines Ltd (collectively
“FKI”) v. the Company and certain of its wind segment subsidiaries (here
referred to as “DeWind”); DeWind v. FKI.





Between
May, 2007 and November, 2007 work was performed on the statutory audits
underlying the claim between DeWind subsidiaries DeWind GmbH and DeWind Holdings
and FKI and which have not been completed pending resolution of the capital
accounts issue. During these audits, the auditors have identified issues
relating to the capital reserve accounts and what DeWind claimed were improper
loan repayments of the German subsidiary prior to the sale of DeWind GmbH by
FKI.





On
December 7, 2007 a hearing was conducted to hear arguments on FKI’s motion for
summary judgment of their claims for the FKI bond calls and the Brush claim. FKI
received approval of a summary judgment on their positions consisting of a net
judgment of 1,415,000 Euros plus interest and costs estimated at approximately
164,000 Euros on the FKI bond call claim between FKI and DeWind Holdings and
650,000 Euros plus interest and costs of approximately 115,000 Euros between FKI
and DeWind GmbH.  DeWind Holdings had a deferred purchase
consideration receivable claim of 2,359,000 Euros reduced to 363,000 Euros and
incurred liabilities totaling 2,789,000 Euros for a total loss of 4,785,000
Euros or approximately $7,700,000 in November, 2008.





Subsequent
to the December 7, 2007 hearing, FKI and DeWind met in January, 2008 to resolve
all differences related to the FKI bond claim, the Brush Claim, and the Capital
Accounts claim. We conducted settlement talks in January, 2008 without reaching
agreement on all issues. Subsequent to these talks, the Company made a 153,000
Euro ($219,000 at January, 2008 exchange rates) progress payment on the FKI
claims in exchange for additional time to prepare a revised settlement proposal
that was provided on February 15, 2008. FKI rejected the settlement proposal. In
April, 2008 mediation meetings to explore settlement of the Brush claim were
held. No settlement was finalized at these meetings.





In April,
2008 DeWind filed an amended counterclaim for the capital reserve accounts
matter against FKI for 37,672,950 Euros ($53,047,280 at September 30, 2008
exchange rates) representing loans that DeWind contends were illegally repaid to
FKI from DeWind between June, 2004 and June, 2005, plus statutory interest
calculated since July, 2006 estimated to be in excess of 3,500,000 Euros
($4,928,000 at September 30, 2008 exchange rates), and additional attorney and
court costs estimated to be approximately 400,000 Pounds Sterling ($712,000 at
September 30, 2008 exchange rates), and inestimable restitution, tax indemnity,
and other damages.





In July,
2008 DeWind, FKI, related counsel, and the presiding judge of the High Court of
Justice, Queen’s Bench Division, Commercial Court in the UK conducted a case
management conference and set a tentative date for trial in April,
2009.  Court briefs and declarations were required to be filed by
November, 2008.





In
September, 2008, DeWind GmbH filed for insolvency proceedings in part due to the
impending costs of litigation against FKI and in part due to the negative
operational cash flows and cash position of the subsidiary.  Effective
in October, 2008 the appointed receiver for DeWind GmbH is now responsible for
pursuing the DeWind GmbH claim against FKI for its capital accounts
litigation.   In November, 2008 a winding up petition was filed
by FKI for DeWind Holdings, Ltd due to non-payment of a statutory demand for
1,545,596 Euros ($2,176,353 at September 30, 2008 exchange rates) filed in
January, 2008 and included in the amounts listed above that were adjudicated in
December, 2007.  On November, 21 2008 FKI filed for and received
approval to dismiss the DeWind GmbH capital accounts claim on December 10, 2008
unless a total of 110,000 Euros ($140,000 at November 30, 2008 exchange rates)
of court and legal costs are paid for by DeWind Holdings or guaranteed by
another entity.  Composite Technology Corporation is no longer
involved in the court proceedings between DeWind GmbH and the FKI parties and
neither Composite Technology Corporation nor its remaining subsidiaries has made
or guaranteed payment through December 12, 2008.  The Company is not
aware whether the DeWind GmbH receiver has made, or intends to make, any such
payment.  Upon filing for insolvency, the DeWind GmbH receiver, at
their sole direction, is responsible for the legal activity surrounding the
capital accounts claim.




34




FKI has
attempted to enforce collection of the funds due to FKI from two of the
Company’s subsidiaries for their adjudicated debts due from DeWind GmbH (now
insolvent) and its holding company, DeWind Holdings. DeWind Holdings’ only asset
is the share capital of DeWind GmbH.  DeWind Holdings is in turn a
wholly owned subsidiary of DeWind Turbines, Ltd. which is in turn a wholly owned
subsidiary of Composite Technology Corporation.  There are no parent
company guarantees provided by DeWind Turbines, Ltd. or Composite Technology
Corporation for either DeWind Holdings or DeWind GmbH.   Prior to
insolvency proceedings, DeWind GmbH operated substantially for the purpose of
servicing and managing the warranty liabilities related to wind turbines sold up
to June, 2005 while DeWind was under FKI control. We believe that the DeWind
GmbH insolvency will have a minimal impact on the expected future operations of
our wind segment.





The
resolution of the capital reserve accounts issues is not reasonably estimable at
this time and no contingent asset has been recorded to date for any future funds
potentially receivable from FKI, if any, to resolve the capital reserve account
issues.





Composite
Technology Corporation and CTC Cable Corporation v. Mercury Cable & Energy,
LLC, Ronald Morris, Edward Skonezny, Wang Chen, and “Doe” Defendents 1-100
(“Mercury”)





On August
15, 2008 the Company filed suit in the Superior Court of the State of
California, County of Orange, Central Justice Center (Case No. 30-2008 00110633)
against the Mercury parties including multiple unknown “Doe” defendants,
expected to be named in discovery proceedings, claiming Breach of Contract,
Unfair Competition, Fraud, Intentional Interference with Contract, and
Injunctive Relief.  Several of the Mercury parties had filed a claim
under the Company’s Chapter 11 bankruptcy proceedings which was settled during
the bankruptcy and which provided for certain payments for sales made to
China.  The settlement agreement included non-compete agreements and
stipulated the need to maintain confidentiality for the Company’s technology,
processes, and business practices.  The Company claims that the
Mercury parties have taken actions, which violate the Settlement Agreement and
the Bankruptcy Court Order, including the development of and attempting to
market similar conductor products and disclosing confidential information and
the Company further claims that the Settlement Agreement was entered into with
fraudulent intent.  The Company claims that the Mercury parties
engaged in unlawful, unfair, and deceptive conduct and that these actions were
performed with malice and with intent to cause injury to the
Company.  The Company is asking for actual damages, punitive damages,
and attorney fees.  No estimate of such damages can be made at this
time and no accrual for such fees is included in the Company’s financial
statements at September 30, 2008.





Insolvency
of DeWind GmbH





On August
29, 2008 in Lubeck Local Court – Bankruptcy Court, Lubeck Germany, the Company’s
DeWind GmbH subsidiary filed for voluntary insolvency in lieu of a required
recapitalization under German statute  of approximately 5,000,000
Euros ($7,040,000 at September 30, 2008 exchange rates).  The DeWind
GmbH subsidiary had limited operational function for the DeWind segment,
functioning solely to provide services on wind turbines that remained under
warranty and which warranties were entered into prior to June, 2005 and in
pursuit of the FKI capital claim described above.  All wind turbines
sold and installed since July, 2005 are serviced under a separate and continuing
DeWind subsidiaries.  At the time of the insolvency, DeWind GmbH was
saddled with contracts which were negotiated while DeWind GmbH was owned by FKI
and that required DeWind GmbH to provide warranty services including “no limit”
wind power generation revenue guarantees (availability penalties) often without
requiring the wind farm customer to properly maintain or service the
turbines.  This subsidiary had incurred losses of $11.9 million and
$8.7 million for fiscal 2007 and 2008 respectively despite a significant
reduction in the number of turbines under warranty.   Concurrent
with the filing of the insolvency, DeWind effectively relinquished its right to
pursue the capital claim to the control of the insolvency
adminstrator.





On
September 18, 2008 an insolvency administrator was appointed and set an initial
reporting date of December 11, 2008.  On December 1, 2008 the initial
report of the liquidator was published which referred primarily to procedural
issues and did not address the assets or liabilities of DeWind GmbH in
detail.  The December 1, 2008 report set the date of the follow on
report to be in June, 2009.





35




ITEM4-SUBMISSIONOFMATTERSTOAVOTE OFSECURITYHOLDERS





No
matters were submitted to a vote of our security holders during the fourth
quarter of our fiscal year ended September 30, 2008.




PARTII





ITEM
5 - MARKET FOR THE COMPANY'S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES





Our
common stock is traded on the over-the-counter market on the OTC Bulletin Board
under the symbol CPTC. The following table sets forth the high and low bid
information for our common stock for each quarter within the last two fiscal
years.





Quarterly Common Stock Price
Ranges


QUARTER ENDED
2006/2007





HIGH
                  
                  
                  LOWDecember
      31, 2006
                  
                  $
                  1.27
                  
                  
                  $
                  0.76March
      31, 2007
                  
                  $
                  1.10
                  
                  
                  $
                  0.82June
      30, 2007
                  
                  $
                  1.95
                  
                  
                  $
                  1.07September
      30, 2007
                  
                  $
                  2.22
                  
                  
                  $
                  1.29





QUARTER ENDED
2007/2008





HIGH
                  
                  
                  LOWDecember
      31, 2007
                  
                  $
                  2.16
                  
                  
                  $
                  1.28March
      31, 2008
                  
                  $
                  1.56
                  
                  
                  $
                  0.70June
      30, 2008
                  
                  $
                  1.28
                  
                  
                  $
                  0.83September
      30, 2008
                  
                  $
                  1.43
                  
                  
                  $
                  0.66




These
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions. As of November 30, 2008,
there were approximately 504 stockholders of record of our common stock and no
stockholders of record of our preferred stock.





We have
never paid any dividends on the common stock. We currently anticipate that any
future earnings will be retained for the development of our business and do not
anticipate paying any dividends on the common stock in the foreseeable
future.





Sales ofUnregistered Securities





None




36




ITEM6-SELECTEDFINANCIAL DATA





The
following table sets forth our selected historical consolidated financial data
for each of the fiscal years in the five-year period ended September 30, 2008,
which were derived from our audited consolidated financial statements. The
following data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our audited
consolidated financial statements and related notes included elsewhere in this
Annual Report.








(All
      figures are presented in thousands except per share items)
                                          
                                          Year
      Ended September 302004*
                                          
                                          
                                          2005
                                          
                                          
                                          
                                          2006**
                                          
                                          
                                          2007
                                          
                                          
                                          2008Statement
      of Operations Data
                                          
                                          RestatedOperating
      Revenues
                                          
                                          $
                                          2,500
                                          
                                          
                                          $
                                          1,009
                                          
                                          
                                          
                                          7,889
                                          
                                          
                                          
                                          34,867
                                          
                                          
                                          
                                          74,141Loss
      from Continued Operations`
                                          
                                          
                                          (14,688
                                          )
                                          
                                          
                                          (40,163
                                          )
                                          
                                          
                                          (24,608
                                          )
                                          
                                          
                                          (30,608
                                          )
                                          
                                          
                                          (35,341
                                          )Loss
      from Discontinued Operations
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (1,915
                                          )
                                          
                                          
                                          (13,876
                                          )
                                          
                                          
                                          (10,212
                                          )Net
      income (loss)
                                          
                                          
                                          (14,688
                                          )
                                          
                                          
                                          (40,163
                                          )
                                          
                                          
                                          (28,523
                                          )
                                          
                                          
                                          (44,484
                                          )
                                          
                                          
                                          45,553Total
      Assets
                                          
                                          
                                          18,081
                                          
                                          
                                          
                                          5,771
                                          
                                          
                                          
                                          87,665
                                          
                                          
                                          
                                          123,837
                                          
                                          
                                          
                                          165,440Total
      Long Term Obligations
                                          
                                          
                                          9,635
                                          
                                          
                                          
                                          11,708
                                          
                                          
                                          
                                          6,421
                                          
                                          
                                          
                                          9,247
                                          
                                          
                                          
                                          7,838Cash
      Dividends per Common Share
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —Basic
      and fully diluted loss from continuing operations per common
      share
                                          
                                          
                                          (0.14
                                          )
                                          
                                          
                                          (0.35
                                          )
                                          
                                          
                                          (0.19
                                          )
                                          
                                          
                                          (0.16
                                          )
                                          
                                          
                                          (0.15
                                          )Basic
      and fully diluted net loss per common share
                                          
                                          $
                                          (0.
      14
                                          )
                                          
                                          $
                                          (0.35
                                          )
                                          
                                          $
                                          (0.20
                                          )
                                          
                                          $
                                          (0.23
                                          )
                                          
                                          
                                          (0.19
                                          )





*
Subsequent to the date of the initial Form 10-KSB and 10-QSB filings for the
fiscal year 2004, the Company determined that $364,277 in compensation expense
related to the modification of employee stock options had not been recorded for
the entire fiscal year. The Company recorded the additional expense as a
correction of an error and restated earnings for fiscal 2004. The impact on
earnings per share was less than $0.01 per share for the fiscal year ended
September 30, 2004.





**On July
3, 2006 the Company acquired its DeWind segment.  This acquisition
resulted in a significant increase in assets, revenues, and operating
losses.  In 2008 the Company sold one of the acquired DeWind
subsidiaries and began insolvency proceedings for a second subsidiary as
described below in Item 7.  The operations of these two subsidiaries
were reclassified to discontinued operations.





ITEM7-MANAGEMENT'S DISCUSSIONANDANALYSIS OF FINANCIAL CONDITIONANDRESULTS OFOPERATION





The
following discussion of our financial condition and results of operations should
be read in conjunction with the financial statements and related notes thereto.
The following discussion contains certain forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those discussed herein. We undertake no obligation publicly to release the
results of any revisions to these forward-looking statements that may be made to
reflect any future events or circumstances.





OVERVIEW





The
financial results for the year ending September 30, 2008 demonstrate continuing
success on our growth strategies. During the year, we saw substantial revenue
growth from $34.9 million in fiscal 2007 to $74.1 million in fiscal
2008.  The revenue growth was driven by an increase of $16.7 million
to $32.7 million for the Cable segment and an increase of $22.6 million to $41.4
million for the Wind segment.  We also improved our cash position,
primarily the result of raising $50 million through a private equity placement
into a Credit Suisse investment fund in the June, 2008 quarter.




37




Our Wind
segment progress was the result of progress on sales of our new and existing
turbines including several sales to Europe, sales of turbine components to
Chinese licensees of our D8 and D6 technology, license fees on Chinese
deliveries of turbines made under the license agreements, and the sale of two
D8.2 units including one 50 hertz turbine in Argentina and the 60 hertz
prototype commissioned in Sweetwater, Texas.  Excluding service
revenue of $2.2 million for 2008 and $7.1 million for 2007 our turbine product
related revenues increased from $17.6 million in 2007 to $40.1
million.





Our Cable
segment success was primarily due to deliveries under our three-year
distribution agreement with the Far East Composite Cable subsidiary of Jiangsu
New Far East Cable Co., in China in January, 2008 and deliveries to customers in
new markets including Spain, Chile, Belgium, Mexico, and
Poland.    We delivered a total of 3,679 KM of product in
2008 including 876 KM of ACCCTM
conductor and 2,803 KM of ACCCTM core
representing an increase of 2,586 KM from 2007 levels.  The revenues
recorded in 2008 represents a shift towards a greater proportion of higher
margin, lower ASP ACCCTM
conductor core sales and despite a low margin ACCCTM
conductor sale to our Polish customer, taken at a discount to establish this
market, our Cable segment product margins increased from 28.6% in 2007 to 35.6%
in 2008.





The
Company made some key management changes during the year.   In
October, 2007, we appointed John Mitola as our second independent
Director.  Mr. Mitola will chair the compensation committee and be a
member of the audit committee.  In November, 2007 we hired Tom Smith
as Chief Strategy Officer and Robert Rugh as VP of DeWind
Operations.  Mr. Rugh was subsequently promoted to President of DeWind
in September, 2008.




We have
enhanced and improved our information technology systems supporting finance,
sales, marketing and administration.  These improvements came on line
in October, 2008 and we believe these infrastructure improvements will improve
efficiency and enhance compliance with the requirements of the Sarbanes Oxley
Act.  In June, 2008 we began the process of transitioning the
management of our turbine supply procurement systems to TECO Westinghouse under
our turbine assembly relationship, which should result in additional systematic
management controls.





The
Company conducts its operations in the following two business segments: the CTC
Cable segment and the DeWind Turbine segment. The segments have been organized
on the basis of products. All of each segment’s product revenues relate to
external customers.





CTC Cable
Segment





Located
in Irvine, California with sales operations in Irvine, California, Shanghai,
China, Brazil, and Europe, the CTC Cable segment produces and sells ACCCTM
conductor, ACCCTM core,
and related ACCCTM
hardware products for the electrical transmission market. ACCCTM
conductor production is a two-step process. The Irvine operations produce
ACCCTM core
which is then shipped to one of four cable manufacturers in Canada, Belgium,
China, or Bahrain where the core is stranded with conductive aluminum wire to
become ACCCTM
conductor. ACCCTM
conductor is sold both through a distribution understanding and manufacturing
agreement with General Cable in the US and Canada, into Europe through a
distribution and manufacturing agreement with Lamifil in Belgium, into China
through a manufacturing and distribution agreement with Far East Composite
Cable, into the Middle East through a manufacturing and distribution agreement
with Midal in Bahrain, as well as directly by CTC Cable to utility customers
worldwide.  ACCCTM
conductor has been sold commercially since 2005 and is currently marketed
worldwide to electrical utilities and transmission companies.





RECENT
DEVELOPMENTS




Our Cable
segment ended fiscal 2008 with $32.7 million in recorded revenues representing
over 104% year over year revenue growth from $16 million in 2007. Gross margins
were 35.4% of revenues as compared to 28.6% margins in
2007.   Our 2008 margins improved over 2007 primarily due to the
change in product mix with our Chinese customer.  In 2007 Far East
Composite Cable purchased high ASP, low margin ACCCTM
conductor.  Beginning in December 2007 and thereafter, Far East
Composite purchases lower ASP but higher margin ACCCTM
core.




38




CTC
Cable’s goal during fiscal 2008 was to generate positive earnings for the entire
fiscal year.  Despite a poorer than expected fourth quarter, which
resulted in a small EBITDAS loss, the segment had non-GAAP EBITDAS of $3.1
million or 9.6% of revenues as compared to an EBITDAS loss in 2007 of $2.4
million.   The $5.5 million improvement is the result of $7.0
million of additional gross margin due to sales growth and improved product mix
and $1.5 million of additional cash basis operating expenses including $1.0
million in sales and marketing, $0.2 million in research and development, and
$0.2 million in general and administrative expenses.  Overall SGA
expenses as a percent of revenue decreased from 54% of revenues in 2007 to 31%
of revenues in 2008.




Our
fourth fiscal quarter revenues and deliveries were lower than we had hoped for
two primary reasons.  We now have two years of commercialization of
ACCCTM and for
our customers located in the Northern Hemisphere; we believe that there is a
seasonal effect that results in lower retrofit installations of ACCCTM
conductor during the summer months when transmission demand is high due to air
conditioning requirements.  However, we do not as yet have a large
enough customer base to confirm this belief.  The second issue was a
temporary reduction in orders from China related to government orders during the
Beijing Olympics.  A large portion of our ACCCTM core
sold to China is installed in the areas around Beijing.  From June,
2008 through September, 2008 the Chinese government mandated a moratorium on
electrical grid modifications in the area due to the Olympics in August, the
Paralympics in September, and additional festivals and functions extending to
the end of September.  We worked with Far East Composite and allowed
them a waiver from their contractual minimum purchase requirements for this
extraordinary event and they agreed to make up the differences in orders in
later quarters.  In the quarter ending December 31, 2008, Far East
Composite has indicated it plans to catch up on the orders of ACCCTM core
with several large orders being negotiated with Power Bureaus of State
Grid.  Unlike the wind segment, we have not seen a significant delay
in obtaining new cable customers or projects as a result of the economic and
credit crises except that some of the tender awards for some of the
international projects under consideration have been delayed.  It is
difficult to determine if this is normal course of business for these markets or
a direct impact of the economic slowdown.





CTC
Cable’s sales and marketing focus continues to be to develop new relationships
in targeted markets including Europe, South America, Southeast Asia, Mexico,
India, and the Middle East and on fulfilling our long-term supply agreement with
our Chinese customers.   During the year we completed the
installation of our largest order to date in Poland and made additional initial
sales into Spain, Belgium, Mexico, Chile, and Indonesia.  We expect to
expand these newly opened markets to full commercialization in 2009 and
2010.  In addition, we have tender offers outstanding and expect
orders in numerous additional markets including the UK, Germany, Scandinavia,
India, Brazil, Argentina, Morocco, Ecuador and several Middle Eastern countries,
including Saudi Arabia, Qatar, Bahrain, and Oman.  All of these new
markets represent the culmination of several years of testing and certification
procedures.  Each success opens these markets to additional orders in
the future. We are excited about the opportunities that these new markets
present and we consider our initial sales to be further proof
of international adoption of ACCCTM
conductors.





A key leg
of our international strategy is to expand our stranding distribution and
manufacturing base to allow for an increase in higher margin ACCCTMcore
sales and to provide a local product, thereby reducing tariffs, shipping, and
costs to the end user utility. In November 2007, Far East Composite successfully
passed certification of several of the more common sizes of core and purchased
their first order of ACCCTM
core.  Their transition to purchasing core was a key driver in our
higher margin per revenue dollar and an important step towards our overall
strategy.  Later in 2008, we expanded our existing relationship with
Lamifil, one of our ACCCTM
stranding manufacturers, to allow Lamifil to sell finished ACCCTM
conductor directly to their customers. This revised arrangement will allow CTC
Cable to sell to Lamifil the higher margin ACCCTM
conductor core that is central to our worldwide sales and marketing
strategy.  The enhanced relations with Lamifil was made possible by
obtaining approval from our warranty insurance partner to include the ACCCTM
conductor stranded by Lamifil and Far East Composite Cable  to the
warranty program. This development is expected to help facilitate additional
sales to new customers by making better use of those stranders and to help
develop and improve end user customer relationships.  Subsequent to
year-end, we signed stranding agreements to produce ACCCTM
conductor in Indonesia and we are working towards signing up additional
stranding manufacturers in Mexico, and Brazil.  We expect to have
stranding capability in place in these two countries in 2009.





39




We
continue to aggressively sell and market our ACCCTM
products in the US.  We have maintained close relationships with two
of our early adopters of ACCCTM
conductor, American Electric Power (AEP) and PacifiCorp.  With AEP we
have conducted an important series of tests at third party facilities to verify
the longevity and performance characteristics of ACCCTM core
and ACCCTM
conductor.  The tests also verified the suitability of ACCCTM
conductor for higher voltage application, from 345KV to 765KV.  The
suitability for higher voltages will open up a new range of opportunities for
CTC Cable globally.  The tests have been very successful, and we
believe this will lead to much broader use of ACCCTM
conductor by AEP and other utilities that follow AEP’s lead.  With
PacifiCorp we have achieved the ability for ACCCTM
conductor to be used widely and suitable for stocking orders.  We have
expanded our US sales force by adding regional sales managers in the Northwest
and Southeast regions.  We hired a new Vice President of Sales, Pat
Avery, who comes from the utility industry and has many key contacts which we
believe will benefit CTC Cable.  We have added regional sales
representative organizations around the country greatly expanding the number of
sales resources promoting ACCCTM
products.  These added sales resources and the continuing
relationships with AEP and PacifiCorp have identified substantial opportunities
for 2009, with bids submitted for a number of large projects.  The
long period of evaluation of ACCCTM
conductor has proven its value and the product is now ready for full commercial
adoption in the US, just as it has been adopted internationally.





We
continue to monitor every installation of ACCCTM
conductor.  We train local installers, hired by our customers, in the
handling and termination of ACCCTM
conductor.   Many of the installations are quite large and use
dozens of crews. We train and certify the lead installers on these crews, who in
turn train their crews.  We have been careful to engineer ACCCTM
conductor to be installable using industry standard tools and
methods.  Properly handled ACCCTM
conductor goes up without any problems, but if mishandled the conductor can be
damaged.  The Polish installation this year suffered mishandling by
one of the contractors.  The conductor was damaged by the use of
improper equipment and techniques by a crew trying to make up
time.  Subsequently the damaged sections of the conductor were
identified and CTC Cable, working with the customer, replaced the damaged
conductor.





The focus
of our cable operations during the year ended September 30, 2008 has been to
increase production to manage our revenue growth drivers including a large
influx of orders from our new markets as well as produce ACCCTMcore
for deliveries under our China agreement. We invested approximately $2 million
into our Irvine, CA plant during the year to add 10 additional pultrusion
machines in addition to redundant power supply for our entire production
floor.  The addition of these machines, which are able to produce
ACCCTM core at
faster speeds than our existing units, brings our total plant capacity to over
18,000 km of ACCCTM core
production per year, sufficient capacity to provide in excess of $100 million in
ACCCTM core
revenue per year.





We
believe that we have lined up sufficient raw materials supplies for our
ACCCTM core to
produce our expected ACCCTM core
sales worldwide for the next twelve months. We will continue to work to expand
our ACCCTM
conductor production capacity through stranding and manufacturing agreements
with targeted manufacturers worldwide. As we open new markets and we begin to
sell ACCCTM
conductor locally, we will look to sign additional agreements with local
stranding sources. In addition, our manufacturing agreement with General Cable,
previously an exclusive agreement, lapsed at the end of the December 31, 2007
quarter. We are beginning the process of negotiating a revised and non-exclusive
agreement with General Cable.





The Cable
segment’s focus will continue to be on obtaining new and repeat orders from U.S.
conductor customers, developing new relationships in targeted international
markets including Europe and the Middle East and on fulfilling the orders and
growth related to the long term supply agreement with our Chinese conductor
distributor Far East Composite Cable Co.




As of
December 15, 2008 we had approximately $12 million in ACCC conductor and related
cable products for which we have received firm purchase orders or similar signed
documents with firm delivery dates.  In addition, we have a contract
for minimum purchases of between $18,000,000 and $38,000,000 in ACCC conductor
products related to our purchase contract with Jiang-su Far East over the next
twelve months.   We consider the $12 million to be our firm CTC
Cable backlog.


DeWind Segment





The
DeWind segment operates under the brand name DeWind, which has manufactured and
sold wind turbines since 1995 from Lubeck, Germany.  Currently, DeWind
is operated from the Company’s Irvine offices with sales operations in Dallas,
Texas, Irvine, California and Lubeck, Germany along with Engineering and R&D
operations in both Irvine, California and Lubeck, Germany.  The DeWind
segment produces, services, and sells DeWind turbines in the 1.25 and 2.0
Megawatt range worldwide. We acquired DeWind during the EU Energy acquisition on
July 3, 2006.  Accordingly, we have incorporated DeWind’s operations
into our financial results since that date.




40




RECENTDEVELOPMENTS


Recorded
product revenues for the fiscal year ended September 30, 2008 totaled $40.1
million consisting primarily of $19.9 million for turbine sales of 15 megawatts
installed, including four D6 turbines, 3 D8 turbines, and 2 D8.2 turbines; $3.7
million of license fee revenue from our Chinese licensees, and $15.7 million
from turbine parts sales to China.  We recorded negative product
revenue margins of $1.0 million or negative 2.4% of
revenues.  Negative margins were driven lower by a $5.1 million
inventory write-off charge taken in June, 2008 due to the elimination of
DeWind’s German production facility and improved by the nearly 100% margin
license fees of $3.7 million.  Excluding the write-off and the license
fees, margin on the parts and turbines sold would have been approximately $0.3
million on $35.6 million of turbines and turbine parts revenues, or 1.1% of
revenues.





During the year, the
DeWind segment continued to identify and target near and long term sales
opportunities for sales of DeWind wind turbines in the US and International
locations.Our turbine sales efforts during the year have been
frustrating.  In November 2007 we signed non-binding term sheets and
received a refundable deposit of $2.65 million in cash from a customer in Brazil
for 75 D8.2 turbines.  The turbine purchase agreements were drafted
but issues with the customers banking and changes to the ownership structure
resulted in delays to this order.  We have not refunded the deposit as
of November 30, 2008.  In December, 2007 we had tentatively agreed to
terms with a US utility to purchase up to 300 D8.2 turbines for deliveries in
2008-2010.  Based on these two opportunities, we began to ramp up our
supply chain to fulfill one, or both of these expected
orders.  Both deals collapsed which caused a significant
impact to our cash flow and turbine supply chain.





After
these contracts fell through, we assessed our turbine and sales approach and
identified three key areas to resolve.  Our development, sales, and
operational efforts over the past year have resulted in substantial improvement
in the salability and for the ability of our customers to obtain financing for
our D8.2 turbine.





First, in
April 2008 we achieved full worldwide DEWI certification for our 60 hertz D8.2
prototype located in Sweetwater, Texas. Second, also in April 2008 we completed
the creation of a five year warranty package including sub-warranties for the
major drive-train components and including full mechanical breakdown coverage
underwritten by Zurich American Insurance Co.   Finally, the
closing of the equity financing in the June quarter provided DeWind with a
substantial cash balance to assist with the sourcing of supply chain components
and reduce the going concern issue expressed by customers.





Due in
large part to the work on the D8.2 prototype, the financing, and the insurance,
during the year, we signed contracts for the sale of 103 turbines with a total
value of approximately $228 million including 60 turbines signed in September
and October, 2008 worth approximately $145 million for the 90 meter version of
our D8.2 model, known as the D9, and scheduled to be delivered in late
2009.  We received cash down payments on these orders in September and
October.  However, the elimination of these three barriers and the
signature of the September and October orders coincided with the beginning of
the worldwide credit crisis and the uncertainty around the US production tax
credit for wind energy.





The
production tax credit (PTC) is an important tax break provided to US wind farm
operators.  The PTC represents a tax benefit of approximately $20 per
megawatt of energy produced by wind turbines.  The PTC was set to
expire on December 31, 2008 without Congressional action.  At various
times throughout 2008 there was proposed discussion on the PTC, which culminated
in a one-year PTC extension in one of the economic stimulus bills that passed
Congress in early October.  The PTC is now set to expire at the end of
2009.  The lack of a long term PTC caused delays in discussion of US
based wind farms since the PTC represents as much as 25% of the total economic
return of a wind farm in the US through lower taxes.    This
significantly hampered our sales efforts during 2008 for farms which were
expected to be installed after December 31, 2008.





Despite
the PTC extension, which was extended in the beginning of the worldwide credit
crisis, the ongoing crisis has impacted sales of wind turbines for
DeWind.  The crisis has resulted in significant equity and debt market
downturns and tightening of credit including investments in wind
farms.  In turn, we have observed project delays or cancellation of
several wind farm projects.  In particular, at risk for DeWind orders
are the 40 D8 units purchased under contract in January, 2008 from the Czech
customer; and two recent orders from the customer in Canada, a 10 unit order for
90 meter D9 units and a follow on unannounced 50 unit D9 order for this same
customer.  Subsequent to receiving a small deposit payment on the
second order, the Canadian customer missed a scheduled payment on the first 10
unit orders and informed DeWind of a project delay due to financing
problems.  This customer has a proven track record of previous wind
farm development and has represented that the financing delay is indicative of
the greater financial crisis.   We are working with both of these
customers to obtain alternative financing.




41




We have
taken several steps recently to preserve the viability and liquidity of the
DeWind business.  These steps consist of:


·
            We
      have significantly restricted the purchase of new turbine parts beginning
      in September, 2008 and delayed delivery of parts not required for existing
      orders with financing already
verified.


·
            We
      signed an agreement in October, 2008, as described in greater detail
      below, to co-develop wind farms using DeWind turbines.  Our
      intention is to obtain financing for these wind farms and to fulfill these
      in large part from existing turbines parts inventories in order to convert
      invested working capital to cash.  See also Perpetual joint
      venture below.


·
            We
      are investigating opportunities to license our D6, D8, and D8.2 turbine
      designs.





These
steps are in addition to our plan developed at the beginning of the fiscal year
to reduce DeWind’s legacy European service and production:


·
            In
      August, 2008 we discontinued the funding of the legacy DeWind GmbH
      (“GmbH”) subsidiary and as a result, this subsidiary was forced into
      insolvency proceedings. Prior to the discontinuation of funding of this
      subsidiary, approximately 1 million Euros ($1.4 million at September 30,
      2008 exchange rates) per quarter was funded to DeWind GmbH for warranty
      and service related items and additional cash payments to pay for legal
      expenses.  See also discussion of the discontinued operations of
      GmbH below and in Note 2 to the financial
  statements.


·
            During
      the year, we continued our strategy to reduce our turbine operations in
      Europe.  On April 3, 2008 we sold the remaining 24.9% ownership
      of E Services to Enertrag for 500,000 Euros ($790,250 at April 3, 2008
      exchange rates).  We have restated our financial statements to
      present the operations of E Services as discontinued
      operations.


·
            In June 2008 we enhanced our
      relationship with TECO Westinghouse, which will include TECO Westinghouse
      taking a greatly increased role in the purchase of turbine component parts
      including utilization of TECO’s economies of scale for bulk purchasing as
      well as increased internal controls and inventory
      reporting.   We began the process of transitioning the
      turbine supply chain purchasing during the June, 2008
      quarter.


·
            Due
      to the increased role for TECO, the high cost of maintaining the facility
      and turbine production in Europe, as well as the sale of the remainder of
      the E Services entity, we determined in July 2008 that we would no longer
      support the fulfillment of our turbines out of our former production
      facility in Lubeck, Germany.  This facility had formerly
      supported E Services through parts storage and staging as well as for the
      prototype fulfillment for our D8.2 unit and for most of our European
      deliveries. We intend to fulfill future European orders either through our
      Chinese licensees for our older D6 turbines or through TECO for our D8 and
      D8.2 turbines.  As a result of the closure of the Lubeck
      manufacturing location, we recorded turbine parts writeoffs that we
      charged to cost of sales for the quarter ended June 30, 2008. We intend to
      keep our Lubeck professional offices, which provides office space for
      sales, marketing, research, and development
  personnel.





In
September, 2007 we began assembly of the 60 Hz D8.2 model
prototype.  The 60 Hz prototype was shipped to the TECO Westinghouse
facility in Texas in October where final assembly was completed and it was
tested prior to it being shipped to the National Renewable Energy Laboratory
(NREL) in Boulder, CO for accelerated power curve testing.  In
November, 2007 it was placed on the NREL test bed where it was evaluated under
modeled conditions designed to accelerate the verification of the 60 Hz power
curve.  Upon completion of these tests in December, 2007 it was
shipped to a test site in Sweetwater, Texas.  The 60 Hz prototype was
commissioned in February, 2008 and fully certified in April, 2008.  We
sold this turbine to the Texas State Technical College in September,
2008.





Production and Supply
Chain: In November, 2006, we announced an agreement with TECO Westinghouse Motor
Company (TECO) in Round Rock, Texas to assist us in the assembly, supply, and
servicing of our turbines.In June 2008 we enhanced our relationship with
TECO Westinghouse, which will include TECO Westinghouse taking a greatly
increased role in the purchase of turbine component parts including utilization
of TECO’s economies of scale for bulk purchasing as well as increased internal
controls and inventory reporting.   Commercial production of D8.2
turbines began in November, 2007 and four nacelle units were completed during
the year.




42




Our
ability to produce turbines is limited by two primary but related factors: i)
our ability to source key components and ii) sufficient working capital to
purchase parts. Turbine components are manufactured by third party vendors which
often require long lead times and considerable down payments in advance of
delivery to cover the vendors’ material purchases and technical costs. Certain
key components, such as blades, gearboxes, bearings, and our Voith torque
converters, also require very accurate engineering and technical specifications
and therefore result in a very limited number of or in some cases one, qualified
vendors available worldwide. Finally, the market for turbine components is very
competitive and requires long lead time of six months or more for these key
components to ensure that the parts are delivered on time at as dictated in the
engineering specification requirements.  We have not seen an increase
in component supply availability as a result of the credit crisis but we are
aware of other turbine manufacturers receiving order cancellations and delays,
which may reduce demand for key and scarce components.




As of
December 15, 2008 we had approximately $180,000,000 in turbines and turbine
parts related orders under contract for which we had received down payments or
deposits and an additional $85,000,000 in turbine orders from previous customers
for which we have not received deposits.  We also have $14, 000,000 of
orders from our own wind farm development venture and approximately $9 million
in projected license fees for a total of approximately $288,000,000 in potential
orders under contract.  Certain of these balances are uncertain due to
the financial markets and the financing of wind farm projects.  Of the
$288 million balance, $50,000,000 represents amounts that we believe are
considered to be firm and deliverable within the next twelve
months.


Perpetual Wind Farm Joint
Venture and wind farm developments:





In
October, 2008 we signed an agreement with Higher Perpetual Energy LLC to
co-develop up to 620 megawatts of wind farms in the Texas Panhandle region under
DeWind SWI Wind Farms, LLC. After the joint venture receives sufficient third
party financing. DeWind expects to pay for and contribute wind turbines at
agreed upon prices, subject to escalators, into the development entity and
receive priority repayments upon the sale or financing of the projects. DeWind
has begun discussions with certain investors that have expressed interest in
participating in the wind farm projects in exchange for ownership positions, tax
benefits, and income from the power sales. DeWind initially will be the 51%
controlling member of SWI Wind Farms and SWI Wind Farms has broken ground on the
first 10 megawatt phase designated as Little Pringle 1.  The total
cost of the 620 megawatts would be in excess of $2 billion, if
completed.




DeWind is
entering into co-development deals for three primary reasons.  First,
this could become an opportunity to build, under conditions controlled by
DeWind, wind farms for our new turbines including our D8.2 units and our
extended rotor D9 expected in 2009 or other future products.  Second,
the placement of these turbines into wind farms will allow eventually for a more
smooth supply chain and production delivery schedule once we achieve full
production.  If another customer has problems that require delivery
delay, DeWind could quickly take delivery and install turbines at our own
development, thus reducing working capital requirements and mitigating penalties
for delivery delays.  Finally, we believe that wind farm development
provides for a substantial potential increase in the profit margin per turbine
produced.  Upon the review of the models of wind farms, it appears
that sharing in the additional developer profit could increase the gross profit
margin in excess of $300,000 per turbine, depending on the quality of the wind
site and the economies of scale involved in the project.




European DeWind corporate
strategy:





We are
continuing to integrate the acquired DeWind personnel and corporate
structure into an optimal corporate structure, primarily through a systematic
winding down and liquidation of several of the subsidiaries formerly owned and
operated by EU Energy in the United Kingdom.  We are undertaking this
strategy so as to preserve the intellectual property of DeWind, preserve the tax
advantages, if applicable, and preserve the personnel and knowledge base of our
wind business.  We are also reducing operations in areas that are not
considered to be long term viable business models.





As part
of this strategy, two DeWind subsidiaries or investments were either sold or
were placed into insolvency during fiscal 2008; DeWind GmbH and E
Services.  We do not believe that either of these subsidiaries’
proceedings will have significant operating impacts to the DeWind segment’s
future operations.





DeWind
GmbH: DeWind GmbH was the original DeWind subsidiary that was owned by FKI prior
to its acquisition by EU Energy (EUE) in 2005. Between 2005 and 2008 the
originally acquired GmbH assets were written off or sold, including much of
the intellectual property rights but by September 2008 the subsidiary was
insolvent primarily due to long-term warranty and turbine service obligations in
existence since the ownership by FKI, along with litigation related liabilities
payable to FKI.  The primary asset of GmbH consisted of a large loan
receivable from another DeWind subsidiary.  At the date of insolvency
filing, a capital investment of approximately 5 million EUR ($7 million at
September 30, 2008 exchange rates) would have been required to continue the
operations of DeWind GmbH.    The subsidiary had incurred
losses of $11.9 million in fiscal 2007 and $8.7 million in fiscal
2008.




43




In
September, 2008 an insolvency receiver was appointed in Germany for
GmbH.  We no longer have operational control over DeWind GmbH
including the decision making on the strategy surrounding our litigation case
between GmbH and FKI.





US GAAP
accounting requires that insolvent subsidiaries be “de-consolidated” as of year
end and the net asset value should be shown under the cost method until the
insolvency proceedings are completed.  Accordingly, the financial
results for DeWind GmbH are included as discontinued operations up to the date
of insolvency and thereafter operations are excluded from the presented
financial statements.  We show a liability on our balance sheet at
September 30, 2008 to reflect the net liability position of DeWind GmbH
subsidiary.  See also Note 2 for additional information.




CRITICAL
ACCOUNTING POLICIES AND ESTIMATES





Please
refer to the Critical Accounting policies in the Footnotes to the Financial
Statements.





Liquidity
and Capital Resources





Comparison
of Years Ended September 30, 2008, September 30, 2007, and September 30,
2006




Our
principal sources of working capital have been private debt issuances and equity
financings.





Cash used
by operations during the year ended September 30, 2008 of $51.4 million was
primarily the result of operating losses of $45.6 million, offset by non-cash
charges of $26.5 million including losses from discontinued operations of $10.2
million, depreciation and amortization of $3.0 million, stock related charges of
$4.4 million, inventory charges of $5.2 million, non-cash interest expense of
$2.8 million, a fixed asset impairment charge of $0.9 million, a change of net
liabilities from discontinued operations of $3.6 million and net use of cash for
working capital of $29.0 million, primarily inventory related purchases of $41.1
million and $8.0 million increase in receivable balances related to increased
business levels offset by an increase in accounts payable of $19.7
million.  Cash used by investing activities of  $2.9 million was
related to the increase in the CTC Cable plant to increase capacity, the
purchase of computer hardware and software, and equipment put in service in
anticipation of increased cable manufacturing activities. Cash provided by
financing activities of $54.5 million was primarily due to the cash proceeds
from our Credit Suisse equity placements in May and June of 2008 along with $4.5
million of warrant exercise proceeds.





We
anticipate that unless we receive a significant influx of working capital due to
a large commercial order that in order to maintain the viability of our turbine
supply chain, we will need to raise additional capital through alternative
sources including a strategic partner for DeWind, the issuance of debt or equity
securities, or both.  We believe that the commercial prospects of our
cable segment will result in positive cash flow from operations from that
operating segment for 2009.  Our stock price is volatile and we may be
required to raise funds at prices below the current conversion price of our
existing debenture issue or our existing warrants. Such a financing may further
dilute our stock through the required issuance of additional shares of common
stock upon the conversion of these debentures.




Cash used
by operations during the year ended September 30, 2007 of $21.8 million was
primarily the result of operating losses of $44.5 million, offset by non-cash
charges of $22.6 million, including a loss on discontinued operations of $13.9
million,  non-cash interest of $5.4 million, depreciation and
amortization of $2.1 million, stock option (SFAS 123R) expense of $2.4 million,
issuance of stock and warrants at fair value for services and settlements of
$0.6 million, amortization of prepaid expenses paid in cash of $0.4 million and
warrant modification charges of $0.4 million; changes in net liabilities of
discontinued operations of $9.5 million, and net working capital providing cash
of $6.9 million, in particular cash received for customer advances for DeWind
turbines of $16.2 million and accounts payable increases of $11.4 million offset
by net inventory purchases of $17.5 million and receivable increases of $1.5
million. Cash used by investing activities of $5.8 million was related to the
equipment purchases of $5.4 million, primarily capitalization of our D8.2 50 and
60 hertz prototypes, and cash invested in the service joint venture of $0.4
million. Cash provided by financing of $47.8 was primarily the result of $21.5
million net proceeds from our February, 2007 convertible debt offering, $23.8
million net proceeds from our June, 2007 equity placement, and $2.8 million in
cash proceeds from the exercise of stock options and warrants offset by $0.3
million in capital lease repayments.





44




Cash used
by operations during the year ended September 30, 2006 of $6.3 million was
primarily the result of operating losses of $28.5 million, offset by non-cash
charges of $15.3 million including stock issuances for settlements of $3.6
million, a carrying value adjustment to convertible debentures of $2.6 million,
losses on discontinued operations of $1.9 million, issuance of stock and
warrants at fair value for services of $1.4 million, $1.1 million of
depreciation and amortization, non cash interest expense of $2.0 million, stock
option (SFAS 123R) expense of $1.0 million, and warrant modification charges of
$0.7 million; and net working capital change of $7.3 million, in particular cash
received for customer advances for DeWind turbines of $8.4 million and cash paid
for discontinued operations of $0.2 million. Cash provided by investing
activities of $0.4 million was related to the equipment purchases of $0.5
million and cash acquired from DeWind net of cash paid of $0.9 million. Cash
provided by financing of $7.6 million was primarily due to the cash proceeds
from convertible debt and notes of $9.5 million and proceeds from warrants of
$0.7 million offset by capital lease and note payable principal payments of $2.6
million.





Results of Operations


Comparison
of fiscal 2008 to 2007 and 2006





In fiscal
2006, with the acquisition of DeWind, activity included one quarter of activity
from the July, 2006 acquisition of wind turbines in addition to one year of
cable activity. Fiscal years 2008 and 2007 saw an entire year of DeWind
activity.





There are
two DeWind European subsidiaries that have had their operations reclassified as
discontinued operations, as described above.  The revenues and
expenses of these subsidiaries have been combined as net losses from
discontinued operations and the balances presented in prior years have been
restated for the reclassification to discontinued operations.  See
Note 2.





Net Loss


Our net
loss increased to $45.6 million from $44.5 million for the years ended September
30, 2008 and 2007 from $28.5 million in fiscal 2006. The net loss increase of
$1.1 million from 2007 to 2008 is due to:





·
            An
      increase in Gross Margin of $5.9 million from 2007 to
  2008




·
              An increase in
      Operating Expenses of $13.7 million from 2007 to
  2008





·
            A
      decrease in Total Other Expenses of $3.2 million from 2007 to
      2008





·
            A
      decrease in Loss from Discontinued Operations of $3.7 million from 2007 to
      2008





Gross
Margin: The Gross Margin decrease is due to the net effect of the increase in
gross margin from the Cable segment of $7.0 million, the result of increased
ACCCTM
conductor margins due to higher revenue levels offset by the decrease in turbine
gross margin of $1.1 million, primarily caused by a $5.1 million charge against
cost of sales for turbine inventory write-downs related to the closure of the
German production facility, offset by high margin turbine license fees of $3.7
million and margin improvement in turbine service margins due to fewer turbines
in warranty in 2008.





Our
operating expenses increased by $13.7 million from $26.6 million in fiscal 2007
to $40.3 million for fiscal 2008.




45




Of the
increase, $11.0 million was due to an increase in DeWind operating expenses,
$1.5 million due to CTC Cable expenses, and $1.1 million in corporate
expenses.
 
 The $11.0
million DeWind increase is due to $6.4 million in US based expenses, $3.3
million in European based expenses and an increase of $1.3 million in intangible
amortization expense..  US based expenses increased from $1.6 million
in 2007 to $8.0 million in 2008 due to increased headcounts as well as increased
costs related to DeWind’s D8.2 60 hertz prototype tested and commissioned in
2008.  European based operating expenses increased by $1.5 million due
to the higher euro rate in 2008 than 2007 in addition to headcount related
increases in R&D of $1.5 million, Sales and Marketing increases of $0.6, and
G&A decreases of $1.5 million related to lower litigation accruals. Included
in 2008 expenses is $0.9 million relates to a non-cash Fixed Asset Impairment to
write down the Cuxhaven D8.2 prototype as described in Note 5.
 
 The $1.5
million increase in CTC cable expenses was due to $0.9 million in higher sales
expenses due to higher headcount and commission costs related to higher revenue,
$0.2 million in additional G&A and $0.4 million in higher R&D
expenses.  The $1.1 million increase in corporate expenses is due to
$0.3 million higher officer compensation, due to increased stock compensation
charges, and $0.9 million in additional G&A expenses.
 
 Other
Expenses: Other expenses decreased by $2.2 million from $7.5 million in fiscal
2007 to $5.3 million in fiscal 2008, due primarily to decreases in interest
expense of $2.7 million related to lower debt balances offset by a $0.9 million
charge in 2008 for fixed asset impairment related to a write down of DeWind’s
Cuxhaven prototype turbine.
 
 Loss from
Discontinued Operations is the $8.7 loss attributable to the DeWind segment’s
insolvent DeWind GmbH subsidiary as well as the write off of $1.5 million for
DeWind’s E Services investment.  In 2007, the DeWind GmbH loss was
$11.9 million and an E Services loss was $1.9 million including goodwill write
down of $0.9 million and operations losses of $1.0 million.
 
 Overall,
our loss from continuing operations for 2008 was negatively impacted by several
DeWind segment related non-recurring charges and costs including $5.2 million in
inventory impairment charges,  $4.5 million related to the US
prototype testing and installation, and a 15% average devaluation of the dollar
against the Euro throughout the year, resulting in approximately $2.6 million in
higher dollar based expenses in 2008 than 2007.





46




The
following table is a reconciliation of consolidated  “non-GAAP” EBITDAS or
Earnings before Interest, Taxes, Depreciation & Amortization, and Stock
Compensation charges.  We include fixed asset impairment in our
reconciliation as well.  Management believes that “non-GAAP” EBITDAS
provides an important decision metric due to the large amount of non-cash
expenses incurred by the Company and its subsidiaries.  We believe
that EBITDAS is a meaningful proxy for the operating cash flow activities since
it excludes non-cash charges for depreciation and for stock based compensation
charges that historically have been dependent on the vesting schedules of the
underlying options granted rather than the operations of the
business.




2008($000’s)
                                              
                                              Corporate
                                              
                                              
                                              Cable
                                              
                                              
                                              DeWind
                                              
                                              
                                              TotalEBITDAS:Loss
      from Continuing Operations
                                              
                                              $
                                              (11,548
                                              )
                                              
                                              $
                                              1,464
                                              
                                              
                                              $
                                              (25,257
                                              )
                                              
                                              $
                                              (35,341
                                              )Depreciation
      & Amortization
                                              
                                              
                                              —
                                              
                                              
                                              
                                              776
                                              
                                              
                                              
                                              3,174
                                              
                                              
                                              
                                              3,950Employee
      stock option expense
                                              
                                              
                                              1,683
                                              
                                              
                                              
                                              972
                                              
                                              
                                              
                                              318
                                              
                                              
                                              
                                              2,973Warrant
      Modification expense
                                              
                                              
                                              553
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              553Interest
                                              
                                              
                                              3,574
                                              
                                              
                                              
                                              1
                                              
                                              
                                              
                                              574
                                              
                                              
                                              
                                              4,149EBITDAS
      Income/(Loss)
                                              
                                              $
                                              (5,738
                                              )
                                              
                                              $
                                              3,213
                                              
                                              
                                              $
                                              (21,191
                                              )
                                              
                                              $
                                              (23,716
                                              )


2007($000’s)
                                  
                                  Corporate
                                  
                                  
                                  Cable
                                  
                                  
                                  DeWind
                                  
                                  
                                  TotalEBITDAS:Loss
      from Continuing Operations
                                  
                                  $
                                  (13,649
                                  )
                                  
                                  $
                                  (4,362
                                  )
                                  
                                  $
                                  (12,597
                                  )
                                  
                                  $
                                  (30,608
                                  )Depreciation
      & Amortization
                                  
                                  
                                  —
                                  
                                  
                                  
                                  799
                                  
                                  
                                  
                                  905
                                  
                                  
                                  
                                  1,704Employee
      stock option expense
                                  
                                  
                                  1,468
                                  
                                  
                                  
                                  873
                                  
                                  
                                  
                                  12
                                  
                                  
                                  
                                  2,353Warrant
      Modification expense
                                  
                                  
                                  374
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  374Interest
                                  
                                  
                                  6,985
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  46
                                  
                                  
                                  
                                  7,031EBITDAS
      Income/(Loss)
                                  
                                  $
                                  (4,822
                                  )
                                  
                                  $
                                  (2,690
                                  )
                                  
                                  $
                                  (11,634
                                  )
                                  
                                  $
                                  (19,146
                                  )




EBITDAS
loss for Corporate related activities increased $0.9 million due to higher cash
basis expenses as described below.  EBITDAS Income for the Cable
segment increased $5.9 million to income of $3.2 million from an EBITDAS loss of
$2.7 million due to gross margin improvement of $7.0 million offset by higher
cash basis operating expenses.  EBITDAS loss for DeWind increased $9.6
million from $11.6 million in 2007 to $21.2 million in 2008 due to $5.1 million
in inventory writeoffs and other non-cash charges related to the closure of
DeWind’s German production facility and increased cash operating expenses,
primarily $4.4 million related to the Sweetwater D8.2 60 hertz
prototype.




47




The
following table presents the Revenues, Cost of Revenues, and Gross Margins for
our two business segments:





2008($000’s)
                                                                  
                                                                  Cable Segment
                                                                  
                                                                  
                                                                  Wind Segment
                                                                  
                                                                  
                                                                  TotalProduct
      Sales –Cable
                                                                  
                                                                  $
                                                                  32,715
                                                                  
                                                                  
                                                                  $
                                                                  —
                                                                  
                                                                  
                                                                  $
                                                                  32,715Product
      Sales – Turbines
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  40,089
                                                                  
                                                                  
                                                                  
                                                                  40,089Other
      Turbine Related Revenue
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  1,337
                                                                  
                                                                  
                                                                  
                                                                  1,337Consulting
      Revenue
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —Total
      Revenues
                                                                  
                                                                  $
                                                                  32,715
                                                                  
                                                                  
                                                                  $
                                                                  41,426
                                                                  
                                                                  
                                                                  $
                                                                  74,141Cost
      of Sales - Cable
                                                                  
                                                                  $
                                                                  21,129
                                                                  
                                                                  
                                                                  $
                                                                  —
                                                                  
                                                                  
                                                                  $
                                                                  21,129Cost
      of Sales – Turbines
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  41,055
                                                                  
                                                                  
                                                                  
                                                                  41,055Cost
      of Sales – Turbine Service
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  2,538
                                                                  
                                                                  
                                                                  
                                                                  2,538Cost
      of Sales - Consulting
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —Total
      Cost of Sales
                                                                  
                                                                  $
                                                                  21,129
                                                                  
                                                                  
                                                                  $
                                                                  43,593
                                                                  
                                                                  
                                                                  $
                                                                  64,722Gross
      Margin - Cable
                                                                  
                                                                  $
                                                                  11,586
                                                                  
                                                                  
                                                                  $
                                                                  —
                                                                  
                                                                  
                                                                  $
                                                                  11,586Gross
      Margin % - Cable
                                                                  
                                                                  
                                                                  35.4
                                                                  %
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  35.4
                                                                  %Gross
      Margin – Turbines
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  (966
                                                                  )
                                                                  
                                                                  
                                                                  (966
                                                                  )Gross
      Margin % - Turbines
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  -2.4
                                                                  %
                                                                  
                                                                  
                                                                  -2.4
                                                                  %Gross
      Margin – Turbine Service
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  (1,201
                                                                  )
                                                                  
                                                                  
                                                                  (1,201
                                                                  )Gross
      Margin % - Turbine Service
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  -89.8
                                                                  %
                                                                  
                                                                  
                                                                  -89.8
                                                                  %Gross
      Margin – Consulting
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —Gross
      Margin % - Consulting
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —Total
      Gross Margin
                                                                  
                                                                  $
                                                                  11,586
                                                                  
                                                                  
                                                                  $
                                                                  (2,167
                                                                  )
                                                                  
                                                                  $
                                                                  9,419Total
      Gross Margin %
                                                                  
                                                                  
                                                                  35.4
                                                                  %
                                                                  
                                                                  
                                                                  -5.2
                                                                  %
                                                                  
                                                                  
                                                                  12.7
                                                                  %





2007($000’s)
                                                      
                                                      Cable Segment
                                                      
                                                      
                                                      Wind Segment
                                                      
                                                      
                                                      TotalProduct
      Sales –Cable
                                                      
                                                      $
                                                      16,008
                                                      
                                                      
                                                      $
                                                      —
                                                      
                                                      
                                                      $
                                                      16,008Product
      Sales – Turbines
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      16,881
                                                      
                                                      
                                                      
                                                      16,881Other
      Turbine Related Revenue
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      1,978
                                                      
                                                      
                                                      
                                                      1,978Consulting
      Revenue
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —Total
      Revenues
                                                      
                                                      $
                                                      16,008
                                                      
                                                      
                                                      $
                                                      18,859
                                                      
                                                      
                                                      $
                                                      34,867Cost
      of Sales - Cable
                                                      
                                                      $
                                                      11,425
                                                      
                                                      
                                                      $
                                                      —
                                                      
                                                      
                                                      $
                                                      11,425Cost
      of Sales – Turbines
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      16,174
                                                      
                                                      
                                                      
                                                      16,174Cost
      of Sales – Turbine Service
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      3,738
                                                      
                                                      
                                                      
                                                      3,738Cost
      of Sales - Consulting
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —Total
      Cost of Sales
                                                      
                                                      $
                                                      11,425
                                                      
                                                      
                                                      $
                                                      19,912
                                                      
                                                      
                                                      $
                                                      31,337Gross
      Margin - Cable
                                                      
                                                      $
                                                      4,583
                                                      
                                                      
                                                      $
                                                      —
                                                      
                                                      
                                                      $
                                                      4,583Gross
      Margin % - Cable
                                                      
                                                      
                                                      28.6
                                                      %
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      28.6
                                                      %Gross
      Margin – Turbines
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      707
                                                      
                                                      
                                                      
                                                      707Gross
      Margin % - Turbines
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      4.2
                                                      %
                                                      
                                                      
                                                      4.2
                                                      %Gross
      Margin – Turbine Service
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      (1,760
                                                      )
                                                      
                                                      
                                                      (1,760
                                                      )Gross
      Margin % - Turbine Service
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      -89.0
                                                      %
                                                      
                                                      
                                                      -89.0
                                                      %Gross
      Margin – Consulting
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —Gross
      Margin % - Consulting
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —Total
      Gross Margin
                                                      
                                                      $
                                                      4,583
                                                      
                                                      
                                                      $
                                                      (1,053
                                                      )
                                                      
                                                      $
                                                      3,530Total
      Gross Margin %
                                                      
                                                      
                                                      28.6
                                                      %
                                                      
                                                      
                                                      -5.6
                                                      %
                                                      
                                                      
                                                      10.1
                                                      %





48




2006($000’s)
                                                                    
                                                                    Cable Segment
                                                                    
                                                                    
                                                                    Wind Segment
                                                                    
                                                                    
                                                                    TotalProduct
      Sales –Cable
                                                                    
                                                                    $
                                                                    3,004
                                                                    
                                                                    
                                                                    $
                                                                    —
                                                                    
                                                                    
                                                                    $
                                                                    3,004Product
      Sales – Turbines
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    3,336
                                                                    
                                                                    
                                                                    
                                                                    3,336Other
      Turbine Related Revenue
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    999
                                                                    
                                                                    
                                                                    
                                                                    999Consulting
      Revenue
                                                                    
                                                                    
                                                                    550
                                                                    
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    550Total
      Revenues
                                                                    
                                                                    $
                                                                    3,554
                                                                    
                                                                    
                                                                    $
                                                                    4,335
                                                                    
                                                                    
                                                                    $
                                                                    7,889Cost
      of Sales - Cable
                                                                    
                                                                    $
                                                                    2,353
                                                                    
                                                                    
                                                                    $
                                                                    —
                                                                    
                                                                    
                                                                    $
                                                                    2,353Cost
      of Sales – Turbines
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    3,900
                                                                    
                                                                    
                                                                    
                                                                    3,900Cost
      of Sales – Turbine Service
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    522
                                                                    
                                                                    
                                                                    
                                                                    522Cost
      of Sales - Consulting
                                                                    
                                                                    
                                                                    305
                                                                    
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    305Total
      Cost of Sales
                                                                    
                                                                    $
                                                                    2,658
                                                                    
                                                                    
                                                                    $
                                                                    4,422
                                                                    
                                                                    
                                                                    $
                                                                    7,080Gross
      Margin - Cable
                                                                    
                                                                    $
                                                                    651
                                                                    
                                                                    
                                                                    $
                                                                    —
                                                                    
                                                                    
                                                                    $
                                                                    651Gross
      Margin % - Cable
                                                                    
                                                                    
                                                                    21.7
                                                                    %
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    21.7
                                                                    %Gross
      Margin – Turbines
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    (564
                                                                    )
                                                                    
                                                                    
                                                                    (564
                                                                    )Gross
      Margin % - Turbines
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    -16.9
                                                                    %
                                                                    
                                                                    
                                                                    -16.9
                                                                    %Gross
      Margin – Turbine Service
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    477
                                                                    
                                                                    
                                                                    
                                                                    477Gross
      Margin % - Turbine Service
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    47.7
                                                                    %
                                                                    
                                                                    
                                                                    47.7
                                                                    %Gross
      Margin  - Consulting
                                                                    
                                                                    
                                                                    245
                                                                    
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    245Gross
      Margin % - Consulting
                                                                    
                                                                    
                                                                    44.5
                                                                    %
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    44.5
                                                                    %Total
      Gross Margin
                                                                    
                                                                    $
                                                                    896
                                                                    
                                                                    
                                                                    $
                                                                    (87
                                                                    )
                                                                    
                                                                    $
                                                                    809Total
      Gross Margin %
                                                                    
                                                                    
                                                                    25.2
                                                                    %
                                                                    
                                                                    
                                                                    -2.0
                                                                    %
                                                                    
                                                                    
                                                                    10.3
                                                                    %





PRODUCT
REVENUES:  Product revenues increased $39.3 million to $72.9 million
in fiscal 2008 from $32.9 million in fiscal 2007 and $20.2 million from $6.3
million in fiscal 2006.  The fiscal 2008 increase was due to a $16.7
million increase in Cable sales, primarily due to increases in shipments to
China and a large sale to Poland, and $22.6 million increase in Wind sales,
primarily an increase in turbine deliveries, turbine parts sales, and license
fees.





The
fiscal 2007 increase of was due to a $13.0 million increase in ACCCTM
conductor sales over 2006 and $7.2 million increase in wind turbine revenue,
primarily due to the incorporation of an entire year of revenue bearing activity
in fiscal 2007 as compared to one quarter of revenue for the period of the July,
2006 acquisition date through the September, 2006 year end reflective of an
increase in the number of turbines and turbine parts sold.





SERVICE
REVENUES:   Service revenues relate to services provided on our
DeWind segments wind turbines.  Prior to our July, 2006 acquisition of
EU Energy, we had no service revenues.   Service revenues from
continuing operations increased from $1.0 million in fiscal 2006 to $2.0 million
in fiscal 2007 and decreased by $0.7 million to $1.3 million in fiscal
2008.  Service revenues from continuing operations relate primarily to
amortization of deferred maintenance revenues related to the turbines acquired
during the DeWind acquisition for those turbines not associated with either of
DeWind’s discontinued operations subsidiaries.   The increase
from 2006 to 2007 was due to the incorporation of an entire years activity in
2007.  The decrease from 2007 to 2008 is due to the reduction of
turbines under warranty that had deferred maintenance revenues.





See also
Note 2 for a description of the service related revenues that are now included
in discontinued operations.





CONSULTING
REVENUES:  Consulting revenues in 2006 represent $550,000 related to
the City of Kingman contract as described above. No consulting contracts were
completed during either the 2008 or 2007 fiscal years.





49





COST OF
PRODUCT REVENUES:  Cost of product revenues include the costs to
produce and ship ACCCTM
conductor products and costs to complete and ship turbines and turbine
parts.  Fiscal 2008 costs increased $33.4 million from $31.3 million
to $64.7 million and fiscal 2007 costs increased $24.3 million from $7.1 million
in 2006 due to increased costs related to the ACCCTM revenue
increase and increased costs related to the turbine and turbine parts
shipments.   Included in cost of product revenues for fiscal 2008
was a non-recurring $5.1 million charge into the DeWind segment to write off
inventory held at our German production facility.  We elected to close
this facility in July, 2008 and the remaining turbine parts and supplies were
reduced to scrap value.





Cost of
product revenues by segment for fiscal 2008 were $21.1 million for cable
products and $41.1 million for turbine products representing gross margins of
$11.6 million or 35.4% for cable products and ($1.0) million or (2.4%) for
turbine products.  Excluding the $5.1 million charge for the closure
of the German DeWind facility and revised DeWind margins would have been $4.1
million or 10.2% of revenues.





Cost of
product revenues for fiscal 2007 were $11.4 million for cable products and $16.2
million for turbine products representing gross margins of $4.6 million or 28.6%
for cable products and $0.7 million or 4.2% for turbine
products.  Cost of product revenues by segment for fiscal 2006 were
$2.4 million for cable products and $3.9 million for turbine products
representing gross margins of $0.6 million for cable products or 21.7% of
revenues and ($0.6) million or (16.9%) of revenues for turbine
products.





Cable
margins increased to 35.4% from 28.6% in 2007 due to the improved revenue mix
from higher margin ACCCTM
conductor core in 2008 as compared to more ACCCTM
conductor in 2007.  Cable margins improved in 2007 to 28.6% from 21.7%
in fiscal 2006 due to a low revenue sale pertaining to a bankruptcy settlement
recorded in 2006. Wind turbine margins of ($1.0) million was due to a $5.1
million turbine inventory write-off taken during 2008 related to the shutdown of
the Lubeck Germany production facility offset by greater margins from $3.7
million of high margin license fees.  For 2007, turbine margin of
($1.5) million were due to $1.2 million in turbine inventory write-offs related
to scrapped service related inventory determined to be obsolete and valuation
reductions of remaining turbines held for sale out of the acquisition inventory
and $0.3 million in recorded additional loss provisions for two turbines sold
out of acquisition inventory expected to be recorded to revenue in the December,
2007 quarter.





COST OF
SERVICE REVENUE:  Cost of service revenue consists primarily of parts,
supplies, labor, travel and other turbine service related costs along with the
net impact of warranty and related retrofit and availability liability expense
accruals. Costs increased from $0.5 million in fiscal 2006 to $3.7 million
in fiscal 2007 and decreased to $2.5 million in fiscal 2008.  The
costs increased from 2006 to 2007 due to a full year of service costs since 2006
had one quarter of activity.  In addition, costs in 2007 were higher
due to higher actual costs of service charged by the E-Services group as
compared to 2006 where DeWind controlled the service
entity.   Costs in 2007 consisted of $3.1 million of service
costs and $0.6 million of additional availability charges.  In 2008,
turbines sold in 2005 and 2006 began to reach the end of their warranty periods
although availability charges increased to $1.5 million, with service costs
decreasing to $1.0 million.





COST OF
CONTRACT REVENUE:  Cost of contract revenue consists primarily of
salaries for engineers and expenses for consultants, supplies, equipment,
depreciation and facilities associated with contract projects. Our total
engineering costs are allocated between cost of contract revenue and research
and development expense. In a given period, the allocation of engineering costs
between cost of contract revenue and research and development is a function of
the level of effort expended on each.





Cost of
contract revenue for fiscal 2006 represents costs capitalized as of September
30, 2005 related to the deferred revenue described above.





50





The
following table provides a comparative analysis of operating
expenses.





2008($000’s)
                                        
                                        Corporate
                                        
                                        
                                        Cable
                                        
                                        
                                        DeWind
                                        
                                        
                                        TotalOfficer
      Compensation
                                        
                                        $
                                        2,129
                                        
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        2,129General
      and Administrative
                                        
                                        
                                        5,289
                                        
                                        
                                        
                                        1,852
                                        
                                        
                                        
                                        6,862
                                        
                                        
                                        
                                        14,003Research
      and Development
                                        
                                        
                                        —
                                        
                                        
                                        
                                        4,083
                                        
                                        
                                        
                                        10,833
                                        
                                        
                                        
                                        14,916Sales
      and Marketing
                                        
                                        
                                        —
                                        
                                        
                                        
                                        3,484
                                        
                                        
                                        
                                        1,862
                                        
                                        
                                        
                                        5,346Depreciation
      and Amortization
                                        
                                        
                                        —
                                        
                                        
                                        
                                        776
                                        
                                        
                                        
                                        3,174
                                        
                                        
                                        
                                        3,950Reorganization
      Exp – BK Legal
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Total
      Operating Expenses
                                        
                                        $
                                        7,418
                                        
                                        
                                        $
                                        10,195
                                        
                                        
                                        $
                                        22,731
                                        
                                        
                                        $
                                        40,344





2007($000’s)
                                    
                                    Corporate
                                    
                                    
                                    Cable
                                    
                                    
                                    DeWind
                                    
                                    
                                    TotalOfficer
      Compensation
                                    
                                    $
                                    1,864
                                    
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    1,864General
      and Administrative
                                    
                                    
                                    4,427
                                    
                                    
                                    
                                    1,941
                                    
                                    
                                    
                                    5,813
                                    
                                    
                                    
                                    12,181Research
      and Development
                                    
                                    
                                    —
                                    
                                    
                                    
                                    3,661
                                    
                                    
                                    
                                    3,293
                                    
                                    
                                    
                                    6,954Sales
      and Marketing
                                    
                                    
                                    —
                                    
                                    
                                    
                                    2,545
                                    
                                    
                                    
                                    1,379
                                    
                                    
                                    
                                    3,924Depreciation
      and Amortization
                                    
                                    
                                    —
                                    
                                    
                                    
                                    799
                                    
                                    
                                    
                                    905
                                    
                                    
                                    
                                    1,704Reorganization
      Exp – BK Legal
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Total
      Operating Expenses
                                    
                                    $
                                    6,291
                                    
                                    
                                    $
                                    8,946
                                    
                                    
                                    $
                                    11,390
                                    
                                    
                                    $
                                    26,627





2006($000’s)
                                    
                                    Corporate
                                    
                                    
                                    Cable
                                    
                                    
                                    DeWind
                                    
                                    
                                    TotalOfficer
      Compensation
                                    
                                    $
                                    566
                                    
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    566General
      and Administrative
                                    
                                    
                                    4,334
                                    
                                    
                                    
                                    2,537
                                    
                                    
                                    
                                    1,440
                                    
                                    
                                    
                                    8,311Research
      and Development
                                    
                                    
                                    —
                                    
                                    
                                    
                                    4,291
                                    
                                    
                                    
                                    563
                                    
                                    
                                    
                                    4,854Sales
      and Marketing
                                    
                                    
                                    —
                                    
                                    
                                    
                                    1,659
                                    
                                    
                                    
                                    422
                                    
                                    
                                    
                                    2,081Depreciation
      and Amortization
                                    
                                    
                                    —
                                    
                                    
                                    
                                    793
                                    
                                    
                                    
                                    296
                                    
                                    
                                    
                                    1,089Reorganization
      Exp – BK Legal
                                    
                                    
                                    635
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    635Total
      Operating Expenses
                                    
                                    $
                                    5,535
                                    
                                    
                                    $
                                    9,280
                                    
                                    
                                    $
                                    2,721
                                    
                                    
                                    $
                                    17,536





OFFICER
COMPENSATION: Officer Compensation represents CTC Corporate expenses and
consists primarily of salaries, consulting fees paid in cash, and the fair value
of stock grants issued to officers of the Company. Officer compensation
increased $0.2 million, or 14% to $2.1 million in fiscal 2008 from $1.9 million
in fiscal 2007 and $0.6 million in fiscal 2006.  The increase from
2007 to 2008 was due to higher fair value stock compensation expense for vested
stock options. The fiscal 2007 increase was due to increases of $0.7 million in
stock compensation expense and $0.6 million in officer salaries resulting from
an increase in the number of officers during the year.





GENERAL
AND ADMINISTRATIVE: General and administrative expense consisted primarily of
salaries and employee benefits for administrative personnel, facilities costs,
stock listing fees, insurance expenses, and expenses related to reserves for
uncollectible receivables. G&A expense increased $3.9 million or 47% from
$8.3 million in 2006 to $12.2 million in 2007 and increased 15% or $1.8 million
from $12.2 million in fiscal 2007 to $14.0 million in fiscal
2008.  The increase of $1.8 million to 2008 levels consists of a $1.0
million increase for DeWind, a $0.1 million decrease for Cable, and a $0.8
million increase for corporate related.  The corporate related
increase is primarily $0.3 million of higher stock compensation charges, $0.3
million in costs associated with our debt and equity financings, and $0.7
million in increased headcount costs, offset by $0.6 million in reduced
professional fees paid.  The $0.2 million increase in Cable G&A
relates to higher costs associated with the increased revenue levels of
Cable.  The $0.8 million DeWind increase is due to $1.0 million in
additional recurring US G&A costs relating to increased US business support
a $0.6 million impact due to the impact of the appreciating Euro on Dollar based
costs of our European operations , $0.6 million in additional costs that were
previously allocated to our discontinued operations in 2007 but are now carried
by the continuing operations group, offset by a decrease of $1.5 million in the
accrual of the FKI litigation accrued in 2007 but not recurring in
2008.





51





The
increase from fiscal 2006 to 2007 of $3.9 million is due to $4.7 million in
DeWind increases and $0.8 million decrease in Cable and Corporate
expenses.  The DeWind increase is due to four quarters of activity in
2007 as compared to only one quarter of activity in 2006 with 2007 also
including a $1.5 million litigation expense charge related to the accrual of the
FKI litigation.  The $0.8 million decrease for Cable and Corporate
expenses is due to lower litigation settlement expenses in 2007. We recorded
$802,000 in expenses related to bankruptcy and litigation settlements in fiscal
2006 that did not recur in 2007 consisting of:




1)
$702,000 paid to the four holders of the $15.0 million Debentures sold in
August, 2004. The holders had made a claim with the bankruptcy court for
liquidated damages relating to a delay in the filing of an effective
registration statement. We settled this claim in June, 2006 by issuing 450,000
shares of Section 1145 stock valued at $1.56 per share.




2)
$100,000 was accrued to settle the litigation with Michael Tarbox in equal
twelve month installments from the date of the settlement in April in settlement
of his litigation with the Company.





PRODUCT
DEVELOPMENT:  Product development expenses consist primarily of
salaries, consulting fees, materials, tools, and related expenses for work
performed in designing and development of manufacturing processes for the
Company's products. Product Development expenses increased 43% or $2.1 million
from $4,854,000 in fiscal 2006 to $6,954,000 in fiscal 2007 and increased 114%
or $8.0 million to $14,916,000 in fiscal 2008.





The
fiscal 2008 increase is due to the combined effect of an increase of $7.5
million of DeWind expenses and a $0.4 million increase in CTC Cable
expenses.  The $7.5 million DeWind increase is the combination of $4.4
million in expenses related to the completion, testing, and commissioning of the
US 60 hertz D8.2 prototype in Sweetwater Texas completed in March, 2008; $1.1
million for additional US headcount expenses related to DeWind engineering
personnel, $1.0 million increase in headcount costs in Germany, of which $0.6
million were related to increased consulting and personnel ad $0.4 million is
due to the increase in the value of the Euro, and $1.0 million in additional
consulting related expenses for advanced blade technology in the US related to
our 90 meter rotor project for our D8.2 product line.  The $0.4
million increase in CTC Cable expenses is due to headcount related increases to
support of our product growth including increased product quality and
testing.





The
fiscal 2007 increase is due to the combined effect of an increase of $2.7
million related to the DeWind operations, offset by a $0.6 million decrease in
the CTC Cable product development expenses to $7.3 million.   The
DeWind increase is due to an entire year of DeWind development expenses in
addition to greater costs related to the production, testing, and certification
of our D8.2 prototypes and additional expense related to our DeWind blade and
power train development initiatives.  The CTC Cable decrease from is
attributable to an increase in stock compensation costs of $385,000, an increase
in employee headcount expense of $587,000, an increase in product development
costs of $513,000 related to core inventory, and an overall increase in product
development costs of $161,000, offset by an increase of $2,276,000 increase in
the product development materials, headcount costs, and overhead costs
capitalized into cost of sales and inventory during 2006 and thereby reducing
operating expenses.





SALES AND
MARKETING: Sales and marketing expenses consist primarily of salaries,
consulting fees, materials, travel, and other expenses performed in marketing,
sales, and business development efforts for the Company. Sales and marketing
expenses increased 89% or $1.8 million from $2,081,000 in 2006 to $3,924,000 in
2007 and $1.4 million or 36% to $5,347,000 in fiscal 2008. The 2008 increase was
due to a $940,000 increase in CTC Cable expenses, primarily the result of
increased headcounts and commissions on higher sales, and a $484,000 increase in
DeWind expenses, primarily accrued commissions on US wind turbine sales along
with increased US headcounts and approximately $100,00 in additional costs
associated with the higher Euro exchange rate.  For 2007, the increase
was due to a full year of DeWind sales and marketing costs and increased
spending on CTC Cable sales of $885,000.  The DeWind sales and
marketing expenses for 2007 and 2008 both reflect an increase in the costs and
spending related to selling our D8.2 products including increased personnel,
tradeshow and travel expenses.  The CTC Cable expense increase
consists of increased sales and marketing employees and consultant costs related
to the expansion of our sales efforts in the US, Europe, and China.





52





DEPRECIATION
AND AMORTIZATION: Depreciation and amortization expense consists of depreciation
related to the depreciation and amortization of the Company's capitalized assets
and Impairment charges for fixed assets. Depreciation expense increased
$0.6 million or 57% from fiscal 2006 to $1.7 million in fiscal 2007 and
increased $2.3 million or 132% to $4.0 million in fiscal 2008. The increase
from 2007 to 2008 was due to an increase in the fixed asset base and a $0.9
million impairment charge taken to the Cuxhaven DeWind prototype
as described in Note 7. The increase from 2006 to 2007 was attributable
almost entirely to the operations of DeWind, increasing $1.6 million from the
three months of operations in fiscal 2006 to a full year’s expenses in fiscal
2007, including $378,000 of amortization of acquired intangibles compared to
$94,000 in prior year.





REORGANIZATION
EXPENSE - BANKRUPTCY: Reorganization expense - Bankruptcy consists of legal and
bankruptcy related expenses, primarily our outside bankruptcy counsel, our trade
payables committee counsel that we are required to fund, and bankruptcy related
consultants, court costs, US Trustee fees, and other bankruptcy related costs.
We exited Chapter 11 bankruptcy in fiscal 2006 and we had no similar costs in
2007 or 2008. See also bankruptcy and litigation section below and the
bankruptcy and litigation footnote disclosures.








INTEREST
EXPENSE: Interest expense consists of interest paid and payable on the Company's
capital lease obligations, the cash interest payable on the Company’s Debentures
and Notes and the amortization of the Convertible Note discount recorded for the
value of the warrants and conversion features issued in conjunction with the
Convertible Notes. The decrease of $2.9 million or 40% is due to lower debt
balances resulting in lower cash interest and reduced amortization of the
discount caused by less acceleration of the discount for conversions for 2008 as
compared to 2007.  The increase of 145% or $4.2 million from $2.9
million in fiscal 2006 to $7.2 in fiscal 2007 was due to an increase of $2.6
million to $4.6 million in non-cash amortization of the debt discount and an
increase of $1.6 million to $2.4 million for interest payable in cash. As of
September 20, 2008 our debt balance consisted of approximately $9.0 million
principal at 8% interest, with $1.2 million of unamortized debt discounts, for a
net debt balance of $7.8 million.





INTEREST
INCOME:  The interest changes from year to year were due to changes in
the underlying cash balances.





EXPENSE
RELATED TO INDUCEMENT OF CONVERTIBLE DEBT:  Expenses related to
inducement of convertible debt of $3.6 million in fiscal 2006 consists of the
fair value of the stock issued to settle certain issues including waiver of
anti-dilutive rights of related warrants and as an inducement to convert the
$6.0 million October, 2005 and $1,325,000 of the $3,500,000 March, 2006
convertible notes. In January, 2006 we issued 1,308,142 shares valued at $1.72
per share or $2,250,000 to settle the October, 2005 convertible notes and in
September, 2006 we issued 1,260,595 shares valued at $1.06 per share or
$1,336,236 to settle $1,375,000 of the March, 2006 notes. There were no similar
expenses for fiscal 2008 or 2007 and we do not expect these expenses to
recur.





EXPENSE
RELATED TO MODIFICATION OF WARRANTS DUE TO ANTI-DILUTIVE
EVENTS:  Expenses related to the modification of warrants due to
anti-dilutive events decreased 46% or $322,000 from $696,000 in fiscal 2006 to
$374,000 in fiscal 2007 and increased 40% to $553,000 in fiscal
2008.  The current fiscal year expense resulted from the events
related to the anti-dilution caused by the issuance of shares related to our
Credit Suisse equity offering in May, 2008, as described in Note 13 to the
Financial Statements. The expense represents the combination of the fair value
of the issuance of any new warrants and the difference in the fair value of the
respective warrants immediately before and immediately after price resets in
warrant exercise prices and as described in the equity footnote to the financial
statements in Item 8. For fiscal 2007, the expense relates to similar price
resets caused by the February, 2007 and June, 2007 financings, For fiscal 2006,
in October, 2005, concurrent with the $6.0 million debtor-in-possession
convertible debt offering, we reset the exercise price of warrants associated
with an August, 2004 $15 million convertible debt offering. In September, 2006,
concurrent with the issuance of stock to settle and induce conversion of a
portion of the March, 2006, we triggered anti-dilution on warrants connected
with the October, 2005 and March, 2006 convertible note offerings.




53




CARRYING
VALUE ADJUSTMENT OF CONVERTIBLE DEBT





INCOME
TAXES:  We made provisions for income taxes of $28,000, $8,000, and
$4,000 for the years ending September 30, 2008, 2007, and 2006
respectively. We have determined that due to our continuing operating losses as
well as the uncertainty of the timing of profitability in future periods, we
should fully reserve our deferred tax assets. As of September 30, 2008, our
deferred tax assets continued to be fully reserved. We will continue to
evaluate, on a quarterly basis, the positive and negative evidence affecting our
ability to realize our deferred tax assets.





CAPITALEXPENDITURES: The Company does
not have any material commitments for capital expenditures.





EFFECTS OFINFLATION: We are subject
to inflation and other price risks arising from price fluctuations in the market
prices of the various raw materials that we use to produce our products. Price
risks are managed through cost-containment measures. Except as noted below, we
do not believe that inflation risk or other price risks with respect to raw
materials used to produce our products are material to our business, financial
position, results of operations or cash flows. Due to increased demand for
composite quality carbon materials worldwide in particular in the aerospace and
defense industries and due to a restricted supply of high quality carbon due to
a limited number of suppliers, the Company may be exposed to raw material price
increases or carbon materials shortfalls until additional suppliers or supplies
become available. We can not quantify any such price or material impacts at this
time.





EFFECTS OFEXCHANGERATECHANGES:We
are subject to price risks arising from exchange rate fluctuations in the
functional currency of our European subsidiaries, primarily the Euro and the UK
Sterling.  We currently do not hedge the exchange rate risk related to
our assets and liabilities and do not hedge the exchange rate risk related to
expected future operating expenses.  For our future sales, we do
inherently hedge against the exchange rate risk for that portion of our turbine
supply chain purchased in Euros through a banding process in our turbine supply
agreements (TSAs).  In our TSAs with prices denominated in US Dollars,
we typically set an exchange rate for the Euro.  For exchange rate
changes greater than approximately a 5% trading range, price adjustments are
made for the final turbine purchase price when the closing exchange rate falls
outside of the trading band.




OFFBALANCESHEETARRANGEMENTS:We do not have
any off balance-sheet arrangements, investments in special purpose entities or
undisclosed borrowings or debt. Additionally, we are not a party to any
derivative contracts or synthetic leases.




CONTRACTUAL
OBLIGATIONSAND
COMMITMENTS:The following table summarizes our contractual obligations (including
interest expense) and commitments as of September 30, 2008:




Less
      than
                            
                            
                            
                            In
      excess ofContractual
      Obligations
                            Total
                            
                            1
      Year
                            
                            1-3
      Years
                            
                            3
      Years(in
      thousands)Long-Term
      Debt Obligations
                            
                            $
                            10,001
                            
                            
                            $
                            723
                            
                            
                            $
                            9,278
                            
                            
                            $
                            —Capital
      Lease Obligations
                            
                            $
                            —
                            
                            
                            $
                            —
                            
                            
                            $
                            —
                            
                            
                            $
                            —Operating
      Lease Obligations
                            
                            $
                            2,939
                            
                            
                            $
                            1,457
                            
                            
                            $
                            1,482
                            
                            
                            $
                            —Purchase
      Obligations
                            
                            $
                            12,000
                            
                            
                            $
                            12,000
                            
                            
                            $
                            —
                            
                            
                            $
                            —


54





NEWACCOUNTINGPROUNOUNCEMENTS:See Note 1 to the Financial
Statements.





ITEM7A-QUANTITATIVEANDQUALITATIVEDISCLOSURESABOUTMARKET RISKS





Our
exposure to market risk relates primarily to our cash balances and the effect
that changes in interest rates have on the interest earned on that portfolio.
Our convertible debentures bear a fixed rate of interest.





As of
September 30, 2008 we did not hold any derivative financial instruments for
speculative or trading purposes. The primary objective of our investment
activities is the preservation of principal while maximizing investment income
and minimizing risk. As of September 30, 2008, we had $23.3 million in cash
(including restricted cash), cash equivalents and short-term investments that
mature in twelve months or less. Due to the short duration of these financial
instruments, we do not expect that a change in interest rates would result in
any material loss to our investment portfolio.




ITEM8-FINANCIAL STATEMENTSAND SUPPLEMENTARYDATA





PageINDEPENDENT
      REGISTERED PUBLIC ACCOUNTING FIRM REPORTS
                            
                            
                            56Composite
      Technology Corporation and Subsidiaries Consolidated Financial
      StatementsConsolidated
      Balance Sheets As of September 30, 2008 and September 30,
    2007
                            
                            
                            59Consolidated
      Statements of Operations and Comprehensive Loss For the Years Ended
      September 30, 2008, 2007, and 2006
                            
                            
                            60Consolidated
      Statements of Shareholders' Equity for the Years Ended September 30, 2008,
      2007, and 2006
                            
                            
                            62Consolidated
      Statements of Cash Flows for the Years Ended September 30, 2008, 2007, and
      2006
                            
                            
                            64Notes
      to the Consolidated Financial Statements
                            
                            
                            69





55





Report
of Independent Registered Public Accounting Firm
 
 To the
Board of Directors and Shareholders
 Composite
Technology Corporation and Subsidiaries
 Irvine,
California
 
 We have
audited the accompanying consolidated balance sheets of Composite Technology
Corporation and subsidiaries (collectively, the “Company”) as of September 30,
2008 and 2007, and the related consolidated statements of operations and
comprehensive loss, shareholders' equity, and cash flows for each of the three
years in the period ended September 30, 2008.  Our audits also
included the financial statement schedule of the Company listed in Item
15(a).  These financial statements and financial statement schedule
are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of September
30, 2008 and 2007, and the results of its operations and its cash flows for each
of the three years in the period ended September 30, 2008, in conformity with
U.S. generally accepted accounting principles.  Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
 
 We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial
reporting as of September 30, 2008, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.  Our report dated December 22, 2008 expressed an
opinion that the Company had not maintained effective internal control over
financial reporting as of September 30, 2008, based on criteria established in
Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
 
 As
discussed in Note 15 to the consolidated financial statements, the Company has
adopted the provisions of Statement of Financial Accounting Standards
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109” on October 1, 2007.
 
 The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern.  As discussed in Note 3 to the
financial statements, the Company has suffered recurring losses from operations.
This raises substantial doubt about the Company's ability to continue as a going
concern.  Management's plans in regard to these matters are also
described in Note 3.  The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
  /s/SINGERLEWAK
LLP
 
 SingerLewak
LLP
 Irvine,
California
 December
22, 2008





56




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors and Shareholders
 Composite
Technology Corporation and Subsidiaries
 
 We have
audited Composite Technology Corporation and Subsidiaries’ (collectively, the
“Company”) internal control over financial reporting as of September 30, 2008,
based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.  The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management's Report on Assessment of Internal
Control over Financial Reporting.  Our responsibility is to express an
opinion on the Company's internal control over financial reporting based on our
audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects.  Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk.  Our
audit also included performing such other procedures as we considered necessary
in the circumstances.  We believe that our audit provides a reasonable
basis for our opinion.
 
 A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.  A company's internal
control over financial reporting includes those policies and procedures that
(a) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (b) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the
company; and (c)
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company's assets that could
have a material effect on the financial statements.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
 
 A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the company's annual or interim financial
statements will not be prevented or detected on a timely basis.  The
following material weaknesses have been identified and included in management's
assessment:
  57
  As of
September 30, 2008, the Company lacked an effective internal control
environment.  Material misstatements may result as the lack of
controls and material weaknesses found in the following transaction
cycles:
 
 ·
              Financial
      control and reporting process which includes monthly, quarterly and annual
      closing processes as well as communicating reporting requirements and
      proper disclosure requirements
 ·
              Revenue
      and accounts receivable process for Company’s sales and recording of
      transactions.
 ·
              Cash
      disbursements process including payment for inventory purchases, fixed
      assets and payment for services
 ·
              Inventory
      management process over on-hand inventory and inventory on
      consignment
 ·
              Shareholders’
      equity process and lack of segregation of duties over tracking and
      recording stock related activity
 ·
              Information
      technology controls and related
systems
 
 These
material weaknesses were considered in determining the nature, timing, and
extent of audit tests applied in our audit of the 2008 financial statements, and
this report does not affect our report dated December 22, 2008 on those
financial statements and financial statement schedules.
 
 In our
opinion, because of the effect of the material weaknesses described above on the
achievement of the objectives of the control criteria, the Company has not
maintained effective internal control over financial reporting as of September
30, 2008, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
 
 We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements and
financial statement schedule as of and for the year ended September 30,
2008  of the Company and our report dated December 22,
2008  expressed an unqualified opinion and included an emphasis
paragraph regarding the Companies ability to continue as a going concern, as
described in Note 3 to the consolidated financial statements.
 
 /s/
SINGERLEWAk LLP
 
 SingerLewak
LLP
 Irvine,
California
 December
22, 2008


58




PART
1 - FINANCIAL STATEMENTS


COMPOSITE
TECHNOLOGY CORPORATION AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(IN
THOUSANDS)





September 30,
                                                                                          2008
                                                                                        
                                                                                        
                                                                                        September 30,
                                                                                          2007ASSETSCURRENT
      ASSETSCash
      and Cash Equivalents
                                                                                        
                                                                                        $
                                                                                        22,594
                                                                                        
                                                                                        
                                                                                        $
                                                                                        22,389Restricted
      Cash
                                                                                        
                                                                                        
                                                                                        693
                                                                                        
                                                                                        
                                                                                        
                                                                                        —Accounts
      Receivable, Current, net
                                                                                        
                                                                                        
                                                                                        11,773
                                                                                        
                                                                                        
                                                                                        
                                                                                        3,159Inventory,
      net
                                                                                        
                                                                                        
                                                                                        42,451
                                                                                        
                                                                                        
                                                                                        
                                                                                        25,702Advanced
      Payments for Turbine Inventory
                                                                                        
                                                                                        
                                                                                        31,245
                                                                                        
                                                                                        
                                                                                        
                                                                                        12,121Prepaid
      Expenses and Other Current Assets
                                                                                        
                                                                                        
                                                                                        1,425
                                                                                        
                                                                                        
                                                                                        
                                                                                        2,743Total
      Current Assets
                                                                                        
                                                                                        
                                                                                        110,181
                                                                                        
                                                                                        
                                                                                        
                                                                                        66,114Long
      Term Trade Receivables, net
                                                                                        
                                                                                        
                                                                                        248
                                                                                        
                                                                                        
                                                                                        
                                                                                        301Investment
      in Unconsolidated Subsidiary
                                                                                        
                                                                                        
                                                                                        —
                                                                                        
                                                                                        
                                                                                        
                                                                                        2,109Property
      and Equipment, net
                                                                                        
                                                                                        
                                                                                        7,955
                                                                                        
                                                                                        
                                                                                        
                                                                                        7,900Intangible
      Assets
                                                                                        
                                                                                        
                                                                                        21,549
                                                                                        
                                                                                        
                                                                                        
                                                                                        22,559Goodwill
                                                                                        
                                                                                        
                                                                                        24,218
                                                                                        
                                                                                        
                                                                                        
                                                                                        24,218Other
      Assets
                                                                                        
                                                                                        
                                                                                        1,289
                                                                                        
                                                                                        
                                                                                        
                                                                                        636TOTAL
      ASSETS
                                                                                        
                                                                                        $
                                                                                        165,440
                                                                                        
                                                                                        
                                                                                        $
                                                                                        123,837LIABILITIES
      AND SHAREHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      Payable and Other Accrued Liabilities
                                                                                        
                                                                                        $
                                                                                        34,607
                                                                                        
                                                                                        
                                                                                        $
                                                                                        15,502Deferred
      Revenues and Customer Advances
                                                                                        
                                                                                        
                                                                                        33,525
                                                                                        
                                                                                        
                                                                                        
                                                                                        32,398Warranty
      Provision
                                                                                        
                                                                                        
                                                                                        1,462
                                                                                        
                                                                                        
                                                                                        
                                                                                        1,008Lease
      Obligation - Current
                                                                                        
                                                                                        
                                                                                        —
                                                                                        
                                                                                        
                                                                                        
                                                                                        109Net
      Liabilities for Deconsolidated Subsidiary in Liquidation  - see
      Note 2
                                                                                        
                                                                                        
                                                                                        19,145
                                                                                        
                                                                                        
                                                                                        
                                                                                        14,667Total
      Current Liabilities
                                                                                        
                                                                                        
                                                                                        88,739
                                                                                        
                                                                                        
                                                                                        
                                                                                        63,684LONG
      TERM LIABILITIESLong-Term
      Portion of Deferred Revenues
                                                                                        
                                                                                        
                                                                                        727
                                                                                        
                                                                                        
                                                                                        
                                                                                        379Long-Term
      Portion of Warranty Provision
                                                                                        
                                                                                        
                                                                                        496
                                                                                        
                                                                                        
                                                                                        
                                                                                        227Convertible
      Notes – Long-Term, net
                                                                                        
                                                                                        
                                                                                        7,838
                                                                                        
                                                                                        
                                                                                        
                                                                                        9,835Total
      Long-Term Liabilities
                                                                                        
                                                                                        
                                                                                        9,061
                                                                                        
                                                                                        
                                                                                        
                                                                                        10,441Total
      Liabilities
                                                                                        
                                                                                        
                                                                                        97,800
                                                                                        
                                                                                        
                                                                                        
                                                                                        74,125COMMITMENTS
      AND CONTINGENCIESSHAREHOLDERS'
      EQUITYCommon
      Stock, $.001 par value 600,000,000 shares authorized 287,988,370 and
      221,308,530 issued and outstanding
                                                                                        
                                                                                        
                                                                                        288
                                                                                        
                                                                                        
                                                                                        
                                                                                        221Additional
      Paid in Capital
                                                                                        
                                                                                        
                                                                                        252,445
                                                                                        
                                                                                        
                                                                                        
                                                                                        189,605Accumulated
        Deficit
                                                                                        
                                                                                        
                                                                                        (185,163
                                                                                        )
                                                                                        
                                                                                        
                                                                                        (139,610
                                                                                        )Accumulated
      Other Comprehensive Gain (Loss)
                                                                                        
                                                                                        
                                                                                        70
                                                                                        
                                                                                        
                                                                                        
                                                                                        (504
                                                                                        )Total
      Shareholders’ Equity
                                                                                        
                                                                                        
                                                                                        67,640
                                                                                        
                                                                                        
                                                                                        
                                                                                        49,712TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY
                                                                                        
                                                                                        $
                                                                                        165,440
                                                                                        
                                                                                        
                                                                                        $
                                                                                        123,837





The
accompanying notes are an integral part of these financial
statements.





59






COMPOSITE
TECHNOLOGY CORPORATION


AND
SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS


(IN
THOUSANDS, EXCEPT PER SHARE AMOUNTS)





For the Years ended September 30,2008
                                                                    
                                                                    
                                                                    2007
                                                                    
                                                                    
                                                                    2006RevenueProduct
      Sales
                                                                    
                                                                    $
                                                                    72,804
                                                                    
                                                                    
                                                                    $
                                                                    32,889
                                                                    
                                                                    
                                                                    $
                                                                    6,340Service
      Revenue
                                                                    
                                                                    
                                                                    1,337
                                                                    
                                                                    
                                                                    
                                                                    1,978
                                                                    
                                                                    
                                                                    
                                                                    999Consulting
      Revenue
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    550Total
      Revenue
                                                                    
                                                                    
                                                                    74,141
                                                                    
                                                                    
                                                                    
                                                                    34,867
                                                                    
                                                                    
                                                                    
                                                                    7,889Cost
      of Product Sold
                                                                    
                                                                    
                                                                    62,184
                                                                    
                                                                    
                                                                    
                                                                    27,599
                                                                    
                                                                    
                                                                    
                                                                    6,253Cost
      of Service Revenue
                                                                    
                                                                    
                                                                    2,538
                                                                    
                                                                    
                                                                    
                                                                    3,738
                                                                    
                                                                    
                                                                    
                                                                    522Cost
      of Consulting Revenue
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    305Gross Profit
                                                                    
                                                                    
                                                                    9,419
                                                                    
                                                                    
                                                                    
                                                                    3,530
                                                                    
                                                                    
                                                                    
                                                                    809OPERATING
      EXPENSESOfficer
      Compensation
                                                                    
                                                                    
                                                                    2,129
                                                                    
                                                                    
                                                                    
                                                                    1,864
                                                                    
                                                                    
                                                                    
                                                                    566General
      and Administrative
                                                                    
                                                                    
                                                                    14,003
                                                                    
                                                                    
                                                                    
                                                                    12,181
                                                                    
                                                                    
                                                                    
                                                                    8,311Research
      and Development
                                                                    
                                                                    
                                                                    14,916
                                                                    
                                                                    
                                                                    
                                                                    6,954
                                                                    
                                                                    
                                                                    
                                                                    4,854Sales
      and Marketing
                                                                    
                                                                    
                                                                    5,346
                                                                    
                                                                    
                                                                    
                                                                    3,924
                                                                    
                                                                    
                                                                    
                                                                    2,081Depreciation
      and Amortization
                                                                    
                                                                    
                                                                    3,950
                                                                    
                                                                    
                                                                    
                                                                    1,704
                                                                    
                                                                    
                                                                    
                                                                    1,089Reorganization
      Expense - Bankruptcy Legal Fees
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    635Total
      Operating Expenses
                                                                    
                                                                    
                                                                    40,344
                                                                    
                                                                    
                                                                    
                                                                    26,627
                                                                    
                                                                    
                                                                    
                                                                    17,536LOSS
      FROM CONTINUING OPERATIONS
                                                                    
                                                                    
                                                                    (30,925
                                                                    )
                                                                    
                                                                    
                                                                    (23,097
                                                                    )
                                                                    
                                                                    
                                                                    (16,727
                                                                    )OTHER
      INCOME / (EXPENSE)Interest
      Expense
                                                                    
                                                                    
                                                                    (4,419
                                                                    )
                                                                    
                                                                    
                                                                    (7,257
                                                                    )
                                                                    
                                                                    
                                                                    (2,940
                                                                    )Interest
      Income
                                                                    
                                                                    
                                                                    270
                                                                    
                                                                    
                                                                    
                                                                    226
                                                                    
                                                                    
                                                                    
                                                                    16Other
      Income/ (Expense)
                                                                    
                                                                    
                                                                    314
                                                                    
                                                                    
                                                                    
                                                                    (98
                                                                    )
                                                                    
                                                                    
                                                                    (48
                                                                    )Expense
      related to Modification of Warrants due to Anti-Dilution
      Events
                                                                    
                                                                    
                                                                    (553
                                                                    )
                                                                    
                                                                    
                                                                    (374
                                                                    )
                                                                    
                                                                    
                                                                    (697
                                                                    )Expense
      related to Inducement of Convertible Debt
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    (3,586
                                                                    )Reorganization
      Item - adjustment to Carrying value of Convertible
    Debentures
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    (2,622
                                                                    )Total
      Other Income / (Expense)
                                                                    
                                                                    
                                                                    (4,388
                                                                    )
                                                                    
                                                                    
                                                                    (7,503
                                                                    )
                                                                    
                                                                    
                                                                    (9,877
                                                                    )Loss
      from Continuing Operations before Income Taxes
                                                                    
                                                                    
                                                                    (35,313
                                                                    )
                                                                    
                                                                    
                                                                    (30,600
                                                                    )
                                                                    
                                                                    
                                                                    (26,604
                                                                    )Income
      Taxes
                                                                    
                                                                    
                                                                    28
                                                                    
                                                                    
                                                                    
                                                                    8
                                                                    
                                                                    
                                                                    
                                                                    4NET
      LOSS BEFORE DISCONTINUED OPERATIONS
                                                                    
                                                                    
                                                                    (35,341
                                                                    )
                                                                    
                                                                    
                                                                    (30,608
                                                                    )
                                                                    
                                                                    
                                                                    (26,608
                                                                    )Loss
      on Discontinued Operations, net of tax of ($4), ($54) and $47,
      respectively
                                                                    
                                                                    
                                                                    (10,212
                                                                    )
                                                                    
                                                                    
                                                                    (13,876
                                                                    )
                                                                    
                                                                    
                                                                    (1,915
                                                                    )NET
      LOSS
                                                                    
                                                                    
                                                                    (45,553
                                                                    )
                                                                    
                                                                    
                                                                    (44,484
                                                                    )
                                                                    
                                                                    
                                                                    (28,523
                                                                    )OTHER
      COMPREHENSIVE INCOME (LOSS)Foreign
      Currency Translation adjustment, net of tax of $0 and $0
                                                                    
                                                                    
                                                                    574
                                                                    
                                                                    
                                                                    
                                                                    (468
                                                                    )
                                                                    
                                                                    
                                                                    (36
                                                                    )COMPREHENSIVE
      LOSS
                                                                    
                                                                    $
                                                                    (44,979
                                                                    )
                                                                    
                                                                    $
                                                                    (44,952
                                                                    )
                                                                    
                                                                    $
                                                                    (28,559
                                                                    )


The
accompanying notes are an integral part of these financial
statements.




60




COMPOSITE
TECHNOLOGY CORPORATION


AND
SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS


CONT’D




For the years ended September 30,2008
                                          
                                          
                                          2007
                                          
                                          
                                          2006BASIC
      AND DILUTED LOSS PER SHARELoss
      per share from continuing operations
                                          
                                          $
                                          (0.15
                                          )
                                          
                                          $
                                          (0.16
                                          )
                                          
                                          $
                                          (0.19
                                          )Loss
      per share from discontinued operations
                                          
                                          $
                                          (0.04
                                          )
                                          
                                          $
                                          (0.07
                                          )
                                          
                                          $
                                          (0.01
                                          )TOTAL
      BASIC AND DILUTED LOSS PER SHARE
                                          
                                          $
                                          (0.19
                                          )
                                          
                                          $
                                          (0.23
                                          )
                                          
                                          $
                                          (0.20
                                          )WEIGHTED-AVERAGE
      COMMON SHARES OUTSTANDING
                                          
                                          
                                          243,369,110
                                          
                                          
                                          
                                          189,683,876
                                          
                                          
                                          
                                          142,462,240


The accompanying
notes are an integral part of these financial statements.


61





COMPOSITE
TECHNOLOGY CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENT OF SHAREHOLDERS’ EQUITY FOR


THE
YEARS ENDED SEPTEMBER 30, 2008, 2007 and 2006




Common
      Stock(In
      Thousands Except For ShareAmounts)
                                      
                                      Shares
                                      
                                      
                                      Amount
                                      
                                      
                                      Subscription
      Receivable
                                      
                                      
                                      Additional
                                        paid-in
      capital
                                      
                                      
                                      Accumulated
                                        Other
                                        Comprehensive
                                        Loss
                                      
                                      
                                      Accumulated
                                        deficit
                                      
                                      
                                      TotalBalance
      at September 30, 2005
                                      
                                      
                                      118,744,359
                                      
                                      
                                      $
                                      119
                                      
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      40,980
                                      
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      (66,603
                                      )
                                      
                                      $
                                      (25,504
                                      )Issuance
      of Common Stock forCash
      pursuant to warrant exercise
                                      
                                      
                                      913,596
                                      
                                      
                                      
                                      1
                                      
                                      
                                      
                                      (378
                                      )
                                      
                                      
                                      1,076
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      699Conversion
      of Convertible Debt
                                      
                                      
                                      7,815,048
                                      
                                      
                                      
                                      8
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      12,154
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      12,162Inducement
      to convert Convertible Debt
                                      
                                      
                                      2,568,737
                                      
                                      
                                      
                                      3
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      3,584
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      3,587Settlement
      of Bankruptcy claims and litigation
                                      
                                      
                                      7,971,425
                                      
                                      
                                      
                                      8
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      15,202
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      15,210Fair
      value of Services provided
                                      
                                      
                                      1,175,014
                                      
                                      
                                      
                                      1
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      1,831
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      1,832Interest
      paid in common stock
                                      
                                      
                                      277,476
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      450
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      450EU
      Energy Acquisition
                                      
                                      
                                      39,169,670
                                      
                                      
                                      
                                      39
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      55,190
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      55,229Issuance
      of Warrants forServices
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      742
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      742Antidilutive
      effect of stock issuance
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      132
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      132$6.0
      million Debtor in Possession financing
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      1,834
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      1,834$3.5
      million Bridge Financing
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      1,957
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      1,957Warrant
      modifications due to antidilutive events
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      564
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      564Additional
      conversion feature - antidilutive event
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      788
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      788Vesting
      of options issued to non-employees
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      239
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      239Vesting
      of options issued to employees
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      738
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      738Other
      Comprehensive Loss
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (36
                                      )
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (36
                                      )Net
      Loss
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (28,523
                                      )
                                      
                                      
                                      (28,523
                                      )Balance
      at September 30, 2006
                                      
                                      
                                      178,635,325
                                      
                                      
                                      $
                                      179
                                      
                                      
                                      $
                                      (378
                                      )
                                      
                                      $
                                      137,461
                                      
                                      
                                      $
                                      (36
                                      )
                                      
                                      $
                                      (95,126
                                      )
                                      
                                      $
                                      42,100Issuance
      of Common Stock forCash
      pursuant to PIPE placement
                                      
                                      
                                      25,201,954
                                      
                                      
                                      
                                      25
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      24,928
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      24,953Cash
      pursuant to warrant exercises
                                      
                                      
                                      2,314,135
                                      
                                      
                                      
                                      2
                                      
                                      
                                      
                                      378
                                      
                                      
                                      
                                      2,445
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      2,825Cash
      pursuant to option exercises
                                      
                                      
                                      1,133,066
                                      
                                      
                                      
                                      1
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      365
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      366Conversion
      of Convertible Debt
                                      
                                      
                                      14,612,136
                                      
                                      
                                      
                                      15
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      16,661
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      16,676Fair
      value of Services provided
                                      
                                      
                                      227,523
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      248
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      248Recovery
      of common stock -EU Energy Acquisition claim
                                      
                                      
                                      (815,789
                                      )
                                      
                                      
                                      (1
                                      )
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (1,149
                                      )
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (1,150
                                      )Offering
      Costs paid in Cash
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (1,497
                                      )
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (1,497
                                      )Offering
      Costs paid in Warrants
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (975
                                      )
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (975
                                      )Issuance
      of Warrants forServices
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      754
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      754Offering
      Costs
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      975
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      975$22.8
      million Convertible Debt Offering
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      4,682
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      4,682Settlement
      of legal claims
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      166
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      166Interest
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      1,008
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      1,008Warrant
      modifications due to antidilutive events
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      553
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      553Additional
      conversion feature - antidilutive event
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      626
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      626Vesting
      of options issued to non-employees
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      831
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      831Vesting
      of options issued to employees
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      1,523
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      1,523Other
      Comprehensive Loss
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (468
                                      )
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (468
                                      )Net
      Loss
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (44,484
                                      )
                                      
                                      
                                      (44,484
                                      )Balance
      at September 30, 2007
                                      
                                      
                                      221,308,350
                                      
                                      
                                      $
                                      221
                                      
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      189,605
                                      
                                      
                                      $
                                      (504
                                      )
                                      
                                      $
                                      (139,610
                                      )
                                      
                                      $
                                      49,712 The
accompanying notes are an integral part of these financial
statements.
 62
  COMPOSITE
TECHNOLOGY CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
STATEMENT OF SHAREHOLDERS’ EQUITY FOR
 THE
YEARS ENDED SEPTEMBER 30, 2008, 2007 and 2006
 CONT’D
  Common
      Stock(In
      Thousands Except For
      Share
                                                                                    Amounts)
                                                                                  
                                                                                  Shares
                                                                                  
                                                                                  
                                                                                  Amount
                                                                                  
                                                                                  
                                                                                  Subscription
      Receivable
                                                                                  
                                                                                  
                                                                                  Additional
                                                                                    paid-in
      capital
                                                                                  
                                                                                  
                                                                                  Accumulated
                                                                                    Other
                                                                                    Comprehensive
                                                                                    Loss
                                                                                  
                                                                                  
                                                                                  Accumulated
                                                                                    deficit
                                                                                  
                                                                                  
                                                                                  TotalIssuance
      of Common Stock forCash
      pursuant to PIPE placement
                                                                                  
                                                                                  
                                                                                  58,787,877
                                                                                  
                                                                                  
                                                                                  
                                                                                  59
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  49,941
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  50,000Cash
      pursuant to warrant exercises
                                                                                  
                                                                                  
                                                                                  4,129,139
                                                                                  
                                                                                  
                                                                                  
                                                                                  4
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  4,453
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  4,457Cash
      pursuant to option exercises
                                                                                  
                                                                                  
                                                                                  490,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  1
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  196
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  197Conversion
      of Convertible Debt
                                                                                  
                                                                                  
                                                                                  3,073,004
                                                                                  
                                                                                  
                                                                                  
                                                                                  3
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  3,132
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  3,135Fair
      value of Services provided
                                                                                  
                                                                                  
                                                                                  200,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  208
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  208Offering
      Costs paid in Cash
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  (91
                                                                                  )
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  (91
                                                                                  )Issuance
      of Warrants forServices
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  127
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  127Antidilutive
      effect of stock issuance
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  138
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  138$5
      million Debt Financing
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,045
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,045Warrant
      modifications due to antidilutive events
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  415
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  415Additional
      conversion feature - antidilutive event
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  302
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  302Vesting
      of options issued
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  2,974
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  2,974Other
      Comprehensive Loss
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  574
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  574Net
      Loss
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  (45,553
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (45,553
                                                                                  )Balance
      at September 30, 2008
                                                                                  
                                                                                  
                                                                                  287,988,370
                                                                                  
                                                                                  
                                                                                  $
                                                                                  288
                                                                                  
                                                                                  
                                                                                  $
                                                                                  —
                                                                                  
                                                                                  
                                                                                  $
                                                                                  252,445
                                                                                  
                                                                                  
                                                                                  $
                                                                                  70
                                                                                  
                                                                                  
                                                                                  $
                                                                                  (185,163
                                                                                  )
                                                                                  
                                                                                  $
                                                                                  67,640




The
accompanying notes are an integral part of these financial
statements




63




COMPOSITE
TECHNOLOGY CORPORATION


AND
SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS FOR


THE
YEARS ENDED SEPTEMBER 30, 2008, 2007 and 2006


(IN
THOUSANDS)





Year Ending September 30,2008
                                            
                                            
                                            2007
                                            
                                            
                                            2006Revised
                                            
                                            
                                            Revised
                                            
                                            
                                            RevisedCASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                                            
                                            $
                                            (45,553
                                            )
                                            
                                            $
                                            (44,484
                                            )
                                            
                                            $
                                            (28,523
                                            )Loss
      from discontinued operations - see Note 2
                                            
                                            
                                            10,212
                                            
                                            
                                            
                                            13,876
                                            
                                            
                                            
                                            1,915Interest
      and deferred finance charge amortization related to detachable warrants
      and fixed conversion features
                                            
                                            
                                            2,824
                                            
                                            
                                            
                                            5,432
                                            
                                            
                                            
                                            1,957Depreciation
      and amortization
                                            
                                            
                                            3,950
                                            
                                            
                                            
                                            1,704
                                            
                                            
                                            
                                            1,089Expense
      related to fair value of vested options
                                            
                                            
                                            2,973
                                            
                                            
                                            
                                            2,354
                                            
                                            
                                            
                                            978Reorganization
      item - adjustment to carrying value of convertible debt
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            2,622Amortization
      of prepaid expenses paid in stock
                                            
                                            
                                            524
                                            
                                            
                                            
                                            422
                                            
                                            
                                            
                                            398Issuance
      of warrants for services
                                            
                                            
                                            127
                                            
                                            
                                            
                                            164
                                            
                                            
                                            
                                            410Issuance
      of common stock for settlement
                                            
                                            
                                            —
                                            
                                            
                                            
                                            166
                                            
                                            
                                            
                                            3,586Issuance
      of common stock for services
                                            
                                            
                                            208
                                            
                                            
                                            
                                            248
                                            
                                            
                                            
                                            1,002Issuance
      of common stock for interest
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            17Compensation
      expense related to modification of stock warrants
                                            
                                            
                                            553
                                            
                                            
                                            
                                            374
                                            
                                            
                                            
                                            696Litigation
      and bankruptcy settlements
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            702Bad
      debt expense
                                            
                                            
                                            266
                                            
                                            
                                            
                                            421
                                            
                                            
                                            
                                            —Inventory
      reserve expense
                                            
                                            
                                            338
                                            
                                            
                                            
                                            1,237
                                            
                                            
                                            
                                            24Impairment
      on obsolete inventory
                                            
                                            
                                            5,286
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —Other
                                            
                                            
                                            (84)
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (12
                                            )Changes
      in Assets / Liabilities:Inventory
                                            
                                            
                                            (23,146
                                            )
                                            
                                            
                                            (18,778
                                            )
                                            
                                            
                                            (433
                                            )Advanced
      payments for inventory
                                            
                                            
                                            (18,351
                                            )
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —Accounts
      receivable
                                            
                                            
                                            (8,827
                                            )
                                            
                                            
                                            (4,687
                                            )
                                            
                                            
                                            (6,031
                                            )Prepaids
      and other current assets
                                            
                                            
                                            319
                                            
                                            
                                            
                                            (63
                                            )
                                            
                                            
                                            1,742Restricted
      cash
                                            
                                            
                                            (693
                                            )
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —Other
      assets
                                            
                                            
                                            (516
                                            )
                                            
                                            
                                            753
                                            
                                            
                                            
                                            (40
                                            )Accounts
      payable and other accruals
                                            
                                            
                                            19,737
                                            
                                            
                                            
                                            11,206
                                            
                                            
                                            
                                            3,971Deferred
      revenue
                                            
                                            
                                            1,476
                                            
                                            
                                            
                                            16,192
                                            
                                            
                                            
                                            8,360Accrued
      warranty liability
                                            
                                            
                                            722
                                            
                                            
                                            
                                            682
                                            
                                            
                                            
                                            (290
                                            )Net
      liabilities of discontinued operations - see Note 2
                                            
                                            
                                            (3,705
                                            )
                                            
                                            
                                            (9,398
                                            )
                                            
                                            
                                            (617
                                            )Cash
      used in operating activities
                                            
                                            $
                                            (51,360
                                            )
                                            
                                            $
                                            (22,179
                                            )
                                            
                                            $
                                            (6,477
                                            )CASH
      FLOWS FROM INVESTING ACTIVITIESCash
      received from EU acquisition
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            1,164Cash
      paid for EU acquisition
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (237
                                            )Proceeds
      from sale of assets
                                            
                                            
                                            110
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —Purchase
      of property, plant and equipment
                                            
                                            
                                            (3,021
                                            )
                                            
                                            
                                            (5,170
                                            )
                                            
                                            
                                            (494
                                            )Cash
      investment in unconsolidated subsidiary
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (413
                                            )
                                            
                                            
                                            —Cash
      provided by (used in) investing activities
                                            
                                            $
                                            (2,911
                                            )
                                            
                                            $
                                            (5,583
                                            )
                                            
                                            $
                                            433


The
accompanying notes are an integral part of these financial
statements.


64




COMPOSITE
TECHNOLOGY CORPORATION


AND
SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS FOR


THE
YEARS ENDED SEPTEMBER 30, 2008, 2007 and 2006, Continued


(IN
THOUSANDS)


CONT'D




CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from issuance of convertible debentures
                                    
                                    
                                    —
                                    
                                    
                                    
                                    21,456
                                    
                                    
                                    
                                    9,500Proceeds
      from issuance of common stock (net of issuing costs of
$90)
                                    
                                    
                                    49,910
                                    
                                    
                                    
                                    23,834
                                    
                                    
                                    
                                    —Proceeds
      from senior secured debt agreements
                                    
                                    
                                    2,500
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Proceeds
      from factoring arrangements
                                    
                                    
                                    —
                                    
                                    
                                    
                                    1,800
                                    
                                    
                                    
                                    —Proceeds
      from notes payable
                                    
                                    
                                    —
                                    
                                    
                                    
                                    500
                                    
                                    
                                    
                                    —Convertible
      debt repayment - $3.5M bridge
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (2,175
                                    )Payments
      on capital leased assets
                                    
                                    
                                    (109
                                    )
                                    
                                    
                                    (289
                                    )
                                    
                                    
                                    (450
                                    )Proceeds
      from exercise of warrants
                                    
                                    
                                    4,457
                                    
                                    
                                    
                                    2,447
                                    
                                    
                                    
                                    698Proceeds
      from exercise of options
                                    
                                    
                                    196
                                    
                                    
                                    
                                    366
                                    
                                    
                                    
                                    —Repayments
      of notes payable and factoring arrangements
                                    
                                    
                                    (2,500
                                    )
                                    
                                    
                                    (2,300
                                    )
                                    
                                    
                                    —Cash
      advances (to)/from officers
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (62
                                    )
                                    
                                    
                                    62Cash
      provided by financing activities
                                    
                                    $
                                    54,454
                                    
                                    
                                    $
                                    47,752
                                    
                                    
                                    $
                                    7,635Effect
      of exchange rate changes on cash from continuing
operations
                                    
                                    $
                                    22
                                    
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    —Net
      increase in cash and cash equivalents from continuing
      operations
                                    
                                    $
                                    205
                                    
                                    
                                    $
                                    19,990
                                    
                                    
                                    $
                                    1,591CASH
      FLOWS FROM DISCONTINUED OPERATIONS - see Note 2Cash
      provided by (used in) operating activities – discontinued
      operations
                                    
                                    
                                    220
                                    
                                    
                                    
                                    123
                                    
                                    
                                    
                                    (234
                                    )Cash
      used for investing activities – discontinued operations
                                    
                                    
                                    (1
                                    )
                                    
                                    
                                    (34
                                    )
                                    
                                    
                                    (3
                                    )Effect
      of exchange rate changes on cash – discontinued operations
                                    
                                    $
                                    4
                                    
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    —Net
      increase/(decrease) in cash and cash equivalents from discontinued
      operations
                                    
                                    $
                                    223
                                    
                                    
                                    $
                                    89
                                    
                                    
                                    $
                                    (237
                                    )Total
      net increase/(decrease) in cash and cash equivalents
                                    
                                    $
                                    428
                                    
                                    
                                    $
                                    20,079
                                    
                                    
                                    $
                                    1,354Cash
      and cash equivalents at beginning of period – continuing
      operations
                                    
                                    
                                    22,389
                                    
                                    
                                    
                                    2,399
                                    
                                    
                                    
                                    808Cash
      and cash equivalents at beginning of period – discontinued
      operations
                                    
                                    
                                    268
                                    
                                    
                                    
                                    179
                                    
                                    
                                    
                                    416Total
      cash and cash equivalents at beginning of period
                                    
                                    $
                                    22,657
                                    
                                    
                                    $
                                    2,578
                                    
                                    
                                    $
                                    1,224Cash
      and cash equivalents at end of period – continuing
    operations
                                    
                                    
                                    22,594
                                    
                                    
                                    
                                    22,389
                                    
                                    
                                    
                                    2,399Cash
      and cash equivalents at end of period – discontinued
      operations
                                    
                                    
                                    491
                                    
                                    
                                    
                                    268
                                    
                                    
                                    
                                    179Total
      cash and cash equivalents at end of period
                                    
                                    $
                                    23,085
                                    
                                    
                                    $
                                    22,657
                                    
                                    
                                    $
                                    2,578SUPPLEMENTAL DISCLOSURE OF CASH
      FLOWINFORMATION:INTEREST
      PAID
                                    
                                    $
                                    1,168
                                    
                                    
                                    $
                                    1,089
                                    
                                    
                                    $
                                    832TAXES
      PAID
                                    
                                    $
                                    11
                                    
                                    
                                    $
                                    4
                                    
                                    
                                    $
                                    4CASH
      PAID FOR REORGANIZATION ITEMS
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    317
                                    
                                    
                                    $
                                    950Supplemental
      Disclosure of Non-cash Activities:On
      July 3, 2006, we acquired EU Energy. (Note 4)Accounts
      receivable
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    11,939Inventories
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    22,450Property,
      plant and equipment
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    2,447Other
      assets
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    5,621Intangible
      assets and goodwill
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    49,942Accounts
      payable and accrued expenses
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (9,412
                                    )Warranty
      reserves
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (15,774
                                    )Deferred
      revenues and customer advances
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (11,828
                                    )Acquisition
      costs net of cash acquired
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (156
                                    )Stock
      issued for purchase of EU Energy
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (55,229
                                    )$
                                    —
                                    
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    —




The
accompanying notes are an integral part of these financial
statements


65


During
the fiscal year ending September 30, 2008, the Company issued:
 
 2,073,004
shares of Common Stock for the conversion of $2,135,000 of Convertible Debt at a
conversion price of $1.03 per share;
 
 1,000,000
shares of Common Stock for the conversion of $1,000,000 of Convertible Debt at a
conversion price of $1.00 per share;
 
 200,000
shares of Common Stock as a prepayment for investor relations services valued at
$208,000, the market price on the date of issuance;
 
 2,500,000
warrants valued at the fair value on the issuance dates of $1,045,000 issued
pursuant to the May 5, 1008 Debt agreement.
 
 542,272
warrants valued at the fair value on the issuance date of $138,000 were issued
pursuant to anti-dilution protection provisions of our 2005 DIP and 2006 Bridge
Note warrant holders as a result of our May, 2008 equity financing.
 
 During
the fiscal year ending September 30, 2007, the Company issued:
  50,000
shares of common stock for the settlement of accounts payable related to
marketing consulting services valued at $55,000;
  177,523
shares of common stock for settlement of accounts payable related to product
development services valued at $194,000;
  220,000
warrants valued at the fair value at the issuance date of $164,000 were issued
to a note holder in lieu of interest and recorded as interest expense during the
quarter at the fair value of the warrants issued;
  10,973,585
warrants valued at the fair value of $5,170,000 at the issuance date were issued
as part of the February, 2007 Senior Convertible Note transaction;
  1,316,827
warrants valued at the fair value of $611,000 at the issuance date were issued
as fees related to the February, 2007 Senior Convertible Note
transaction;
  1,800,000
warrants valued at the fair value of $844,000 at the issuance date were issued
in conjunction with the factored receivable arrangement;
  629,128
warrants valued at the fair value of $195,000 at the issuance date were issued
pursuant to anti-dilution protection provisions of our 2005 DIP financing as the
result of our February, 2007 Convertible Debt offering;
  152,341
warrants valued at the fair value of $62,000 at the issuance date were issued
pursuant to anti-dilution protection provisions of our 2006 Bridge Notes
financing as the result of anti-dilution of our February, 2007 Convertible Debt
offering;
  300,000
warrants valued at the fair value of $166,000 were issued in settlement of a
legal dispute;
  6,247,676
warrants valued at the fair value of $4,029,000 at the issuance date were issued
in conjunction with the two PIPE equity placements;
  66
  1,564,901
warrants valued at the fair value of $1,009,000 at the issuance date were issued
for services related to the two PIPE equity placements;
  87,374
warrants valued at the fair value of $76,000 at the issuance date were issued
for the anti-dilution impact of the 2006 Series A and the 2005 DIP warrants as a
result of our June, 2007 PIPE equity issuances;
 
 The
Company issued 4,273,000 shares of common stock for the conversion of $6,023,000
of the August, 2004 Convertible Debentures as follows:
 -
                  
                  $1,010,000
      of principal was converted at $1.46 per share into 691,816 shares of
      common stock-
                  
                  $5,013,000
      of principal was converted at $1.40 per share into 3,580,857 shares of
      common stock.
 
 The
Company issued 10,383,150 shares of common stock for the conversion of
$10,698,000 of the February, 2007 Convertible Notes as follows:
 -
                
                $300,000
      of principal was converted at $1.04 per share into 288,462 shares of
      common stock-
                
                $10,353,000
      of principal was converted at $1.03 per share into 10,050,997 shares of
      common stock.
 
 During
the fiscal year ending September 30, 2006, the Company issued:
 
 3,089,236
shares of common stock for the conversion of $4,838 of the August, 2004
Convertible Debentures as follows:
 -
                
                $680,000
      of principal was converted at $1.67 per share into 407,300 shares of
      common stock-
                
                $4,157,000
      of principal was converted at $1.55 per share into 2,681,936 shares of
      common stock.
 
 In fiscal
2006, the Company raised $6,000,000 in convertible notes. In conjunction with
these notes:
 -
                
                The
      Company issued 1,354,838 warrants and valued the conversion features of
      the notes and warrants at $1,834,000.-
                
                The
      Company issued 232,258 shares of common stock for debt financing services
      valued at $360,000.-
                
                The
      Company issued 3,870,972 shares of common stock at a conversion price of
      $1.55 per share for the conversion of the $6.0 million in notes. To
      facilitate the conversion and to settle other outstanding issues, the
      Company issued 1,308,142 common shares valued at the market price of $1.72
      per share. The company recorded a charge of $2,250,000 to other expense
      relating to inducement of convertible debt as a result of this
      transaction. To facilitate this transaction, 78,459 shares of stock valued
      at $1.72 per share were issued and the Company recorded a charge to legal,
      professional, and consulting expense of $135,000 for these
      services.
  67
  During
the year ending September 30, 2006, in March, 2006 the Company issued $3,500,000
in convertible notes due September, 2006. In conjunction with these notes
2,750,000 warrants were issued and the company valued the conversion features of
the notes and warrants at $1,957,000 which was recorded as a discount to the
note principal on the balance sheet. In September, 2006, $1,325,000 of the
$3,500,000 in principal was converted at $1.55 per share into 854,840 shares of
common stock. As an inducement to convert the principal and in exchange for the
waiver of future antidilution of the note holders’ remaining warrants, we issued
1,260,595 shares of common stock valued at the fair value of $1,336,000. To
facilitate this transaction, 72,000 shares of unregistered stock were issued and
the Company recorded a charge to legal, professional, and consulting expense of
$76,000 for these services.
 
 During
fiscal 2006, the Company issued 7,971,425 shares of common stock for settlement
of bankruptcy claims and litigation settlements valued at
$15,210,000.
 
 During
fiscal 2006, the Company issued 265,427 shares of common stock in settlement of
Accounts Payable totaling $428,000.
 
 During
fiscal 2006, the Company issued 526,840 shares of common stock as prepayment for
public and media relations consulting services from January, 2006 through March,
2008 valued at $832,000.
 
 During
fiscal 2006, the Company issued 277,476 shares of common stock in lieu of
interest totaling $451,000.




68






COMPOSITE
TECHNOLOGY CORPORATION


AND
SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED SEPTEMBER 30, 2008, 2007, AND 2006





NOTE
1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES





Composite
Technology Corporation, originally incorporated in Florida and reincorporated in
Nevada, is an Irvine, CA based company operating in two segments CTC Cable
“Cable” and DeWind, “Wind”. The Cable Segment sells high efficiency patented
composite core electricity conductors known as "ACCCTMconductor" for use in electric transmission and distribution lines. The
Wind segment sells wind turbines under the brand name DeWind. ACCC conductor is
commercially available in the United States and Canada through distribution and
purchase agreements with General Cable Industries, Inc; in China through Far
East Composite Cable; in Europe through Lamifil; in the Middle East through
Midal Cable; and directly through CTC Cable worldwide.





In July,
2006 we acquired EU Energy, Ltd. which has been operated as DeWind since
the acquisition. DeWind wind turbines are commercially available from our
contract manufacturer in Texas for sale worldwide for our D8 and D8.2 turbine
models and through our Chinese license partner for worldwide sales outside of
the US for our D6 turbine model.





On May 5,
2005, (Petition Date) Composite Technology Corporation filed a voluntary
reorganization plan and disclosure statement under the provisions of Title 11 of
the Federal Bankruptcy Code in the United States Bankruptcy Court for the
Central District of California under case number SA 05-13107 JR. Its
subsidiaries, including CTC Cable Corporation, CTC Wind Systems Corporation and
CTC Towers and Poles Corporation, are not party to the Title 11 case. As of the
Petition Date, multiple lawsuits were taxing the Company's resources and
threatened to divert management from their duties of running the business. One
of these lawsuits also resulted in an attachment of more than $2.5 million of
the Company's funds. Our bankruptcy plan was confirmed on October 31, 2005. We
exited Title 11 Bankruptcy on November 21, 2005 and received a formal decree,
which released us from Bankruptcy Court oversight on August 2,
2006.





On August
29, 2008 a subsidiary of the Company, DeWind GmbH, was placed into insolvency
under German law in Lubeck, Germany.  At the time of insolvency, the
subsidiary was engaged in managing the service and warranty related liabilities
for DeWind turbines that were placed in service prior to June, 2005 when DeWind
GmbH was owned by FKI, plc.   At the time of the insolvency,
DeWind, GmbH was a wholly owned subsidiary of DeWind Holdings Ltd., itself a
wholly owned subsidiary of DeWind Turbines, Ltd., itself a wholly owned
subsidiary of the parent Company, Composite Technology Corporation. See Note 2
below.





BASIS
OF FINANCIAL STATEMENTS





The
accompanying Consolidated Financial Statements have been prepared on a going
concern basis.





BASIS OF CONSOLIDATION.  The financial statements include the accounts of Composite
Technology Corporation and its wholly-owned subsidiaries, the most significant
of which are CTC Cable Corporation, DeWind, Inc., the principal operating
subsidiary of DeWind as well as multiple DeWind subsidiaries related to its
European operations.




As required by Accounting Research
Bulletin No. 51, “Consolidated Financial Statements” (“ARB 51”) and
Statement of Financial Accounting Standards No 94 (“SFAS 94”, “Consolidation of
All Majority-Owned Subsidiaries,”) the Company consolidates the financial
statements of all entities in which the Company has a controlling financial
interest, as defined by ARB 51.All significant inter-company accounts
and transactions are eliminated during consolidation. Certain prior year
balances have been reclassified to conform to the current year presentation.
Such reclassifications did not affect total revenues, operating income, or net
income.





In July,
2006 we acquired EU Energy, Ltd. and its wholly owned subsidiaries. We accounted
for the acquisition under the purchase accounting method required under SFAS 141
“Business Combinations.” We have incorporated the results of EU’s operations
under the brand name DeWind from the period since the July 3, 2006 acquisition
date through September 30, 2008.


69





Discontinued
Operations





DeWind,
GmbH:


During
fiscal 2008, the Company’s DeWind segment placed a subsidiary, DeWind GmbH into
insolvency proceedings.  The net liabilities associated with this
subsidiary as of the date of insolvency and for comparable prior periods are
shown on the balance sheet as “Net Liabilities for Deconsolidated Subsidiary in
Liquidation” under the guidance of ARB 51 and SFAS 94.  Results of
operations have been reclassified to discontinued operations for periods up to
the date of insolvency. Thereafter, the entity will be
deconsolidated. Prior year presentation has been reclassified
accordingly. See Note 2 below.





Also
during 2008, the Company sold its remaining interest in E Services which had
been consolidated into operations as a VIE for the first fiscal quarter of 2007
and thereafter accounted for under the equity method.  Results of
operations have been reclassified to discontinued operations for periods up to
the date of sale.  Prior year presentation has been reclassified
accordingly.  See Note 2 below.





REVENUE
RECOGNITION





Revenues
are recognized based on guidance provided in the Securities and Exchange
Commission (SEC) Staff Accounting Bulletin No. 104 “Revenue Recognition in
Financial Statements,” as amended (SAB 104). Accordingly, our general revenue
recognition policy is to recognize revenue when there is persuasive evidence of
an arrangement, the sales price is fixed or determinable, collection of the
related receivable is reasonably assured, and delivery has occurred or services
have been rendered.




The
Company derives, or seeks to derive revenues from following
sources:


(1)
Product revenue which includes revenue from:


a) the
sale of composite core, stranded composite core, core and stranded core
hardware, and other electric utility related products.


b) the
sale of electrical generation turbines, related turbine parts, and license
royalties on turbines sold by third parties.


(2)
Service revenue which includes revenue from the service and maintenance of
turbine generators under service contracts or revenue from billings on a cost
and materials basis.





In
addition to the above general revenue recognition principles prescribed by SAB
104, our specific revenue recognition policies for each revenue
source:





PRODUCT
REVENUES. Product revenues are recognized when product shipment has been made
and title has passed to the end user customer. Product revenues consist
primarily of revenue from the sale of: (i) stranded composite core and related
hardware to utilities either sold directly by the Company or through a
distribution agreement, ii) composite core and related hardware sold to a cable
stranding entity, or iii) turbines, turbine parts, or license rights sold
to wind farm operators, utilities, and technology licensees. Revenues are
deferred for product contracts where the Company is required to perform
installation services until after the installation is complete. Our distribution
agreements are structured so that our revenue cycle is complete upon shipment
and title transfer of products to the distributor with no right of
return.





CTC Cable
sales for the years ended September 30, 2008 and 2007 consisted of stranded ACCC
conductor and ACCC hardware sold to end user utilities, sales of ACCC conductor
sold to our Chinese distributor, and sales of ACCC conductor core and ACCC
hardware to two of our stranding manufacturers. All ACCC product related sales
were recognized upon delivery of product and transfer of title. There is no
right of return for sales of ACCC conductor or ACCC core to our Chinese
distributor. For
ACCCTM
conductor product sales made directly by us and not through a manufacturer or
distributor, we offer a product replacement warranty of two years with an
optional purchase of up to seven years.  We allocate a portion of
sales proceeds to the estimated fair value of the cost to provide such a
warranty.  To date, most of our ACCC related product sales have been
without warranty coverage.




DeWind
Turbine related sales for the years ended September 30, 2008, 2007 and 2006
consisted of completed and installed wind turbine units, turbine parts, and
license fees. For DeWind turbine revenues, for turbine sales, we recognized
revenues for completed and installed wind turbine units upon the commissioning,
or operational viability of each wind turbine unit. We recognized revenues on
turbine parts sales upon delivery to the customer and title transfer. We
recognized revenues on the license fees upon collection of the license fees and
reporting by the licensee of units sold under each license
agreement.





For
turbine sales, our contracted sales typically include the turbine and warranty
services for up to two years after turbine installation and we offer extended
warranties for an additional fee. One turbine was sold during the fiscal year
ending September 30, 2008 that did not have a warranty. All other turbines sold
carried a two year warranty. Our turbine sales are documented by turbine supply
agreements that specify the contracted value of the turbine, the warranty
service period, and the timing of cash payments by our customers. Our
operational history and the value of extended warranties sold allow us to
provide sufficient vendor specific objective evidence (VSOE) to value the
warranty included with a wind turbine, generally $25,000 per rated megawatt of
power per year representing expected warranty and availability related
liabilities during the warranty period. We recognize as revenue the contracted
turbine value reduced by the value of the warranty portion when the revenue
cycle is completed as described above. Progress payments and customer deposits
are recorded as deferred revenues until the revenue cycle is completed. Costs
incurred and turbine materials purchased during the production of turbines in
completion of the revenue cycle are capitalized into inventory. Operating
expenses, including indirect costs and administrative expenses, are charged as
incurred to periodic income and not allocated to contract costs.  The value
of the warranty portion determined by the VSOE is deferred and recognized
ratably over the life of the warranty service period. For multiple element
contracts where there is no vendor specific objective evidence (VSOE) or
third-party evidence that would allow the allocation of an arrangement fee
amongst various pieces of a multi-element contract, fees received in advance of
services provided would be recorded as deferred revenues until additional
operational experience or other vendor specific objective evidence becomes
available, or until the contract is completed.


70





SERVICE
REVENUES. Service revenues consist of service and maintenance on our wind
turbines under flat rate contracts, typically billed in advance on an annual or
semi-annual basis on a flat rate, as a full service contract, typically
calculated as a rate per kilowatt of generation and billed monthly or quarterly
in arrears, or as a point of sale service call basis billed on a time and
materials basis. Service revenues are deferred and recognized ratably over the
life of a flat rate service contract, recognized as billed for full service
contracts, or for point of delivery services, when the service has been
provided. Direct costs of uncompleted work related to maintenance or repairs
activity is capitalized and expensed upon completion.  Billings for
turbines on a time and materials basis are recorded into revenue as the services
are delivered.





LICENSE
REVENUE. License revenues consist of cash payments for the licensing of our
older D6 and D8 turbines on a per unit delivered basis. We have license
agreements with three companies in China and India that call for progress
payments to DeWind upon the completion of certain technology transfer
milestones. We defer all payments received and recognize revenue when the
licensee has shipped the finished turbine to the wind farm
operator.




CONSULTING
REVENUE. Consulting revenues are generally recognized as the consulting services
are provided. We have entered into service contract agreements with electric
utility and utility services companies that generally require us to provide
engineering or design services, often in conjunction with current or future
product sales. In return, we receive engineering service fees payable in
cash.





For
multiple element contracts where there is no vendor specific objective evidence
(VSOE) or third-party evidence that would allow the allocation of an arrangement
fee amongst various pieces of a multi-element contract, fees received in advance
of services provided are recorded as deferred revenues until additional
operational experience or other vendor specific objective evidence becomes
available, or until the contract is completed.





WARRANTY,
RETROFIT, AND AVAILABILITY PROVISIONS





Warranty
provisions consist of the estimates of the costs and liabilities associated with
the post-sale servicing of our DeWind wind turbines, and the costs and
liabilities associated with any post-sales associated with our ACCC conductor
and related hardware parts.





Warranty
periods for our wind turbines range from zero to seven years and may include
parts-only warranties or parts and repair services warranties and may or may not
include revenue guarantees. Warranty conditions are specific to and are governed
by the turbine supply agreement contract. Warranty related liabilities for time
periods in excess of one year are classified as non-current
liabilities.




Warranties
related to our ACCCTM
products relate to conductor and hardware sold directly by us to the end-user
customer.  We mitigate our loss exposure through the use of third
party warranty insurance.  Warranty related liabilities for time
periods in excess of one year are classified as non-current
liabilities.





We use
the following terms, all of which are accounted for as warranty related
liabilities:





(1)
            Warranty
      provisions represent the estimated costs to perform expected future
      repairs of wind turbines, which are covered under a warranty. We estimate
      warranty provisions based on the historical cost to provide the services
      under warranty including monitoring, repairs, parts, and insurance and
      based on the age of the turbine under warranty. We also include as
      warranty provisions the estimated losses on “full service” contracts where
      we provide full service in exchange for a revenue share of the wind power
      produced.(2)
            Retrofit
      provisions represent the estimated future cost to perform significant
      repairs for known defects in turbines that are expected to be incurred
      during the warranty period or were obligated to be repaired while a
      turbine was under warranty. Retrofit costs are estimated based on
      management’s projection of the costs to repair the known defects on a
      parts and labor basis. When completed, retrofit provisions are amortized
      against the actual expenses incurred. All retrofit accruals are recorded
      as current liabilities.(3)
            Availability
      penalties represent a combination of i) the calculated revenue guarantees
      under the turbine supply agreement and ii) the estimate of future payments
      for revenue guarantees. Actual penalties are calculated under the terms of
      each individual contract and represent the guaranteed value of the wind
      power generated under the term of the contract. If the turbine delivers
      less than the rated power determined under the contract, subject to
      minimum wind conditions, DeWind is obligated under some contracts to
      reimburse the wind turbine purchaser for the shortfall subject to contract
      or turbine maximums, as applicable. Actual availability penalties are
      recorded as current liabilities although such penalties are often disputed
      as to the amounts due and then subsequently mediated or negotiated and
      which often results in payments made in excess of one year. Estimated
      penalties are determined by past availability histories and management
      estimates of the required revenue reimbursement on a per turbine basis and
      calculated using the expected availability rate multiplied by the number
      of months remaining under warranty. Estimated availability penalties are
      amortized against actual availability penalties incurred ratably over the
      remaining warranty period.


71








The
turbine related warranty liabilities were significantly reduced by the filing of
insolvency of DeWind GmbH as described below in Note 2.  Prior to the
insolvency filing, approximately 90% of the Company’s warranty liabilities were
related to turbines under warranty and acquired through the EU acquisition,
dating to periods prior to July 2005.





Estimates





The
preparation of our financial statements conforms with accounting principles
generally accepted in the United States of America, which requires management to
make estimates and judgments in applying our accounting policies that have an
important impact on our reported amounts of assets, liabilities, revenue,
expenses and related disclosures at the date of our financial statements. On an
on-going basis, management evaluates its estimates including those related to
accounts receivable, inventories, stock-based compensation, warranty, retrofit
and availability provisions and goodwill and intangibles. Management bases its
estimates and judgments on historical experience and on various other factors
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from management’s estimates. We believe that the application of our
critical accounting policies requires significant judgments and estimates on the
part of management.   We believe that the estimates, judgments and
assumption upon which we rely are reasonable, and based upon information
available to us at the time that these estimates, judgments and assumptions are
made. These estimates, judgments and assumptions can affect the reported amounts
of assets and liabilities as of the date of the financial statements as well as
the reported amounts of revenues and expenses during the period presented. To
the extent there are material differences between these estimates, judgments or
assumptions and actual results, our financial statements will be affected. In
many cases, the accounting treatment of a particular transaction is specifically
dictated by GAAP and does not require management's judgment in its application.
There are also many areas in which management's judgment in selecting among
available alternatives would produce a materially different result.





Our key
estimates we use that rely upon management judgment include:





-
            the
      estimates pertaining to the likelihood of our accounts receivable
      collectability, These estimates primarily rely upon past payment history
      by customer and management judgment on the likelihood of future payments
      based on the current business condition of each customer and the general
      business environment.-
            the
      estimates pertaining to the valuation of our inventories. These estimates
      primarily rely upon the current order book for each product in inventory
      along with management’s expectations and visibility into future sales of
      each product in inventory.-
            the
      assumptions used to calculate fair value of our stock based compensation,
      primarily the volatility component of the Black-Scholes-Merton option
      pricing model used to value our warrants and our employee and non-employee
      options. This estimate relies upon the past volatility of our share price
      over time as well as the estimate of the option life.-
            the
      warranty, retrofit and availability provisions for our wind turbines.
      These estimates rely primarily on the past history of repairs and
      maintenance, turbine downtime and incurred availability charges as
      calculated under the terms of each contract, and management judgment on:
      i) the likelihood of customer claims for availability based on past
      history, ii) the likelihood of proactively solving or preventing similar
      repair, warranty, or availability expenses in the future, and iii) the
      projected recovery of sub-warranty claims, insurance claims, and other
      mitigating reimbursements.-
            goodwill
      and intangible valuation. These estimates rely primarily on financial
      models reviewed by senior management which incorporate business
      assumptions made by management on the underlying products and technologies
      acquired in the DeWind acquisition and the likelihood that the values
      assigned during the initial valuations will be recoverable over time
      through increased revenues, profits, and enterprise
  value.





Reclassifications





Certain
balances were reclassified to conform with current period
presentation.


72





DERIVATIVE
FINANCIAL INSTRUMENTS





The
Company issues financial instruments in the form of stock options, stock
warrants, and debt conversion features as part of its convertible debt
issuances. The Company has not issued any derivative instruments for hedging
purposes since inception. The Company uses the guidance of and has adopted the
disclosure requirements of Statement of Financial Accounting Standards No. 133
Accounting for Derivative
Instruments and Hedging Activities and the FASB Emerging Issues Task
Force (EITF) Issue No. 00-19 Accounting for
Derivative Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock. Freestanding derivative contracts where settlement is required by
physical share settlement or in net share settlement; or where the Company has a
choice of share or net cash settlement are accounted for as equity. Contracts
where settlement is in cash or where the counterparty may choose cash settlement
are accounted for as debt. The Company has accounted for all derivative
instruments indexed to the Company’s stock as equity.




The
values of the financial instruments are estimated using the Black-Scholes-Merton
(Black-Scholes) option pricing model. Key assumptions used during the fiscal
year ended September 30, 2008 to value options and warrants granted or issued
are as follows:




Year endedSeptember 30,2008
                
                
                2007
                
                
                2006Risk
      Free Rate of Return
                
                
                1.61%-4.29
                %
                
                
                4.01%-4.97
                %
                
                
                3.97%-4.95
                %Volatility
                
                
                66%-88
                %
                
                
                88%-98
                %
                
                
                95%-107
                %Dividend
      yield
                
                
                0
                %
                
                
                0
                %
                
                
                0
                %





The
accounting for derivative financial instruments related to stock-based
compensation is further described below.





Stock-Based
Compensation





In
December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No.
123R, Share-Based
Payments to require that compensation cost relating to share-based
payment arrangements be recognized in the financial statements. As of October 1,
2005, we adopted SFAS No. 123R using the modified prospective method, which
requires measurement of compensation cost for all stock-based awards at fair
value on date of grant and recognition of compensation over the service period
for awards expected to vest. The fair value of stock options was determined
using the Black-Scholes valuation model, which is consistent with our valuation
techniques previously utilized for stock options in footnote disclosures
required under SFAS No. 123, as amended by SFAS No. 148. Such fair value is
recognized as expense over the service period, net of estimated forfeitures. The
adoption of SFAS No.123R resulted in no cumulative change in accounting as of
the date of adoption.





On
September 27, 2001, the FASB Emerging Issues Task Force (EITF) issued EITF Issue
96-18 “Accounting for Equity Instruments That are Issued to Other than Employees
for Acquiring, or in Conjunction with Selling, Goods or Services” which requires
that equity instruments issued in exchange for services be valued at the more
accurate of the fair value of the services provided or the fair value of the
equity instruments issued. For equity instruments issued that are subject to a
required service period the expense associated with the equity instruments is
recorded as the instruments vest or the services are provided. The Company has
granted options and warrants to non-employees and recorded the fair value of
these equity instruments on the date of issuance using the Black-Scholes
valuation model. The Company has granted stock to non-employees for services and
values the stock at the more reliable of the market value on the date of
issuance or the value of the services provided. For grants subject to vesting or
service requirements, expenses are deferred and recognized over the more
appropriate of the vesting period, or as services are provided.




On March
29, 2005, the Securities and Exchange Commission published Staff Accounting
Bulletin No. 107 (SAB 107), which provides the Staff’s views on a variety of
matters relating to stock-based payments. SAB 107 requires stock-based
compensation to be classified in the same expense line items as cash
compensation. Information about stock-based compensation is described in Note
14.





Convertible
Debt





Convertible
debt is accounted for under the guidelines established by APB Opinion No. 14
Accounting for Convertible
Debt and Debt issued with Stock Purchase Warrants (APB14) under the
direction of Emerging Issues Task Force (EITF) 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios, (EITF 98-5) EITF 00-27 Application of Issue No 98-5 to
Certain Convertible Instruments (EITF 00-27) , and EITF 05-8 Income Tax Consequences of Issuing
Convertible Debt with Beneficial Conversion Features. The Company records
a beneficial conversion feature (BCF) related to the issuance of
convertible debt that have conversion features at fixed or adjustable rates that
are in-the-money when issued and records the fair value of warrants issued with
those instruments. The BCF for the convertible instruments is recognized and
measured by allocating a portion of the proceeds to warrants and as a reduction
to the carrying amount of the convertible instrument equal to the intrinsic
value of the conversion features, both of which are credited to paid-in-capital.
The Company calculates the fair value of warrants issued with the convertible
instruments using the Black Scholes valuation method, using the same assumptions
used for valuing employee options for purposes of SFAS No. 123R, except that the
contractual life of the warrant is used.  Under these
guidelines, the Company allocates the value of the proceeds received from a
convertible debt transaction between the conversion feature and any other
detachable instruments (such as warrants) on a relative fair value basis. The
allocated fair value is recorded as a debt discount or premium and is amortized
over the expected term of the convertible debt to interest expense. For a
conversion price change of a convertible debt issue, the additional intrinsic
value of the debt conversion feature, calculated as the number of additional
shares issuable due to a conversion price change multiplied by the previous
conversion price, is recorded as additional debt discount and amortized over the
remaining life of the debt.


In
December 2006, the FASB issued FASB Staff Position EITF 00-19-2, Accounting for Registration Payment
Arrangements(“FSP 00-19-2”). FSP 00-19-2 specifies that the contingent
obligation to make future payments or otherwise transfer consideration under a
registration payment arrangement, whether issued as a separate agreement or
included as a provision of a financial instrument or other agreement, should be
separately recognized and measured in accordance with FASB Statement No. 5,
Accounting for Contingencies. As of January 1, 2007, the Company adopted FSP 00-19-2 and evaluated
the effective provisions, which specifies that the contingent obligation to make
future payments or otherwise transfer consideration under a registration payment
arrangement should be separately recognized and measured in accordance with FASB
Statement No. 5, Accounting
for Contingencies, pursuant to which a contingent obligation must be
accrued only if it is more likely than not to occur. In management’s estimation,
the contingent payments related to the registration payment arrangement are not
likely to occur, and thus no amount need be accrued. Accordingly, the adoption
did not have an effect on our financial statements as of the date of
adoption.




73





CASH
AND CASH EQUIVALENTS


For the
purpose of the statements of cash flows, the Company considers all highly liquid
investments purchased with original maturities of three months or less to be
cash equivalents.




RESTRICTED
CASH
 Restricted
cash represents cash on deposit under control of the Company that secures
standby letters of credit and other payment guarantees for wind turbine parts
vendors.




ACCOUNTS
RECEIVABLE


The
Company has trade accounts receivable from cable and turbine customers. Cable
customer receivables are typically on net 30 day terms. Turbine trade
receivables include amounts billed for service or maintenance related billings,
typically on net 30 day terms, and amounts billed for turbine purchases
including progress payments, typically on net 30 day terms and turbine retention
payments, typically collectible between 6 and 18 months after delivery of a
turbine. Balances due greater than one year from the balance sheet date have
been reclassified to long term assets. Collateral is generally not required for
credit extended to customers. Credit losses are provided for in the financial
statements based on management's evaluation of historical and current industry
trends as well as history with individual customers. Although the Company
expects to collect amounts due, actual collections may differ from estimated
amounts.





CONCENTRATIONS
OF CREDIT RISK


Financial
instruments which potentially subject the Company to concentrations of credit
risk consist of cash and cash equivalents. The Company places its cash and cash
equivalents with high credit, quality financial institutions. At times, such
cash and cash equivalents may be in excess of the Federal Deposit Insurance
Corporation insurance limit of $250,000. The Company has not experienced any
losses in such accounts and believes it is not exposed to any significant credit
risk on cash and cash equivalents.





The
Company has one customer, representing 30% of the total net receivables balance
as of September 30, 2008. The
Company and its wholly owned subsidiaries maintain allowances 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 allowances may be required. Management reviews delinquent
accounts at least quarterly, to identify potential doubtful accounts, and
together with customer follow-up estimates the amounts of potential
losses.




Revenue
from two customers from our Cable segment represented 31% and 16% of the
Company’s revenues for the fiscal year ended September 30, 2006. Revenue from
three customers, 30% from one customer in our Cable segment, and two customers,
each at 10%, from our Wind segment represented 50% of the Company’s revenues for
the fiscal year ended September 30, 2007. Revenue from three customers, 30% from
one customer in our Cable segment, and two customers, each at 10%, from our Wind
segment represented 50% of the Company’s revenues for the fiscal year ended
September 30, 2008




PROPERTY
AND EQUIPMENT


Property
is stated at the lower of cost or realizable value, net of accumulated
depreciation. Depreciation is computed using the straight-line method based on
estimated useful lives of the assets which range from three to ten years.
Leasehold improvements and leased assets are amortized or depreciated over the
lesser of estimated useful lives or lease terms, as appropriate. Property is
periodically reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. In fiscal
2008, we recorded a $934,000 loss on impairment of a fixed asset into our DeWind
segment to write down our prototype unit located in Germany to its estimated
market value.We did not recognize any property impairment charges in
fiscal 2007, or 2006. Expenditures for maintenance and repairs are charged to
operations as incurred while renewals and betterments are capitalized. Gains or
losses on the sale of property and equipment are reflected in the statements of
operations.





ACQUISITIONS


The
Company utilizes SFAS No. 141 “Business Combinations.” The acquisition of EU
Energy was accounted for under the purchase method. All acquired assets were
adjusted to their fair values on the acquisition date and the liabilities
incurred were adjusted to the present values of the amounts expected to be paid.
See also Note 4.




IMPAIRMENT
OF LONG-LIVED ASSETS


Management
evaluates long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. If the estimated future cash flow (undiscounted and without
interest charges) from the use of an asset are less than the carrying value, an
impairment would be recorded to reduce the related asset to its estimated fair
value. Intangibles and goodwill are evaluated annually for
impairment.





FAIR
VALUE OF FINANCIAL INSTRUMENTS


The
Company's financial instruments include cash and cash equivalents and accounts
payable - trade, accounts receivable and convertible notes. The carrying amounts
for these financial instruments approximate fair value due to their short
maturities.





FOREIGN
CURRENCY TRANSLATION


The
Company’s primary functional currency is the U.S. dollar, while DeWind’s
operations functional currency is in Euros. Assets and liabilities of the
Company denominated in foreign currencies are translated at the rate of exchange
on the balance sheet date. Revenues and expenses are translated using the
average exchange rate for the period.


74





COMPREHENSIVE
LOSS


Comprehensive
loss includes all changes in stockholders’ equity except those resulting from
investments by, and distributions to, stockholders. Accordingly, the Company’s
Consolidated Statements of Operations and Comprehensive Loss include net loss
and foreign currency adjustments that arise from the translation of the
financial statements of Euro denominated DeWind subsidiaries into U.S.
dollars.




RESEARCH
AND DEVELOPMENT EXPENSES


Research
and development expenses are charged to operations as incurred.





INVENTORIES


Inventories
consist of our wrapped and unwrapped manufactured composite core and related
hardware products and raw materials used in the production of those products and
turbines, turbines under construction, and turbine parts. Inventories are valued
at the lower of cost or market under the FIFO method. Cable segment products
manufactured internally are valued at standard cost which approximates
replacement cost. Turbine segment products assembled internally are valued at
materials costs plus labor and overhead costs involved with the turbine
assembly. Payments made to third party vendors in advance of parts deliveries
made to DeWind in order to secure delivery of future parts deliveries are
inclosed as a separate balance sheet line item.  Costs to ship product
held for sale or for product sold is recorded to cost of goods sold as the
expenses are incurred.




INCOME
TAXES


The
Company accounts for income taxes under the liability method, which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each period end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.





As of
September 30, 2008, 2007, and 2006, the deferred tax assets related primarily to
the Company's net operating loss carry-forwards are fully reserved. Due to the
provisions of Internal Revenue Code Section 382, the Company may not have any
net operating loss carry-forwards available to offset financial statement or tax
return taxable income in future periods as a result of a change in control
involving 50 percentage points or more of the issued and outstanding securities
of the Company.





LOSS
PER SHARE





The
Company utilizes SFAS No. 128, "Earnings per Share." Basic loss per share is
computed by dividing loss available to common shareholders by the
weighted-average number of common shares outstanding. Diluted loss per share is
computed similar to basic loss per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the additional
common shares were dilutive. Common equivalent shares are excluded from the
computation if their effect is anti-dilutive.





The
following common stock equivalents were excluded from the calculation of diluted
loss per share for the years ended September 30, 2008, 2007, and 2006 since
their effect would have been anti-dilutive:




September
      30,2008
                  
                  
                  2007
                  
                  
                  2006Options
      for common stock
                  
                  
                  25,130,521
                  
                  
                  
                  15,019,870
                  
                  
                  
                  15,965,336Warrants
      for common stock
                  
                  
                  26,150,817
                  
                  
                  
                  32,449,107
                  
                  
                  
                  11,488,393Convertible
      Debentures, if converted
                  
                  
                  9,037,280
                  
                  
                  
                  11,817,935
                  
                  
                  
                  3,885,96860,318,618
                  
                  
                  
                  59,286,912
                  
                  
                  
                  31,339,697





NEW
ACCOUNTING PROUNOUNCEMENTS




In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements(SFAS
157), which defines the fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements. This statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. Early
adoption is encouraged, provided that we have not yet issued financial
statements for that fiscal year, including any financial statements for an
interim period within that fiscal year. The Company is currently in the process
of evaluating the impact SFAS 157 may have on its results of operations and
financial position.
 
 In
October 2006, the Emerging Issues Task Force (EITF) issued EITF 06-3,
How Taxes Collected from
Customers and Remitted to Governmental Authorities Should Be Presented in the
Income Statement (That is, Gross versus Net Presentation)to clarify
diversity in practice on the presentation of different types of taxes in the
financial statements. The Task Force concluded that, for taxes within the scope
of the issue, a company may adopt a policy of presenting taxes either gross
within revenue or net. That is, it may include charges to customers for taxes
within revenues and the charge for the taxes from the taxing authority within
cost of sales, or, alternatively, it may net the charge to the customer and the
charge from the taxing authority. If taxes subject to EITF 06-3 are significant,
a company is required to disclose its accounting policy for presenting taxes and
the amounts of such taxes that are recognized on a gross basis. The guidance in
this consensus is effective for the first interim reporting period beginning
after December 15, 2006 (the first quarter of our fiscal year 2007). The
application of EITF 06-3 has not had a material impact on the Company’s results
of operations, financial position or cash flow.
 
 In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. SFAS No. 159 permits entities to
choose to measure at fair value many financial instruments and certain other
items that are not currently required to be measured at fair value. Subsequent
changes in fair value for designated items will be required to be reported in
earnings in the current period. SFAS No. 159 also establishes presentation
and disclosure requirements for similar types of assets and liabilities measured
at fair value. SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007. The Company is currently assessing the effect of
implementing this guidance, which directly depends on the nature and extent of
eligible items elected to be measured at fair value, upon initial application of
the standard on January 1, 2008.
 
 In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations(SFAS
141(R)). The objective of SFAS 141 (R) is to improve reporting by creating
greater consistency in the accounting and financial reporting of business
combinations, resulting in more complete, comparable and relevant information
for investors and other users of financial statements. SFAS 141 (R) requires the
acquiring entity in a business combination to recognize all (and only) the
assets acquired and liabilities assumed in the transaction; establishes the
acquisition-date fair value as the measurement objective for all assets acquired
and liabilities assumed; and requires the acquirer to disclose to investors and
other users all of the information they need to evaluate and understand the
nature and financial effect of the business combination. SFAS 141
(R) includes both core principles and pertinent application guidance,
eliminating the need for numerous EITF issues and other interpretative guidance,
thereby reducing the complexity of existing GAAP. SFAS 141 (R) is effective as
of the start of fiscal years beginning after December 15, 2008. Early
adoption is not allowed. The Company is in the process of evaluating this
standard and has not yet determined the impact that the adoption of SFAS 141
(R) will have on its financial position, results of operations or cash
flows.
 
 In
December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements(SFAS 160). SFAS 160 improves the
relevance, comparability, and transparency of financial information provided to
investors by requiring all entities to report non-controlling
(minority) interests in subsidiaries in the same way—as equity in the
consolidated financial statements. Moreover, SFAS 160 eliminates the diversity
that currently exists in accounting for transactions between an entity and
non-controlling interests by requiring they be treated as equity transactions.
SFAS 160 is effective as of the start of fiscal years beginning after
December 15, 2008. Early adoption is not allowed. The Company is in the
process of evaluating this standard and has not yet determined the impact that
the adoption of SFAS 160 will have on its financial position, results of
operations or cash flows.
 
 In
May 2008, the Financial Accounting Standards Board (the “FASB”) issued SFAS
No. 162, The Hierarchy of
Generally Accepted Accounting Principles. SFAS No. 162 identifies
the sources of accounting principles to be used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with
generally accepted accounting principles (“GAAP”) in the United States. This
Statement is effective 60 days following the SEC’s approval of the Public
Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles. The Company
currently adheres to the hierarchy of GAAP as presented in SFAS No. 162,
and does not expect its adoption will have a material impact on its consolidated
results of operations and financial condition.


75




Significant
new accounting policies adopted or implemented during the year ended September
30, 2008




Statement
No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48)




In July
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”),
which clarifies the accounting and disclosure for uncertainty in tax positions
by prescribing a minimum probability threshold a tax position must meet to be
recognized in the financial statements. FIN 48 requires an entity to recognize
all or a portion of the financial statement benefit of an uncertain income tax
position only if the position, based solely on its technical merits and on all
relevant information as of the reporting date, would have a greater than 50%
probability of being sustained were the relevant taxing authority to audit the
applicable tax returns. If a tax position meets the threshold, then the entity
will evaluate the benefits it would recognize at increasing levels of cumulative
probabilities, and will record the largest amount of benefit that would have a
greater than 50% probability of being sustained on audit (including resolution
of any related appeals or litigation). An entity will not recognize any benefit
of an uncertain income tax position that fails to meet the greater than 50%
probability threshold.





The
Company is subject to the provisions of FIN 48 as of October 1,
2007, and has analyzed filing positions in all of the federal, state, and
foreign jurisdictions where it is required to file income tax returns, as well
as all open tax years in these jurisdictions. As a result of adoption, we
have recorded no tax liability and have no unrecognized tax benefits as of the
date of adoption.




The
Company files consolidated tax returns in the United States Federal jurisdiction
and in California as well as foreign jurisdictions including Germany and the
United Kingdom. The Company is no longer subject to US Federal income tax
examinations for fiscal years before 2001, is no longer subject to state and
local income tax examinations by tax authorities for fiscal years before 2001,
and is no longer subject to foreign examinations before 2006.




During
the fiscal year ended September 30, 2008, the Company’s federal
returns were selected for examination by the Internal Revenue Service (IRS) for
prior fiscals years ended September 30, 2001 through 2005, all years in which
net losses were reported and filed.  As of September 30, 2008, the IRS has
not proposed any significant adjustments to the Company’s tax positions.
Currently, the Company is not able to reasonably estimate the amount by which
the liability for unrecognized tax benefits may increase or decrease during the
next 12 months as a result of the ongoing IRS audit. However, the Company does
not anticipate any adjustments that would result in a material change to its
financial position. Payments relating to any proposed assessments arising from
the 2001 through 2005 audits will not be made until a final agreement is reached
between the Company and the IRS on such assessments or upon a final resolution
resulting from the administrative appeals process or judicial
action.





The
Company recognizes potential accrued interest and penalties related to uncertain
tax positions in income tax expense. During the fiscal year ended September 30,
2008, the Company did not recognize any amount in potential interest and
penalties associated with uncertain tax positions. To the extent interest and
penalties are not assessed with respect to uncertain tax positions, amounts
accrued will be reduced and reflected as a reduction of the overall income tax
provision.





The
Company does not anticipate that total unrecognized tax benefits will
significantly change due to the settlement of audits and the expiration of
statute of limitations prior to September 30, 2008.


76




NOTE
2 – DISCONTINUED OPERATIONS OF DEWIND SUBSIDIARIES
 
 During
fiscal 2008 two subsidiaries of DeWind with operations in Europe were either
disposed of or put into insolvency.
 
 DeWind
GmbH:
 On
September 1, 2008 the board of directors of DeWind GmbH filed to place that
subsidiary into insolvency in Lubeck, Germany.  This subsidiary
primarily served the acquired turbines under warranty and had operated at a
substantial loss since the July 3, 2006 acquisition of EU Energy.  The
directors faced a near term requirement to recapitalize this subsidiary for
approximately EUR 5 million.  The filing of insolvency for this
subsidiary is not expected to have a material impact on the future operations of
the Company’s DeWind segment.




The
assets and liabilities of DeWind GmbH have been classified on the balance sheet
as Net
Liabilities for Deconsolidated Subsidiary in Liquidation.  The
asset and liabilities comprising this balance consist of:





in thousands
                              
                              September 30, 2008
                              
                              
                              September 30, 2007ASSETSCash
      and Cash Equivalents
                              
                              $
                              491
                              
                              
                              $
                              268Accounts
      Receivable, net
                              
                              
                              6,961
                              
                              
                              
                              7,159Inventory,
      net
                              
                              
                              —
                              
                              
                              
                              773Prepaid
      Expenses and Other Current Assets
                              
                              
                              548
                              
                              
                              
                              750Property
      and Equipment, net
                              
                              
                              10
                              
                              
                              
                              43Other
      Assets
                              
                              
                              —
                              
                              
                              
                              5TOTAL
      ASSETS
                              
                              $
                              8,010
                              
                              
                              $
                              8,998LIABILITIESAccounts
      Payable and Other Accrued Liabilities
                              
                              $
                              14,026
                              
                              
                              $
                              5,144Deferred
      Revenues and Customer Advances
                              
                              
                              1,883
                              
                              
                              
                              3,941Warranty
      Provision
                              
                              
                              11,246
                              
                              
                              
                              14,580Total
      Liabilities
                              
                              $
                              27,155
                              
                              
                              $
                              23,665Net
      Liabilities for Deconsolidated Subsidiary in Liquidation
                              
                              
                              19,145
                              
                              
                              
                              14,667





The net
income from operations of DeWind GmbH through the date of insolvency has been
classified on the statement of operations and comprehensive loss as loss from
discontinued operations. Summarized results of discontinued operations are as
follows:




Year ending
                          
                          
                          Year ending
                          
                          
                          Year endingin thousands
                          
                          September 30,
                            2008
                          
                          
                          September 30,
                            2007
                          
                          
                          September 30,
                            2006Service
      Revenues
                          
                          $
                          1,687
                          
                          
                          $
                          2,746
                          
                          
                          $
                          1,009Cost
      of Service Revenues
                          
                          
                          8,432
                          
                          
                          
                          10,279
                          
                          
                          
                          952Operating
      Expenses
                          
                          
                          2,029
                          
                          
                          
                          4,621
                          
                          
                          
                          469Other
      Income
                          
                          
                          (35
                          )
                          
                          
                          (166
                          )
                          
                          
                          —Income
      Taxes and Other (income) expenses
                          
                          
                          (4
                          )
                          
                          
                          (54
                          )
                          
                          
                          47Loss
      from discontinued operations
                          
                          $
                          8,735
                          
                          
                          $
                          11,934
                          
                          
                          $
                          459


77







DeWind
Service/Eservice:


On
October 1, 2006, the Company’s wholly owned subsidiary, EU Energy Service GmbH
(EUES) entered into a recapitalization arrangement whereby 50% of the voting
stock of EUES was sold to Enertrag AG, a turbine service customer of EUES and a
new entity was created, called E Service. The new entity was operated under
joint control of both Enertrag and DeWind executives during the quarter ended
December 31, 2006.





The
Company determined that the arrangement was within the scope of FIN 46R as a
Variable Interest Entity. During the fiscal quarter beginning October 1,
2006, the Company accounted for the arrangement as a Variable Interest Entity
(VIE) under the provisions of FIN 46R. This required the Company to consolidate
the balances and operations of E Service with the balances and operations of the
remainder of the Company.





On
January 19, 2007 we agreed to amend our agreement between Enertrag AG that
formed our E Services venture. This resulted in a decrease in our share of E
Services share capital to 24.9%. Upon review of the new arrangement, the Company
determined that E Services no longer met the reporting requirements for Variable
Interest Entities under FIN 46R. As a result, effective as of January 19, 2007,
the Company has been recording its interest in E Service as an investment using
the equity reporting method rather than consolidating the assets, liabilities,
and operations of E Service with those of the Company.





On April
3, 2008 the Company and Enertrag closed the sale of the remaining 24.9%
ownership in E Services for 500,000 Euros ($790,250 at April 3, 2008 exchange
rates). The consolidated financial statements of Composite Technology
Corporation have been restated to present the E Services operations, assets and
liabilities as discontinued operations.




The net
income from operations of E Services has been classified on the statement
of operations and comprehensive loss as loss from discontinued
operations. Summarized results of discontinued operations are as
follows:
 
 Year
      ending
                      
                      
                      Year
      ending
                      
                      
                      Year
      ending(in
      thousands)
                      
                      September
      30,
                        2008
                      
                      
                      September
      30,
                        2007
                      
                      
                      September
      30,
                        2006Service
      Revenues
                      
                      $
                      —
                      
                      
                      $
                      3,890
                      
                      
                      $
                      1,221Cost
      of Service Revenues
                      
                      
                      —
                      
                      
                      
                      2,612
                      
                      
                      
                      2,099Operating Expenses
                      
                      
                      —
                      
                      
                      
                      2,449
                      
                      
                      
                      578Other
      Expenses
                      
                      
                      —
                      
                      
                      
                      993
                      
                      
                      
                      —(Income)/Losses
      from unconsolidated subsidiary accounted for under the equity
      method
                      
                      
                      57
                      
                      
                      
                      (212
                      )
                      
                      
                      1456Impairment
      of long term assets
                      
                      
                      1,421
                      
                      
                      
                      —
                      
                      
                      
                      —Minority
      Interest in loss of consolidated subsidiary
                      
                      
                      —
                      
                      
                      
                      10
                      
                      
                      
                      —Loss
      from discontinued operations
                      
                      $
                      1,477
                      
                      
                      $
                      1,942
                      
                      
                      $
                      1,456
  
 E
Services had previously been accounted for as a Variable Interest Entity (VIE)
in past accounting periods. For the three months ending December 31, 2006, the
operations were consolidated into the operations of the Company. In January
2007, the ownership ratio of E Services decreased to 24.9%, the operations were
no longer consolidated and the VIE was accounted for under the equity method.
The impairment loss recorded during the year ended September 30, 2008 represents
the write down of the investment to the $790,250 sales value. Since October 1,
2006 E Services was operated as a stand-alone entity, generated no continuing
cash flows and neither the Company nor any of its subsidiaries made any
allocation of overhead including interest expense. No material contingent
liabilities were retained after the disposal and no material operations
activities occurred between September 30, 2008 and the disposal date of April 3,
2008.
 
 Both of
the DeWind subsidiaries represent entities that were originally acquired on July
3, 2006.  Assets and liabilities balances associated with these
discontinued subsidiaries at the acquisition date include:
  (unaudited, in thousands)Allocated Intangible
Assets:Goodwill 
      - allocated to service entity
                                              
                                              $
                                              931Service
      Contracts – allocated to service entity
                                              
                                              
                                              1,442Tangible Assets Acquired:Cash
                                              
                                              
                                              505Trade
      Receivables, net
                                              
                                              
                                              8,211Inventories
                                              
                                              
                                              3,585Fixed
      Assets
                                              
                                              
                                              1,046Other
      assets
                                              
                                              
                                              644Total
      Fair value of tangible assets acquired
                                              
                                              
                                              13,991Total
      Assets Acquired
                                              
                                              $
                                              16,364Liabilities AssumedAccounts
      Payable and Accrued Liabilities
                                              
                                              $
                                              (8,129
                                              )Warranty
      Reserves
                                              
                                              
                                              (14,991
                                              )Deferred
      revenues and customer advances
                                              
                                              
                                              (5,106
                                              )Total
      Liabilities assumed
                                              
                                              $
                                              (28,336
                                              )Net
      Liabilities assumed
                                              
                                              $
                                              (11,972
                                              )
  During
fiscal 2007 we wrote off $931,000 of goodwill that had been allocated to the
service entity since recovery of this balance was unlikely and is included in
the other expense balance above.  During fiscal 2006 and 2007 the
entire service contract intangible asset was amortized to
expense.




NOTE
3 - GOING CONCERN





The
Company has received a report from its independent auditors for the year ended
September 30, 2008 that includes an explanatory paragraph describing the
uncertainty as to the Company's ability to continue as a going concern. These
consolidated financial statements contemplate the ability to continue as such
and do not include any adjustments that might result from this
uncertainty.





During
the year ended September 30, 2008, the Company incurred a net loss of
$45,553,000 and had negative cash flows from continuing operations of
$51,360,000. In addition, the Company had an accumulated deficit of $185,163,000
at September 30, 2008. The Company's ability to continue as a going concern is
dependent upon its ability to generate profitable operations in the future
and/or to obtain the necessary financing to meet its obligations and repay its
liabilities arising from normal business operations when they come due. The
outcome of these matters cannot be predicted with any certainty at this
time.




Our
principal sources of working capital have been private debt issuances and
historically, the Company has issued registered stock and unregistered,
restricted stock, stock options, and warrants in settlement of both operational
and non-operational related liabilities and as a source of
funds.


78





Commercial
orders: To date, since inception for our Cable products and since the
acquisition of DeWind, we have received orders for approximately $60 million in
ACCC conductor products and $310 million of Wind turbines. We will require a
significant increase in customer orders at sufficient profit margin levels to
cover our expenses and generate sufficient cash flows from
operations.





There is
no guarantee that our products will be accepted or provide a marketable
advantage and therefore no guarantee that our products will ever be profitable.
In addition, management plans to ensure that sufficient capital will be
available to provide for its capital needs with minimal borrowings and may issue
equity securities to ensure that this is the case. However, there is no
guarantee that the Company will be successful in obtaining sufficient capital
through borrowings or selling equity securities. These financial statements do
not include any adjustments to the amounts and classification of assets and
liabilities that may be necessary should the Company be unable to continue
as a going concern.





We
believe our cash position, including usable restricted cash as of September 30,
2008 of $23.3 million and expected cash flows from revenue orders may not be
sufficient to fund operations for the next four calendar quarters for both of
our business segments.  We believe that we will have positive cash
flow from our Cable business to fund its operations. We anticipate that
additional cash is needed to fund operations beyond March, 2009 for our DeWind
business, absent a large cash deposit for a future turbine order and to the
extent required the Company intends to continue the practice of issuing stock,
debt or other financial instruments for cash or for payment of services until
our cash flows from the sales of our primary products is sufficient to provide
cash from operations or if we believe such a financing event would be a sound
business strategy.





NOTE
4 – ACQUISITION





EU
Energy


On July
3, 2006, the Company acquired all of the outstanding equity of EU Energy, and
its subsidiaries. EUE (subsequently operated as DeWind) is a provider of wind
turbine generators to the electrical utility industry. Consideration for the
Acquisition consisted of an aggregate 39,169,670 shares of the Company’s common
stock. The shares were issued with certain lock up provisions over a twelve
month period and piggyback registration rights for the shares. The Company and
the EU shareholders agreed to a fair value of $1.55 per share or $60.7 million
prior to the approval of the EU shareholders. For accounting purposes, at the
acquisition date, the fair value was determined to be $55.2 million. The $1.41
per share value was calculated based on the 5 day average closing prices of
the Company’s common stock prior to the date the EU Shareholders accepted the
offer.





In June,
2007 the Company filed for a claim against the principal shareholders of EU
Energy to compensate the Company for under recorded liabilities and overstated
asset balances.  The claim was resolved in July, 2007 by the return of
815,789 shares of Common Stock by the principal shareholders valued at $1.41 per
share and was accounted for as a reduction in the purchase price of
$1,150,000.





The
Company accounted for the Acquisition as a purchase and, accordingly, the
results of operations of EUE have been included in the consolidated financial
statements since July 3, 2006. The allocation of the adjusted purchase price of
$55,399,000 (including transaction costs) is as follows in
thousands:





Goodwill
                        
                        
                        
                        
                        $
                        24,319Identifiable
      intangibles (see note 8)
                        
                        
                        
                        
                        
                        24,473Assets
      acquired:Cash
                        
                        
                        1,164Trade
      receivables, net
                        
                        
                        11,939Inventories
                        
                        
                        22,450Fixed
      assets
                        
                        
                        2,447Other
      assets
                        
                        
                        5,621Total
      fair value of tangible assets acquired
                        
                        
                        
                        
                        
                        
                        43,621Liabilities
      assumedAccounts
      payable and accrued liabilities
                        
                        
                        (9,412
                        )Warranty
      reserves
                        
                        
                        (15,774
                        )Deferred
      revenues and customer advances
                        
                        
                        (11,828
                        )Total
      liabilities assumed
                        
                        
                        
                        
                        
                        
                        (37,014
                        )Allocated
      purchase price
                        
                        
                        
                        
                        
                        $
                        55,399Fair
      value of stock issued, less stock recovered through claim of
      $1,150,000
                        
                        
                        
                        
                        
                        $
                        54,079Transaction
      costs
                        
                        
                        
                        
                        
                        
                        1,320Total
      consideration
                        
                        
                        
                        
                        
                        $
                        55,399




The
acquisition resulted in a significant amount of goodwill recorded which will not
be deductible for income tax purposes. We believe that the goodwill represents
the market opportunity inherent in wind turbines.







79




The
following table presents the consolidated results of operations on an unaudited
pro forma basis as if the acquisition of EUE had taken place at the beginning of
the periods presented. The following table has been prepared on the basis of
estimates and assumptions available at the time of this filing that we believe
are reasonable.





Year endedSeptember 30In
      thousands
                      
                      2006Revenues
                      
                      $
                      35,691Loss
      from Operations
                      
                      
                      (39,729
                      )Loss
      from Operations per weighted average share
                      
                      $
                      (0.23
                      )





Other
than the event described above, there was no difference between the loss from
continuing operations and net loss for either fiscal year on a pro forma
basis.




NOTE
5 - ACCOUNTS RECEIVABLE





Accounts
receivable, net consists of the following:




In
      thousands
                                  
                                  September 30,
                                    2008
                                  
                                  
                                  September 30,
                                    2007Turbine
      products and services receivables
                                  
                                  $
                                  6,480
                                  
                                  
                                  $
                                  814Uninvoiced
      receivables
                                  
                                  
                                  1,744
                                  
                                  
                                  
                                  1,867Cable
      products receivables
                                  
                                  
                                  4,484
                                  
                                  
                                  
                                  1,200Gross
      receivables
                                  
                                  
                                  12,708
                                  
                                  
                                  
                                  3,881Reserves
                                  
                                  
                                  (687
                                  )
                                  
                                  
                                  (421
                                  )Net
      receivables
                                  
                                  
                                  12,021
                                  
                                  
                                  
                                  3,460Portion
      relating to greater than one year, net of reserves of $0 and
      $0
                                  
                                  
                                  248
                                  
                                  
                                  
                                  301Net
      current accounts receivable
                                  
                                  $
                                  11,773
                                  
                                  
                                  $
                                  3,159




Included
in accounts receivable at September 30, 2008 and 2007 are billings on long term
contracts, primarily for turbine retention payments. There are no unbilled
balances related to long term contracts that are included in accounts receivable
as of September 30, 2008 or 2007.





The
retention payments arise under the terms of certain DeWind turbine purchase
agreements where typically between 2% and 10% of a turbine purchase price is
held back by a customer typically between six and twenty-four months following
delivery of the turbine. As of September 30, 2008 there were $248,000 of
retention payments receivable of which $89,000 is expected to be collected
within one year and $159,000 is expected to be collected after September 30,
2009. Substantially all of the long term retention receivables are expected to
be collected in the fiscal year ending September 30, 2010.





The asset
unbilled receivables (noted in above table) represents revenue that is
recognizable due to the performance of services for which billings have not been
generated as of the balance sheet date. In general, amounts become billable
pursuant to contractual milestones or in accordance with predetermined billing
schedules.





NOTE
6 - INVENTORY





Inventories
consist of the following:





In
      thousands
                              
                              September
      30,
                                2008
                              
                              
                              September
      30,
                                2007Raw
      Materials and Turbine Parts
                              
                              $
                              36,704
                              
                              
                              $
                              12,591Work
      in Progress
                              
                              
                              4,457
                              
                              
                              
                              10,621Finished
      Goods
                              
                              
                              3,123
                              
                              
                              
                              3,985Gross
      Inventory
                              
                              
                              44,284
                              
                              
                              
                              27,197Reserves
                              
                              
                              (1,833
                              )
                              
                              
                              (1,495
                              )Net
      Inventory
                              
                              $
                              42,451
                              
                              
                              $
                              25,702Advanced
      payments for Turbine Inventory
                              
                              $
                              31,245
                              
                              
                              $
                              12,121


80





Inventory acquired during the EU Energy
acquisition consisted of partially constructed turbines, turbine parts used for
construction of turbines, and service parts valued in the aggregate at
$22,449,390. We evaluated all inventory acquired to determine the fair value
under the guidance of SFAS 141. We valued the service parts and turbine parts
used for turbine construction at replacement cost. We valued the partially
constructed turbines at liquidated value, determined as the estimated sales
price less costs to complete and sell. Partially constructed turbines are
included in the work in progress balance as of September 30, 2008 and
2007.




The
following table is offered to provide additional information regarding the
composition of inventory as at September 30, 2008:





In
      thousands
                                    
                                    Cable Segment
                                    
                                    
                                    Wind Segment
                                    
                                    
                                    TotalRaw
      Materials and Turbine Parts
                                    
                                    $
                                    3,869
                                    
                                    
                                    $
                                    32,835
                                    
                                    
                                    $
                                    36,704WIP
                                    
                                    
                                    35
                                    
                                    
                                    
                                    4,422
                                    
                                    
                                    
                                    4,457ACCCTM
      Finished Core, Cable, & Related Hardware
                                    
                                    
                                    3,123
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    3,123Gross
      Inventory
                                    
                                    
                                    7,027
                                    
                                    
                                    
                                    37,257
                                    
                                    
                                    
                                    44,284Reserves
                                    
                                    
                                    (978
                                    )
                                    
                                    
                                    (855
                                    )
                                    
                                    
                                    (1,833
                                    )Net
      Inventory
                                    
                                    $
                                    6,049
                                    
                                    
                                    $
                                    36,402
                                    
                                    
                                    $
                                    42,451




During
2008 the Company’s DeWind segment had two inventory writeoffs, charged to
turbine cost of sales.  DeWind wrote off $4,732,000 for turbine parts
located at its German production facility that were scrapped as a result of the
closure of that facility.  DeWind also recorded a reserve for $563,000
to reserve a partially completed turbine to be sold to a US customer to its
estimated sales value.




NOTE
7- PROPERTY AND EQUIPMENT





Property
and equipment consisted of the following:




September 30,In thousands
                                          
                                          Estimated Useful
                                            Lives
                                          
                                          
                                          2008
                                          
                                          
                                          2007Office
      furniture and equipment
                                          
                                          
                                          3-10
      yrs
                                          
                                          
                                          $
                                          1,584
                                          
                                          
                                          $
                                          1,142Production
      equipment
                                          
                                          
                                          3-10
      yrs
                                          
                                          
                                          
                                          6,390
                                          
                                          
                                          
                                          5,986Wind
      turbines in production
                                          
                                          
                                          3-10
      yrs
                                          
                                          
                                          
                                          3,296
                                          
                                          
                                          
                                          3,321Automobiles
                                          
                                          
                                          3-5
      yrs
                                          
                                          
                                          
                                          36
                                          
                                          
                                          
                                          19Leasehold
      improvements
                                          
                                          
                                          7
      yrs
                                          
                                          
                                          
                                          2,075
                                          
                                          
                                          
                                          424Total
      Property
                                          
                                          
                                          
                                          
                                          
                                          
                                          13,381
                                          
                                          
                                          
                                          10,892Accumulated
      Depreciation
                                          
                                          
                                          
                                          
                                          
                                          
                                          (5,426
                                          )
                                          
                                          
                                          (2,992
                                          )Property,
      net
                                          
                                          
                                          
                                          
                                          
                                          $
                                          7,955
                                          
                                          
                                          $
                                          7,900





Property
and equipment from EU Energy consisted of primarily production equipment, office
equipment, and automobiles and totaled $5,660,000 in the aggregate. All property
was evaluated under the guidance of SFAS 141, and properly valued
accordingly.




In fiscal
2008, we recorded a $934,000 loss on impairment of a fixed asset into our DeWind
segment recorded into depreciation to write down our prototype unit
located in Germany to its estimated market value. Management determined that the
wind patterns around the turbine had changed due to the erection of a building
nearby.  We wrote down the turbine to its estimated open market sales
value based on tender offers received, net of decommissioning and
recommissioning costs.




Depreciation
expense, including the loss on impairment above, was $2,940,000,
$1,326,000, and $995,000, for the years ended September 30, 2008, 2007, and
2006, respectively.





NOTE
8 – GOODWILL AND INTANGIBLE ASSETS





The
Company adopted SFAS No. 142 “Goodwill and Other Intangible Assets” (SFAS
142) effective January 1, 2002. In accordance with SFAS 142, the Company
does not amortize goodwill. The Company’s goodwill of $24,218,000 at September
30, 2008 is related to the acquisition of EU Energy on July 3, 2006 and is
currently attributable entirely to the DeWind segment. In accordance with
SFAS 142, the Company evaluates goodwill impairment at least annually, normally
at year-end or when situations arise that may require
re-evaluation.  We determined that as of September 30, 2008 no
goodwill impairment was required except as noted below.





The
following table reconciles the changes made to the goodwill acquired during the
EU Energy Acquisition.





In
      thousandsBalanceBalance
      as of September 30, 2006
                            
                            $
                            25,469Goodwill
      reduction due to returned shares – see Note 4
                            
                            
                            (1,150
                            )Increase
      in Goodwill due to acquisition inventory write downs
                            
                            
                            830Impairment
      of Goodwill allocated to Service organization - see Note 2
                            
                            
                            (931
                            )Balance
      as of September 30, 2007 and 2008
                            
                            $
                            24,218





The
increase in goodwill due to acquisition inventory write downs reflect a true up
in the acquired turbine inventory balances.  During the year
subsequent to the acquisition date of July 3, 2006, as the turbine inventory was
sold at liquidation prices the Company reviewed the acquired
cost.  For turbines sold out of the acquired inventory, under SFAS
141, when the recorded inventory cost was in excess of the liquidated sales
price, the inventory cost was reduced to the liquidation price and goodwill was
increased.




During
fiscal 2007 we wrote off $931,000 of goodwill that had been allocated to our
service entity, now recorded as discontinued operations.  We had
allocated no goodwill to DeWind GmbH.


81





As of
September 30, 2008, the Company had the following amounts related to other
intangible assets, all related to the acquisition of EU Energy on July 3, 2006
and therefore the Turbine segment:





September 30, 2008Gross
                          
                          
                          
                          NetCarrying
                          
                          Accumulated
                          
                          IntangibleIn
      thousands
                          Amount
                          
                          Amortization
                          
                          AssetsSupply
      Agreements
                          
                          $
                          12,347
                          
                          
                          $
                          (165
                          )
                          
                          $
                          12,182Technology
      Transfer Agreements
                          
                          
                          3,131
                          
                          
                          
                          (467
                          )
                          
                          
                          2,664Trade
      name
                          
                          
                          7,553
                          
                          
                          
                          (850
                          )
                          
                          
                          6,703Service
      Contracts - see Note 2
                          
                          
                          1,442
                          
                          
                          
                          (1,442
                          )
                          
                          
                          —Total
                          
                          $
                          24,473
                          
                          
                          $
                          (2,924
                          )
                          
                          $
                          21,549





September 30, 2007Gross
                          
                          
                          
                          NetCarrying
                          
                          Accumulated
                          
                          IntangibleAmount
                          
                          Amortization
                          
                          AssetsSupply
      Agreements
                          
                          $
                          12,347
                          
                          
                          $
                          —
                          
                          
                          $
                          12,347Technology
      Transfer Agreements
                          
                          
                          3,131
                          
                          
                          
                          —
                          
                          
                          
                          3,131Trade
      name
                          
                          
                          7,553
                          
                          
                          
                          (472
                          )
                          
                          
                          7,081Service
      Contracts - see Note 2
                          
                          
                          1,442
                          
                          
                          
                          (1,442
                          )
                          
                          
                          —Total
                          
                          $
                          24,473
                          
                          
                          $
                          (1,914
                          )
                          
                          $
                          22,559





Aggregate
amortization expense associated with continuing operations of the intangible
assets with determinable lives was $1,010,000, 378,000, and $94,000 for the
years ended September 30, 2008, 2007, and 2006 respectively.




The
supply agreements are related to supplier agreements related to our DeWind D8.2
model. We will record amortization on this agreement over the life of the
agreement beginning with the first commercial shipments of our D8.2, two
units of which shipped in fiscal year 2008, and based on the expected units
purchased under this agreement. Our technology transfer agreements are related
to our China licensing arrangements. We will record amortization on these
agreements as we recognize revenues under these agreements which are based on
the turbines produced under these arrangements over three to five years. We have
determined that our Trade name, DeWind, has a life of twenty years and we will
amortize this balance on a straight-line basis. Our service contracts include
service and maintenance contracts.  We fully amortized the service
contracts as of September 30, 2007. All intangible assets listed are considered
to have no residual value.




The
unamortized balance of intangible assets is estimated to be amortized as
follows:




In
      thousands
                            For the Year Ending
                          
                          Estimated
                            AmortizationSeptember 30,
                          
                          Expense2009
                          
                          $
                          3,5062010
                          
                          
                          4,2922011
                          
                          
                          4,4532012
                          
                          
                          3,980Thereafter
                          
                          
                          5,318$
                          21,549


82




NOTE
9 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES





Accounts
payable and Accrued Liabilities consisted of the following:





September 30,In thousands
                            
                            2008
                            
                            
                            2007Trade
      Payables
                            
                            $
                            33,099
                            
                            
                            $
                            13,983Accrued
      Acquisition Costs
                            
                            
                            250
                            
                            
                            
                            319Accrued
      Payroll
                            
                            
                            1,059
                            
                            
                            
                            973Deferred
      Rents
                            
                            
                            199
                            
                            
                            
                            227Total
      Accounts Payable and Accrued Liabilities
                            
                            $
                            34,607
                            
                            
                            $
                            15,502





Accrued
acquisition costs represent primarily legal and statutory payments required as a
result of the EU acquisition.




NOTE
10 - WARRANTIES AND PRODUCT GUARANTEES





Through
its ownership of EU Energy, operating as the Wind segment as DeWind, the Company
has financial obligations to customers related to warranty and the availability
performance of wind turbines and has made provisions to reflect these
liabilities. Turbines sold by DeWind are sold with product warranties, typically
between two and five years and which cover replacement parts for turbines and
labor.




Warranty
obligations reflect expected minor repairs during the period of warranty of the
turbine, between 2 and 5 years following installation (Warranty), and more major
repairs which may affect particular types of units (Retrofit). Provisions for
the former are based on historical experience of repair frequency and cost and
for the latter are based on engineering estimates of the likely incidence and
cost. In addition, turbines sold that remain under warranty carry guarantees of
availability (Availability) to produce electric power at certain levels. If a
turbine under warranty does not meet these availability thresholds due to
turbine failure covered by the warranty or servicing contract and the customer’s
turbine produces less power and therefore less revenue, the company reimburses
the customer for the lost value of the power shortfall. Availability provisions
are based on data obtained from the company’s turbine monitoring system, actual
performance being compared to contractual obligation, with provisions made for
any potential contractual liability and estimates of future availability
penalties based on this historical performance. We have classified all warranty
and product guarantee reserves considered to be payable within one year as
current liabilities and all warranty and product guarantee reserves considered
to be payable greater than one year as non-current liabilities.




Warranty
reserves consisted of:




September 30,
                                2008
                              
                              
                              September 30,
                                2007In thousandsTurbine
      warranty reserves
                              
                              $
                              684
                              
                              
                              $
                              519Cable
      warranty reserves
                              
                              
                              220
                              
                              
                              
                              —Reserve
      for turbine retrofitting
                              
                              
                              —
                              
                              
                              
                              —Reserve
      for turbine availability
                              
                              
                              1,053
                              
                              
                              
                              716Total
      Warranty and Product Guarantee reserves
                              
                              
                              1,957
                              
                              
                              
                              1,235Less
      Amount classified as current liabilities
                              
                              
                              1,461
                              
                              
                              
                              1,008Long
      term warranty liability
                              
                              $
                              496
                              
                              
                              $
                              227




The
following table sets forth an analysis of warranty reserve activity




In thousands
                        
                        September 30, 2008
                        
                        
                        September 30, 2007Beginning
      balance
                        
                        $
                        1,235
                        
                        
                        $
                        323Additional
      reserves recorded to expense
                        
                        
                        835
                        
                        
                        
                        972Reserves
      utilized
                        
                        
                        (90
                        )
                        
                        
                        (98
                        )Impact
      of foreign currency translation
                        
                        
                        (23
                        )
                        
                        
                        38Ending
      balance
                        
                        $
                        1,957
                        
                        
                        $
                        1,235




83




NOTE
11 - DEFERRED REVENUES AND CUSTOMER ADVANCES





The
Company records all cash proceeds received from customers for advance payments
on turbines, turbine parts, or cable orders and extended warranties on cable, as
opted by the customer, to deferred revenues and customer advances until such
time as the revenue cycle is completed and the amounts are recognized into
revenues. Due to the long term nature of turbine sales which typically are
supported by contracts with substantial payments in advance of delivery,
deferred revenues and customer advances comprise a large component of our
balance sheet. Deferred revenues and customer advances consist of the
following:




September 30,
                                  2008
                                
                                
                                September 30,
                                  2007In thousandsCustomer
      advances on turbine and turbine parts sales
                                
                                $
                                26,847
                                
                                
                                
                                24,862Deferred
      revenues - Other Turbine related
                                
                                
                                5,589
                                
                                
                                
                                5,581Deferred
      revenues - Cable sales
                                
                                
                                1,817
                                
                                
                                
                                2,334Total,
      Deferred revenues and customer advances
                                
                                
                                34,253
                                
                                
                                
                                32,777Balance
      included in current liabilities
                                
                                
                                33,525
                                
                                
                                
                                32,398Long
      term Deferred Revenues
                                
                                $
                                728
                                
                                
                                $
                                379





Costs
incurred related to deferred revenues and customer advances are capitalized into
inventory as of the balance sheet date.




NOTE
12 – DEBT AND NOTES PAYABLE





The
following table summarizes the Company’s debt structure as of September 30,
2008, 2007, and 2006:




(In thousands)
                                    
                                    September 30, 2008
                                    
                                    
                                    September 30, 2007Senior
      Convertible 8% Notes due January, 2010 net discount of $1,199,098 and
      $2,337,656
                                    
                                    
                                    7,838
                                    
                                    
                                    
                                    9,835Capital
      Leases
                                    
                                    
                                    —
                                    
                                    
                                    
                                    109Total
      Debt
                                    
                                    
                                    7,838
                                    
                                    
                                    
                                    9,944Balance
      included in current liabilities
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (109
                                    )Long
      Term Debt
                                    
                                    $
                                    7,838
                                    
                                    
                                    $
                                    9,835





Debt
outstanding or issued during the year ended September 30, 2008 consisted
of:





A.
            February,
      2007 Convertible Notes Payable





In
February, 2007 we sold $22,825,000 face value of Senior Convertible Notes and
detachable stock warrants to a group of private investors for gross proceeds of
$22,825,000.  The notes are currently convertible into common stock of
the Company at a price of $1.00 per share.  The Notes bear interest at
the rate of 8% per year and may be redeemed by the Company at the Company’s
option upon 30 days notice under the following scenarios:




1.
            For
      108% of the outstanding principal at any time prior to the one year
      anniversary of the February, 2007 closing (“Closing”) if the weighted
      average price of the Company’s common stock (“WAP”)  is 200% of
      the conversion price for twenty consecutive trading
  days;




2.
            For
      106% of the outstanding principal at any time after the one year
      anniversary of the Closing but prior to the two year anniversary of the
      Closing if the WAP is 150% of the conversion price for twenty consecutive
      trading days;




3.
            For
      103% of the outstanding principal at any time after the two year
      anniversary of the Closing but prior to maturity if the WAP is 125% of the
      conversion price for twenty consecutive trading
  days.




Subsequent
to the issuance, the June, 2007 Private Placement resulted in the Company
issuing common shares at a price less than the conversion price of the Notes and
less than the exercise price of the detachable warrants.  The
issuances resulted in the decrease in the conversion price of the debt from
$1.04 to $1.03 and a decrease in the exercise price of the detachable warrants
from $1.13 per warrant to $1.11 per warrant.  The Company recorded
additional debt discount of $297,000 consisting of $244,000 intrinsic value of
the additional shares issuable at $1.03 and $53,000 for the difference in fair
value of the warrants in 2007.




On May 9,
2008 the combined effect of the issuance of 13,333,333 common shares at $0.75
per share, the warrants issued in conjunction with the senior secured debt
financing, and the option to purchase 45,454,544 shares at $0.88 per share
resulted in the conversion price of the remaining principal to decrease from
$1.03 to $1.00.   On May 9, 2008 the Company recorded an
additional $302,000 of convertible debt discount consisting of $257,000 relating
to the intrinsic value of the additional shares issuable upon full conversion of
the remaining debt and $45,000 relating to the difference in fair value for the
affiliated convertible debt warrants price adjustments as described in Note
13.  The additional debt discount will be amortized to interest
expense over the remaining life of the convertible debt.


84




The
following tables summarize the recording of the debt discount and deferred cash
financing fees for the February, 2007 Notes:




In thousands:Debt Discount:Warrants
      issued for financing fees
                                
                                $
                                610Detachable
      warrants and beneficial conversion features of Senior
Notes
                                
                                
                                4,682Total
      discount recorded at issuance
                                
                                $
                                5,292Additional
      discount – anti-dilution impacts - 2007
                                
                                
                                297Discount
      amortized to interest expense - 2007
                                
                                
                                (1,015
                                )Discount
      amortization accelerated due to conversion - 2007
                                
                                
                                (2,236
                                )Discount
      balance, September 30, 2007
                                
                                $
                                2,338Additional
      discount – anti-dilution impacts - 2008
                                
                                
                                302Discount
      amortized to interest expense - 2008
                                
                                
                                (889
                                )Discount
      amortization accelerated due to conversion - 2008
                                
                                
                                (552
                                )Discount
      balance, September 30, 2008
                                
                                $
                                1,199




Deferred Cash Financing
    Fees:Cash
      financing fee of 6% of face value of Senior Convertible
    Notes
                            
                            $
                            1,369Cash
      legal fees relating to financing
                            
                            
                            47Total
      deferred cash financing fees recorded at issuance
                            
                            $
                            1,416Deferred
      cash financing fees amortized to interest expense - 2007
                            
                            
                            (266
                            )Deferred
      cash financing fees accelerated due to conversion - 2007
                            
                            
                            (563
                            )Deferred
      cash financing fees balance, September 30, 2007
                            
                            $
                            587Deferred
      cash financing fees amortized to interest expense - 2008
                            
                            
                            (206
                            )Deferred
      cash financing fees accelerated due to conversion - 2008
                            
                            
                            (132
                            )Deferred
      cash financing fees balance, September 30, 2008
                            
                            $
                            249




The
remaining note discount recorded will be amortized ratably to interest expense
over the expected remaining life of the Notes, currently the maturity date of
January, 2010.





The
following table summarizes the conversion of the principal of the 2007
Convertible Notes since issuance:





In thousands
                                  
                                  Principal
                                  
                                  
                                  Common Shares
                                    Issued or IssuablePrincipal
      balance at issuance, February, 2007
                                  
                                  $
                                  22,825Conversions
      at $1.04 per share
                                  
                                  
                                  (300
                                  )
                                  
                                  
                                  288Conversions
      at $1.03 per share
                                  
                                  
                                  (10,353
                                  )
                                  
                                  
                                  10,051Principal
      balance at September 30, 2007
                                  
                                  $
                                  12,172Conversions
      at $1.03 per share
                                  
                                  
                                  (2,135
                                  )
                                  
                                  
                                  2,073Conversions
      at $1.00 per share
                                  
                                  
                                  (1,000
                                  )
                                  
                                  
                                  1,000Principal
      balance at September 30, 2008
                                  
                                  $
                                  9,037Total
      Shares issued for conversions to date
                                  
                                  
                                  —
                                  
                                  
                                  
                                  13,412Total
      Shares issuable at current conversion price
                                  
                                  
                                  —
                                  
                                  
                                  
                                  9,037





B.  Bridge
Financing:




On May 5,
2008 the Company entered into a bridge financing structured as a Senior Secured
Debt Facility, which allowed for borrowings of up to $5,000,000 in exchange for
cash interest consideration and 2,250,000 warrants with a term of three years
and a $0.99 exercise price.   On May 5, 2008, the Company
borrowed $2,500,000 under the facility and issued an initial 1,125,000
warrants.  The remaining $2,500,000 would become available for
borrowing upon the satisfaction of the perfection of security interests in
certain of the Company’s assets and which had been expected to become available
within two weeks of the signature of the Facility.  For any amounts
drawn, the Company was required under the facility to pay six months cash
interest regardless of the length of time the debt was
outstanding.  On May 9, 2008, as described in Note 6, the Company
closed on the equity financing for $10,000,000 and pursuant the terms of the
Senior Debt Facility was required to repay the initial drawdown in full which
occurred on May 12, 2008 along with the required cash
interest.  Subsequent to the repayment of the initial draw, a dispute
arose over the requirement under the facility as to whether the Company was
required to draw the additional $2,500,000 under the terms of the
Facility.  In exchange for a release from all obligations under the
Facility including the requirement to draw the additional funds which would then
require additional payment of cash interest and including the release the
security interests in certain assets of the Company, on May 23, 2008 the Company
and the lender agreed to terminate the facility in exchange for the issuance of
the warrants associated with the second drawdown. Accordingly, the Company
issued the final 1,125,000 warrants at $0.99 exercise price per warrant and
terminated the facility.  The Company recorded all warrants issued,
financing fees, and cash interest as interest expense during the quarter ended
June 30, 2008.  The Company valued the 2,250,000 warrants
issued  at the fair value of  $1,045,000 using the
Black-Scholes-Merton option-pricing model with a life of three years, volatility
of 84%, a risk free rate of 2.3% and a dividend yield of 0%.


85





NOTE
13 - SHAREHOLDERS' EQUITY





PREFERRED
STOCK





We have
5,000,000 shares of preferred stock authorized.  For the year ending
September 30, 2008 there was no preferred stock outstanding.




COMMON
STOCK




The
Company has 600,000,000 shares of Common Stock authorized.  The
covenants of our $22.8 million Convertible Debt offering prohibit the payment of
cash dividends on our Common Stock prior to the Convertible Debt maturity,
repayment, or conversion.  We have never paid cash dividends on our
common stock.
 
 The
following issuances of common stock were made during fiscal
2008:




SERVICES
RENDERED





In April,
2008 the Company issued 200,000 shares of common stock in exchange for investor
relations services to be provided between April, 2008 and December, 2010. The
Company recorded the issuance as a prepaid expense valued at $208,000, the
market price on the date of issuance of $1.04, which is the fair value of the
services to be provided.




CONVERSION
OF CONVERTIBLE NOTES AND DEBENTURES





For the
fiscal year ending September 30, 2008 we issued 3,073,004 shares of common stock
for the conversion of $3,135,193 in convertible
debentures.   $1,000,000 was converted at $1.00 per share and
$2,135,193 was converted at $1.03 per share into 2,073,004 shares of common
stock.





CASH





During
the year ended September 30, 2008 the Company received $4,457,338 in cash from
the exercise of 4,129,139 warrants.





During
the year ended September 30, 2008 the Company received $196,000 from the
exercise of 490,000 employee and consultant stock options.





May, 2008 Private Equity
Placement





On May 9,
2008 the Company agreed to sell up to $50,000,000 of the Company’s Common Stock
to Credit Suisse Securities (Europe) Limited.  The transaction was
structured to provide for an immediate investment of $10,000,000 received on May
9, 2008 in exchange for 13,333,333 shares of Common Stock at a price per share
of $0.75 with an option to purchase up to an additional 45,454,544 shares of
common stock at a price per share of $0.88 per share for total potential
proceeds of an additional $40,000,000.  The option would expire on
June 30, 2008 if not exercised.  On June 27, 2008 Credit Suisse
exercised the option in full and the Company received $40,000,000 in cash from
the option exercise.   The Company valued the option using the
Black-Scholes-Merton option pricing model at $4,014,000 using a volatility of
65%, a risk free rate of 1.79%, a  dividend rate of 0% and a market
price of $0.88 per share.  The Company incurred $90,000 in fees
associated with this transaction.





WARRANTS





The
Company issues warrants to purchase common shares of the Company either as
compensation for consulting services or as additional incentive for investors
who purchase unregistered, restricted common stock or Convertible Debentures.
The value of warrants issued for compensation is accounted for as a non-cash
expense to the Company at the fair value of the warrants issued. The value of
warrants issued in conjunction with financing events is either a reduction in
paid in capital for common stock issuances or as a discount for debt issuances.
The Company values the warrants at fair value as calculated by using the
Black-Scholes option-pricing model.


86





The
following table summarizes all warrant activity from September 30, 2005 through
September 30, 2008:




Number of
                                            Shares
                                          
                                          
                                          Weighted-Average
                                            Exercise PriceOutstanding,
      September 30, 2005
                                          
                                          
                                          8,796,393
                                          
                                          
                                          $
                                          1.70Granted
                                          
                                          
                                          5,261,756
                                          
                                          
                                          $
                                          1.75Exercised
                                          
                                          
                                          (913,596
                                          )
                                          
                                          $
                                          1.18Cancelled
                                          
                                          
                                          (1,656,160
                                          )
                                          
                                          $
                                          1.42Outstanding,
      September 30, 2006
                                          
                                          
                                          11,488,393
                                          
                                          
                                          $
                                          1.58Granted
                                          
                                          
                                          23,291,849
                                          
                                          
                                          $
                                          1.13Exercised
                                          
                                          
                                          (2,314,135
                                          )
                                          
                                          $
                                          1.06Cancelled
                                          
                                          
                                          (17,000
                                          )
                                          
                                          $
                                          1.00Outstanding,
      September 30, 2007
                                          
                                          
                                          32,449,107
                                          
                                          
                                          $
                                          1.30Granted
                                          
                                          
                                          2,250,000
                                          
                                          
                                          $
                                          0.99Issued
      pursuant to antidilution protection
                                          
                                          
                                          542,272
                                          
                                          
                                          
                                          n/aExercised
                                          
                                          
                                          (4,129,139
                                          )
                                          
                                          $
                                          1.08Cancelled
                                          
                                          
                                          (4,961,425
                                          )
                                          
                                          $
                                          1.33OUTSTANDING,
      September 30, 2008
                                          
                                          
                                          26,150,815
                                          
                                          
                                          $
                                          1.20EXERCISABLE,
      September 30, 2008
                                          
                                          
                                          26,150,815
                                          
                                          
                                          $
                                          1.20


87





Cash
exercises:





The
following table summarizes the warrant exercises for cash for the year ended
September 30, 2008. Each warrant was exercised for cash for a like number of
shares of common stock of the Company:





Warrant Series
                                                              
                                                              # of exercises
                                                              
                                                              
                                                              Warrants
                                                                exercised
                                                              
                                                              
                                                              Cash consideration
                                                                in $000s
                                                              
                                                              
                                                              Exercise Price
                                                                per shareMarch,
      2006 Series
                                                              
                                                              
                                                              5
                                                              
                                                              
                                                              
                                                              926,716
                                                              
                                                              
                                                              $
                                                              695
                                                              
                                                              
                                                              $
                                                              0.75Series
      T
                                                              
                                                              
                                                              2
                                                              
                                                              
                                                              
                                                              41,000
                                                              
                                                              
                                                              $
                                                              41
                                                              
                                                              
                                                              $
                                                              1.00February,
      2007 Convertible Notes
                                                              
                                                              
                                                              1
                                                              
                                                              
                                                              
                                                              2,403,847
                                                              
                                                              
                                                              $
                                                              2,668
                                                              
                                                              
                                                              $
                                                              1.11June,
      2007 PIPE
                                                              
                                                              
                                                              1
                                                              
                                                              
                                                              
                                                              757,576
                                                              
                                                              
                                                              $
                                                              1,053
                                                              
                                                              
                                                              $
                                                              1.39Total
                                                              
                                                              
                                                              9
                                                              
                                                              
                                                              
                                                              4,129,139
                                                              
                                                              
                                                              $
                                                              4,457
                                                              
                                                              
                                                              $
                                                              1.08





The
following table summarizes the warrants issued, outstanding, and exercisable as
of September 30, 2008:




Warrant Series
                                        
                                        Grant Date
                                        
                                        Strike
                                          Price
                                        
                                        Expiration Date
                                        
                                        Warrants
                                          remaining
                                        
                                        
                                        Proceeds if
                                          Exercised (in
                                          $000s)
                                        
                                        Call
                                          feature“December
      2003”
                                        
                                        Dec.,
      2003
                                        
                                        $
                                        2.04
                                        
                                        December,
      2008
                                        
                                        
                                        120,000
                                        
                                        
                                        $
                                        245
                                        
                                        (E
                                        )October,
      2005 DIP Series 1
                                        
                                        Oct,
      2005
                                        
                                        $
                                        1.17
                                        (B)
                                        October,
      2008
                                        
                                        
                                        1,030,608
                                        
                                        
                                        
                                        1,206
                                        
                                        NoneOctober,
      2005 DIP Series 2
                                        
                                        Oct,
      2005
                                        
                                        $
                                        1.27
                                        (C)
                                        October,
      2008
                                        
                                        
                                        1,034,803
                                        
                                        
                                        
                                        1,314
                                        
                                        None2006
      Series A1
                                        
                                        Mar,
      2006
                                        
                                        $
                                        1.55
                                        
                                        March,
      2009
                                        
                                        
                                        150,000
                                        
                                        
                                        
                                        233
                                        
                                        None2006
      Series A2
                                        
                                        Mar,
      2006
                                        
                                        $
                                        0.75
                                        (D)
                                        March,
      2009
                                        
                                        
                                        1,039,291
                                        
                                        
                                        
                                        779
                                        
                                        None2006
      Series B
                                        
                                        Various
      2006
                                        
                                        $
                                        2.00
                                        
                                        May,
      2009
                                        
                                        
                                        2,191,466
                                        
                                        
                                        
                                        4,383
                                        
                                        (F
                                        )2006
      Series C
                                        
                                        May,
      2006
                                        
                                        $
                                        1.25
                                        
                                        December,
      2010
                                        
                                        
                                        200,000
                                        
                                        
                                        
                                        250
                                        
                                        None2006
      Series D
                                        
                                        May,
      2006
                                        
                                        $
                                        1.50
                                        
                                        December,
      2010
                                        
                                        
                                        200,000
                                        
                                        
                                        
                                        300
                                        
                                        None2006
      Series E
                                        
                                        May,
      2006
                                        
                                        $
                                        1.75
                                        
                                        December,
      2010
                                        
                                        
                                        200,000
                                        
                                        
                                        
                                        350
                                        
                                        None2007
      Series F
                                        
                                        Nov,
      2006
                                        
                                        $
                                        1.10
                                        
                                        November,
      2009
                                        
                                        
                                        220,000
                                        
                                        
                                        
                                        242
                                        
                                        None2007
      Convertible Debt
                                        
                                        Feb,
      2007
                                        
                                        $
                                        1.06
                                        (A)
                                        February,
      2010
                                        
                                        
                                        7,367,815
                                        
                                        
                                        
                                        7,810
                                        
                                        None2007
      Convertible Debt Fees
                                        
                                        Mar,
      2007
                                        
                                        $
                                        1.00
                                        (A)
                                        February,
      2010
                                        
                                        
                                        1,291,833
                                        
                                        
                                        
                                        1,292
                                        
                                        None2007
      Factoring
                                        
                                        Mar,
      2007
                                        
                                        $
                                        1.06
                                        
                                        February,
      2009
                                        
                                        
                                        1,800,000
                                        
                                        
                                        
                                        1,908
                                        
                                        NoneJune
      PIPE Series 1
                                        
                                        Jun,
      2007
                                        
                                        $
                                        1.27
                                        (A)
                                        June,
      2010
                                        
                                        
                                        5,490,100
                                        
                                        
                                        
                                        6,972
                                        
                                        NoneJune
      PIPE Series 2
                                        
                                        Jun,
      2007
                                        
                                        $
                                        1.28
                                        (A)
                                        June,
      2010
                                        
                                        
                                        1,564,901
                                        
                                        
                                        
                                        2,003
                                        
                                        None2008
      Debt Series 1
                                        
                                        May,
      2008
                                        
                                        $
                                        0.96
                                        (A)
                                        May,
      2011
                                        
                                        
                                        1,125,000
                                        
                                        
                                        
                                        1,080
                                        
                                        None2008
      Debt Amendment
                                        
                                        May,
      2008
                                        
                                        $
                                        0.99
                                        (A)
                                        May,
      2011
                                        
                                        
                                        1,125,000
                                        
                                        
                                        
                                        1,114
                                        
                                        NoneTotal
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        26,150,817
                                        
                                        
                                        $
                                        31,481





(A)
Subject to anti-dilution provisions. Certain future equity or equity equivalent
issuances below the current exercise price per warrant may result in a weighted
average price reset of the exercise price.





(B)
Subject to anti-dilution provisions. Price reset under a weighted average 115%
of “new issue price” reset in May, 2008. Certain future warrant issuances with
exercise prices below $1.02 per warrant may result in weighted average price
re-set and additional issuances of warrants.  These warrants expired
unexercised in October, 2008.





(C)
Subject to anti-dilution provisions. Price reset under a weighted average 125%
of “new issue price” reset in May, 2008. Certain future warrant issuances with
exercise prices below $1.02 per warrant may result in weighted average price
re-set and additional issuances of warrants. These warrants expired unexercised
in October, 2008.





(D)
Subject anti-dilution provisions. Certain future equity or equity equivalent
issuances below $0.75 per share may result in a price reset to 100% of the new
issue price and additional issuances of warrants.


88





(E)
Callable if closing market price is 200% of strike price for 20 consecutive
trading days





(F)
Callable if trading price is greater than $2.50 for 10 consecutive
days





On May 9,
2008 we closed a common stock subscription and option transaction consisting of
13,333,333 shares of common stock for a $10,000,000 cash investment at $0.75 per
share and an option for an additional cash investment of 45,454,544 shares of
common stock for a  $40,000,000 cash investment at $0.88 per share. On
May 5, 2008 and May 23, 2008 we issued a total of 2,250,000 warrants under the
May 5, 2008 debt agreement valued at $1,045,000.  The combination of
the issuance of the common shares, the investment option, and the warrants
resulted in the triggering of anti-dilution protection of the following series
resulting in exercise price decreases and additional warrant
issuances:





Price prior
                              toreset
                            
                            
                            Reset
                              price
                            
                            
                            Warrants
                              issued prior to
                              dilutive
                              issuance
                            
                            
                            Additional
                              Warrants
                              issued
                            
                            
                            Reduction in
                              Cash Proceeds
                              (in $000s)August,
      2004 Debenture warrants
                            
                            $
                            1.40
                            
                            
                            $
                            1.28
                            
                            
                            
                            3,221,471
                            
                            
                            
                            —
                            
                            
                            $
                            387Debenture
      Amend
                            
                            $
                            1.40
                            
                            
                            $
                            1.28
                            
                            
                            
                            1,083,592
                            
                            
                            
                            —
                            
                            
                            
                            130October,
      2005 DIP Series 1
                            
                            $
                            1.21
                            
                            
                            $
                            1.17
                            
                            
                            
                            996,538
                            
                            
                            
                            34,070
                            
                            
                            
                            —October,
      2005 DIP Series 2
                            
                            $
                            1.31
                            
                            
                            $
                            1.27
                            
                            
                            
                            1,003,207
                            
                            
                            
                            31,596
                            
                            
                            
                            —2006
      Series A2
                            
                            $
                            0.99
                            
                            
                            $
                            0.75
                            
                            
                            
                            1,489,399
                            
                            
                            
                            476,606
                            
                            
                            
                            —2007
      Convertible Debt
                            
                            $
                            1.11
                            
                            
                            $
                            1.06
                            
                            
                            
                            7,367,815
                            
                            
                            
                            —
                            
                            
                            
                            3682007
      Convertible Debt Fees
                            
                            $
                            1.03
                            
                            
                            $
                            1.00
                            
                            
                            
                            1,316,833
                            
                            
                            
                            —
                            
                            
                            
                            40June
      PIPE Series 1
                            
                            $
                            1.39
                            
                            
                            $
                            1.27
                            
                            
                            
                            5,490,100
                            
                            
                            
                            —
                            
                            
                            
                            659June
      PIPE Series 2
                            
                            $
                            1.40
                            
                            
                            $
                            1.28
                            
                            
                            
                            1,564,901
                            
                            
                            
                            —
                            
                            
                            
                            1882008
      Debt Series 1
                            
                            $
                            0.99
                            
                            
                            $
                            0.96
                            
                            
                            
                            1,125,000
                            
                            
                            
                            —
                            
                            
                            
                            34Total
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            542,272
                            
                            
                            $
                            1,806





There was
no further impact to the price of any warrants on June 27, 2008 as a result of
the option exercise to purchase 45,454,544 shares of common stock for
$40,000,000.





We valued
the price changes and additional warrants issued using the Black-Scholes-Merton
option-pricing model.  We recorded expense related to modification of
warrants for the combination of the fair value of any additional warrants issued
and the difference between the fair value of the warrants prior to the exercise
price reset and after the exercise price reset.  The total expense
related to warrant modifications was $553,000.  We recorded an
additional $45,000 of debt discount as discussed in Note 7 to record the fair
value of those warrants associated with the remaining Convertible Debt
principal.  We used the following assumptions to value the warrants
affected:





Dividend
rate = 0%


Risk free
return between 1.80% and 2.3%


Market
price of $0.88 per share


Volatility
of between 66% and 84%


Time to
maturity was the remaining life of the warrant series in question of between
0.27 and 3 years.





In April,
2008 the Company extended the life of the 2006 Series C, Series D, and Series E
warrants by one year to December 31, 2010 as additional consideration for public
relations work to be performed through December 31, 2010.  The Company
recorded additional prepaid expense of $109,000 for the three warrant series
representing the difference in fair value before and after the
modification.  We used the following assumptions for the fair value
calculations:





Dividend
rate = 0%


Risk free
return of 2.3%


Market
price of $0.99 per share


Volatility
of between 70% and 84%


Time to
maturity of between 1.73 and 2.73 years





Management
has reviewed and assessed the warrants issued during the year ended September
30, 2008 and determined that they do not qualify for treatment as derivatives
under SFAS 133.


89





STOCK
OPTIONS





On May
15, 2001, TTC, a predecessor to the Company, established the 2001 Incentive
Compensation Stock Option Plan (the "TTC Plan"). The TTC Plan was administered
by the Company's Board of Directors. Under the TTC Plan, the Board had reserved
4,764,000 shares of common stock to support the underlying options which may be
granted. As part of TTC's acquisition by the Company on November 3, 2001, the
TTC Plan was terminated, and the options were converted into options to purchase
shares of the Company’s common stock pursuant to the 2002 Non-Qualified Stock
Compensation Plan (the "2002 Stock Plan"). The number of shares reserved
initially under the 2002 Stock Plan was 9,000,000. This number was increased to
14,000,000 on October 24, 2002 and increased to 24,000,000 on April 27, 2006.
The 2002 Stock Plan automatically terminates on May 15, 2021 and no options
under the 2002 Stock Plan may be granted after May 15, 2011.





On
January 11, 2008 the Company’s Board of Directors established the 2008
Non-Qualified Stock Compensation Plan (the “2008 Stock Plan”) which was ratified
by the Shareholders of the Company on March 4, 2008. The number of shares
reserved under the 2008 Stock Plan was established at
25,000,000.   The 2008 Stock Plan allows for Incentive Stock
Options to be issued to the Company’s employees or officers and Non-Statutory or
Non-Qualifying Stock Options to be issued to the Company’s employees, officers,
consultants, and directors for a period of 10 years from January 11,
2008.  To date, only Non-Qualifying Stock Options have been
issued.





The
exercise price of the underlying shares for both the 2002 Stock Plan and 2008
Stock Plan will be directed by the Board of Directors; however, the exercise
price may not be lower than 100% of the mean of the last reported bid and asked
price of the Company's common stock on the grant date as quoted on the NASDAQ
Bulletin Board or any other exchange or organization. The term of each option
will be established by the Board of Directors at the date of issue and may not
exceed 10 years.  Option grants to employees, directors, and officers
typically have a vesting schedule of between 3 and 5 years and are based upon
length of service.




The
following table summarizes the 2002 Stock Plan and 2008 Stock Plan stock option
activity from September 30, 2005 through September 30, 2008.





2002 Plan
                                            Number of
                                            Options
                                          
                                          
                                          2008 Plan
                                            Number of
                                            Options
                                          
                                          
                                          Total Number of
                                            Options
                                          
                                          
                                          Average
                                            Exercise
                                            PriceOutstanding,
      September 30, 2005
                                          
                                          
                                          6,167,936
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          6,167,936
                                          
                                          
                                          $
                                          0.57Granted
                                          
                                          
                                          10,177,000
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          10,177,000
                                          
                                          
                                          
                                          1.01Exercised
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —Cancelled
                                          
                                          
                                          (379,600
                                          )
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (379,600
                                          )
                                          
                                          
                                          1.29Outstanding,
      September 30, 2006
                                          
                                          
                                          15,965,336
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          15,965,336
                                          
                                          
                                          $
                                          0.83Granted
                                          
                                          
                                          3,972,000
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          3,972,000
                                          
                                          
                                          
                                          1.11Exercised
                                          
                                          
                                          (1,133,066
                                          )
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (1,133,066
                                          )
                                          
                                          
                                          0.32Cancelled
                                          
                                          
                                          (3,784,400
                                          )
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (3,784,400
                                          )
                                          
                                          
                                          1.04Outstanding,
      September 30, 2007
                                          
                                          
                                          15,019,870
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          15,019,870
                                          
                                          
                                          $
                                          0.91Granted
                                          
                                          
                                          3,745,000
                                          
                                          
                                          
                                          7,231,000
                                          
                                          
                                          
                                          10,976,000
                                          
                                          
                                          
                                          1.42Exercised
                                          
                                          
                                          (490,000
                                          )
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (490,000
                                          )
                                          
                                          
                                          0.40Cancelled
                                          
                                          
                                          (375,349
                                          )
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (375,349
                                          )
                                          
                                          
                                          1.44Outstanding,
      September 30, 2008
                                          
                                          
                                          17,899,521
                                          
                                          
                                          
                                          7,231,000
                                          
                                          
                                          
                                          25,130,521
                                          
                                          
                                          $
                                          1.14Exercisable,
      September 30, 2008
                                          
                                          
                                          10,629,420
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          10,629,420
                                          
                                          
                                          $
                                          0.89


90





The
weighted-average remaining contractual life of the options outstanding at
September 30, 2008 was 5.2 years. The exercise prices of the options outstanding
at September 30, 2008 ranged from $0.25 to $2.09, and information relating to
these options is as follows:




Range of Exercise
                                                      Prices
                                                    
                                                    
                                                    Stock Options
                                                      Outstanding
                                                    
                                                    
                                                    Stock Options
                                                      Exercisable
                                                    
                                                    
                                                    Weighted
                                                      Average
                                                      Remaining
                                                      Contractual
                                                      Life in years
                                                    
                                                    
                                                    Weighted
                                                      Average
                                                      Exercise Price
                                                      of Options
                                                      Outstanding
                                                    
                                                    
                                                    Weighted
                                                      Average
                                                      Exercise Price of
                                                      Options
                                                      Exercisable$0.25-0.49
                                                    
                                                    
                                                    
                                                    1,363,216
                                                    
                                                    
                                                    
                                                    1,363,216
                                                    
                                                    
                                                    
                                                    3.3
                                                    
                                                    
                                                    $
                                                    0.30
                                                    
                                                    
                                                    $
                                                    0.29$0.50-$0.99
                                                    
                                                    
                                                    
                                                    2,845,000
                                                    
                                                    
                                                    
                                                    2,520,000
                                                    
                                                    
                                                    
                                                    3.9
                                                    
                                                    
                                                    $
                                                    0.63
                                                    
                                                    
                                                    $
                                                    0.60$1.00-$1.49
                                                    
                                                    
                                                    
                                                    17,156,054
                                                    
                                                    
                                                    
                                                    6,141,391
                                                    
                                                    
                                                    
                                                    5.9
                                                    
                                                    
                                                    $
                                                    1.14
                                                    
                                                    
                                                    $
                                                    1.05$1.50-2.50
                                                    
                                                    
                                                    
                                                    3,766,251
                                                    
                                                    
                                                    
                                                    604,813
                                                    
                                                    
                                                    
                                                    3.2
                                                    
                                                    
                                                    $
                                                    1.80
                                                    
                                                    
                                                    $
                                                    1.87Total
                                                    
                                                    
                                                    
                                                    25,130,521
                                                    
                                                    
                                                    
                                                    10,629,420




During
fiscal 2008 the Company granted 10,976,000 options with a weighted average fair
value of $0.69 per option, determined using the Black-Scholes-Merton option
pricing model.
 
 As of
September 30, 2008 the Company had 10,629,420 options exercisable with a total
aggregate intrinsic value of $9,494,000.




LOSS
PER SHARE





The
Company utilizes SFAS No. 128, “Earnings per Share.” Basic loss per share is
computed by dividing loss available to common shareholders by the
weighted-average number of common shares outstanding. Diluted loss per share is
computed similar to basic loss per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the additional
common shares were dilutive. Common equivalent shares are excluded from the
computation if their effect is anti-dilutive.


91




NOTE
14 - EQUITY BASED COMPENSATION





On
October 1, 2005, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment,” (SFAS
No. 123R) which was issued in December 2004. SFAS No. 123R revises SFAS No. 123,
“Accounting for Stock Based
Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to
Employees,” and its related interpretations. SFAS No. 123R requires
recognition of the cost of employee services received in exchange for an award
of equity instruments in the financial statements over the period the employee
is required to perform the services in exchange for the award. SFAS No. 123R
also requires measurement of the cost of employee services received in exchange
for an award based on the grant-date fair value of the award. SFAS No. 123R also
amends SFAS No. 95, “Statement
of Cash Flows,” to require that excess tax benefits be reported as
financing cash inflows, rather than as a reduction of taxes paid, which is
included within operating cash flows. The Company adopted SFAS No. 123R using
the modified prospective method. Accordingly, prior period amounts have not been
restated. Under this application, the Company is required to record compensation
expense for all awards granted after the date of adoption and for the unvested
portion of previously granted awards that remain outstanding at the date of
adoption.





On
September 27, 2001, the FASB Emerging Issues Task Force (EITF) issued EITF Issue
96-18 “Accounting for Equity Instruments That are Issued to Other than Employees
for Acquiring, or in Conjunction with Selling, Goods or Services” which requires
that equity instruments issued in exchange for services be valued at the more
accurate of the fair value of the services provided or the fair value of the
equity instruments issued. For equity instruments issued that are subject to a
required service period, the expense associated with the equity instruments is
recorded as the instruments vest or the services are provided. For common stock
issued, the fair value is determined to be the closing market price on the date
of issuance. For options and warrants issued or granted, the Company values the
options and warrants on the date of issuance using the Black-Scholes valuation
model. For grants subject to vesting or service requirements, the expenses is
deferred and is recognized over the more appropriate of the vesting period, or
as services are provided.





Key
assumptions used in valuing options issued in the years ending September 30,
2008, 2007, and 2006 are as follows:





Fiscal
      year ending September 30
                        
                        Risk
      Free Rate
                        
                        Volatility2006
                        
                        
                        4.36-4.95
                        %
                        98-107
                        %2007
                        
                        
                        4.01-4.97
                        %
                        88-98
                        %2008
                        
                        
                        2.30-4.29
                        %
                        78-88
                        %


A
dividend yield of 0% was used for all years and the life used was the expected
life of the instrument issued.




Stock
compensation included in the results of operations for the years ended September
30, 2008, 2007, and 2006 is as follows:





Year
      ended
                            
                            
                            Year
    ended
                            
                            
                            Year
      endedIn
      thousands
                            
                            September
      30
                            
                            
                            September
    30
                            
                            
                            September
      302008
                            
                            
                            2007
                            
                            
                            2006Cost
      of products sold
                            
                            $
                            64
                            
                            
                            $
                            77
                            
                            
                            $
                            —Officer
      compensation
                            
                            
                            1,148
                            
                            
                            
                            873
                            
                            
                            
                            189Selling
      and marketing
                            
                            
                            386
                            
                            
                            
                            533
                            
                            
                            
                            21Research
      and development
                            
                            
                            622
                            
                            
                            
                            569
                            
                            
                            
                            207General
      and administrative
                            
                            
                            753
                            
                            
                            
                            302
                            
                            
                            
                            561Totals
                            
                            $
                            2,973
                            
                            
                            $
                            2,354
                            
                            
                            $
                            978





As of
September 30, 2008, there was $10.5 million of total unrecognized compensation
cost related to non-vested share-based compensation arrangements related to
stock options consisting of $8.6 million related to employee grants and $1.9
million related to consultant and director grants. The costs are expected to be
recognized over a weighted-average period of 2.2 years.





The fair
value of the Company’s stock-based compensation was estimated at the date of
grant using the Black-Scholes option-pricing model, assuming no dividends and
using the valuation assumptions noted in the following table. The risk-free rate
is based on the U.S. Treasury yield curve in effect at the time of grant. The
expected life (estimated period of time outstanding) of the stock options
granted was estimated using the historical exercise behavior of employees and
the option expiration date. Due to the lack of an efficient public market in the
Company’s stock prior to 2003, the estimated volatility for option grants is the
historical volatility for the shorter of a three year look back period or the
equivalent look back period for the expected life of the grant. All volatility
calculations were made on a daily basis. The Company has valued 2008, 2007 and
2006 grants using 3 year volatility and 2005 grants using 2 year volatility.
Options granted from fiscal 2006 through fiscal 2008 used the following range of
assumptions:




Expected
      term
                
                0.5-5 yearsExpected
      and weighted average volatility
                
                
                91.51
                %Risk-free
      rate
                
                
                2.30-4.97
                %




92




Tax
Effect related to Stock-based Compensation Expense





SFAS No.
123R provides that income tax effects of share-based payments are recognized in
the financial statements for those awards that will normally result in tax
deductions under existing tax law. Under current U.S. federal tax law, the
Company would receive a compensation expense deduction related to non-qualified
stock options only when those options are exercised and vested shares are
received. Accordingly, the financial statement recognition of compensation cost
for non-qualified stock options creates a deductible temporary difference which
results in a deferred tax asset and a corresponding deferred tax benefit in the
income statement. Due to the uncertainty surrounding the future utility of the
Company’s deferred tax assets, all deferred tax assets are fully allowed for as
of September 30, 2008.





NOTE
15 - INCOME TAXES




The
provision for income taxes differs from the amount of income tax determined by
applying the applicable U.S. statutory federal income tax rate of 34% to pre-tax
loss from operations as a result of the following:




(In
      thousands)
                              
                              Year
      Ended September 30,2008
                              
                              
                              2007
                              
                              
                              2006Statutory
      regular federal tax rate
                              
                              $
                              (12,007
                              )
                              
                              
                              34.0
                              %
                              
                              $
                              (14,390
                              )
                              
                              
                              34.0
                              %
                              
                              $
                              (9,741
                              )
                              
                              
                              34.0
                              %Change
      in valuation allowance
                              
                              
                              14,061
                              
                              
                              
                              (40.0
                              )%
                              
                              
                              16,067
                              
                              
                              
                              (38.0
                              )%
                              
                              
                              9,694
                              
                              
                              
                              (33.8
                              )%State
      tax, net of federal benefit
                              
                              
                              (1,303
                              )
                              
                              
                              3.7
                              %
                              
                              
                              (1,390
                              )
                              
                              
                              3.3
                              %
                              
                              
                              (1,690
                              )
                              
                              
                              5.9
                              %Convertible
      Note Exchanges
                              
                              
                              —
                              
                              
                              
                              0.0
                              %
                              
                              
                              —
                              
                              
                              
                              0.0
                              %
                              
                              
                              1,219
                              
                              
                              
                              (4.3
                              )%Refundable
      Credit
                              
                              
                              (16
                              )
                              
                              
                              0.0
                              %
                              
                              
                              —
                              
                              
                              
                              0.0
                              %
                              
                              
                              —
                              
                              
                              
                              0.0
                              %Other
                              
                              
                              (748
                              )
                              
                              
                              2.3
                              %
                              
                              
                              (290
                              )
                              
                              
                              (0.7
                              )%
                              
                              
                              518
                              
                              
                              
                              (1.8
                              )%Total
                              
                              $
                              (13
                              )
                              
                              
                              0
                              %
                              
                              $
                              3
                              
                              
                              
                              0
                              %
                              
                              $
                              0
                              
                              
                              
                              0
                              %




In the
first quarter in calendar year 2008, the Economic Stimulus Act of 2008 was
enacted.  This act contained a provision which allowed for taxpayers
to claim 50% bonus depreciation on eligible fixed assets placed in service
during the period January 1, 2008 through December 31, 2008.  In
addition to the Economic Stimulus Act of 2008, the Housing Assistance Act of
2008 was enacted.  This act had a provision that allowed taxpayers to
claim a partial refund of its research and development credit and alternative
minimum tax credit carryforwards in lieu of claiming the bonus
depreciation.  The fixed assets eligible for calculating the
refundable credit must be placed in service during the period April 1, 2008
through December 31, 2008.  As of  September 30, 2008, the
Company estimates a total refundable credit of approximately
$16,000.




Net
deferred tax assets comprised the following at September 30, 2008
and 2007:




In
      thousands
                    
                    2008
                    
                    
                    2007Deferred
      tax assetsNet
      operating loss carry forwards and tax credits
                    
                    $
                    58,900
                    
                    
                    $
                    46,200Accrued
      legal settlements
                    
                    
                    —
                    
                    
                    
                    —Warrants
      issued for services
                    
                    
                    170
                    
                    
                    
                    (1,078
                    )SFAS
      123R stock-based compensation
                    
                    
                    1,970
                    
                    
                    
                    1,192Asset
      reserves and provisions
                    
                    
                    6,320
                    
                    
                    
                    6,030Fixed
      assets
                    
                    
                    610
                    
                    
                    
                    (503
                    )Capitalized
      intangible assets
                    
                    
                    (6,550
                    )
                    
                    
                    (6,853
                    )Other
                    
                    
                    —
                    
                    
                    
                    —Less:
      Valuation allowance
                    
                    
                    (61,420
                    )
                    
                    
                    (44,988
                    )Net
      deferred tax assets
                    
                    $
                    —
                    
                    
                    $
                    —





The
valuation allowance increased by $15.4 million and $10.0 million during 2008 and
2007, respectively. The increases were due to the full reservation of additional
deferred tax assets, primarily the additional net operating loss carry forwards
generated from the Company’s annual net losses.





In
assessing the realizability of the net deferred tax assets, management considers
whether it is more likely than not that some or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets depends
upon either the generation of future taxable income during the periods in which
those temporary differences become deductible or the carry back of losses to
recover income taxes previously paid during the carry back period. As of
September 30, 2008, the Company had provided a full valuation allowance to
reduce net deferred tax assets.





93







As of
September 30, 2008, the Company had net operating loss carry forwards for
federal, state and foreign income tax purposes of approximately $95,034,000,
$72,342,000, and $62,023,000 respectively. The net operating loss carry forwards
begin expiring in 2020 and 2010, for the Federal and State,
respectively.





NOTE
16 - COMMITMENTS AND CONTINGENCIES





LEASES





The
company leases the following office and production space:





Monthly
      rent
                      
                      ExpiresIrvine,
      CA, headquarters
                      
                      $
                      83,044
                      
                      December,
      2010Office
      and production - Lubeck, Germany
                      
                      $
                      21,200
                      
                      June,
      2009





Monthly
rents are listed in US Dollars at the September 30, 2008 exchange rate. The
Irvine, California rent increases by $3,154 per month on each January 1 lease
anniversary date.





The
Company leases vehicles with minimum payments of approximately $5,647 per month.
The vehicles leases expire through May, 2011.


Rent
expense was $1,398,000, $972,000, and $1,083,000 for the years ended September
30, 2008, 2007, and 2006, respectively.





Future
minimum operating lease payments at September 30, 2008 were as
follows:





In
      thousandsYear ending
      September 30,
                            
                            Operating
                              Leases2009
                            
                            $
                            1,4592010
                            
                            
                            1,1692011
                            
                            
                            3092012
                            
                            
                            5Thereafter
                            
                            $
                            —




All
leases classified as capital leases during the year were paid off at September
30, 2008. Depreciation expense recorded for assets recorded under capital leases
was $109,000, $369,000 and $400,000 for the fiscal years 2008, 2007 and 2006,
respectively.




94




PROFESSIONAL
SERVICES AGREEMENTS





The
Company and its DeWind, Inc and CTC Cable Corporation subsidiaries currently
have one  consulting agreement and two legal services agreements for
professional  services  with entities affiliated with its
director Michael McIntosh as follows:





The
Company had contracts with two companies owned by its director, Michael
McIntosh: a legal services agreement with The McIntosh Group (TMG) for legal and
intellectual property services and a consulting agreement with Technology
Management Advisors, LLC (TMA) for strategic business advisory services related
to technology and international patent and intellectual property filings. The
initial agreements were executed on March 1, 2002 for a term of three years and
were renewed in March, 2005 for an additional three years expiring on February
29, 2008. Each contract provides for payment of service fees of $250,000 per
annum plus out of pocket expenses.





On July
3, 2006 these agreements were cancelled and replaced with three agreements as
follows:


·
            An
      agreement between TMG and CTC Cable, a wholly owned subsidiary operating
      as the “cable” segment of the Company to provide legal and intellectual
      property services for that segment.·
            An
      agreement between TMG and EU Energy/DeWind, a wholly owned subsidiary
      operating as the “wind” segment of the Company to provide legal and
      intellectual property services for that segment.·
            An
      agreement between TMA and the Company to provide management services
      related to the Company’s technology protection and
    management.


Each of
these agreements is for $250,000 per year, payable in equal installments at the
beginning of each calendar month. Each Agreement will terminate on July 3, 2009,
provided that it may be terminated at the end of each anniversary of its
effective date upon 90 days prior written notice to the other
party.





NOTE
17 LITIGATION





Enable
Vs. Composite Technology Corporation:


On May
11, 2007 Enable Growth Partners, Enable Opportunity Partners, and Pierce
Diversified Strategy Master Fund (collectively “Enable”) filed a Complaint in
the Supreme Court of the State of New York, County of New York, Index No.
601598/2007 (the “Claim”).  Enable had previously invested $1,000,000
in the October, 2005 DIP financing and $1,000,000 in the March, 2006 Bridge
Notes Financing.    The Claim states that the Company failed
to properly calculate the fair value of certain consideration that was given in
September, 2006 as an inducement to convert the March, 2006 Bridge Notes of
certain other investors. On November 7, 2007 oral arguments were heard on the
motion to dismiss. On May 12, 2008 Justice Bernard J. Fried of the Supreme Court
of the State of New York granted our motion to dismiss and ordered that the case
be closed.   On June 3, 2008 Enable filed a Notice of Appeal and
Pre-Argument Statement.  In November, 2008 Enable and the Company’s
insurer settled the claim whereby Enable agreed to drop the appeal of the case
in exchange for $150,000 cash, paid by the insurer





FKI
Engineering Ltd., FKI plc, and Brush Electrical Machines Ltd (collectively
“FKI”) v. the Company and certain of its wind segment subsidiaries (here
referred to as “DeWind”); DeWind v. FKI.





Between
May, 2007 and November, 2007 work was performed on the statutory audits
underlying the claim between DeWind subsidiaries DeWind GmbH and DeWind Holdings
and FKI and which have not been completed pending resolution of the capital
accounts issue. During these audits, the auditors have identified issues
relating to the capital reserve accounts and what DeWind claimed were improper
loan repayments of the German subsidiary prior to the sale of DeWind GmbH by
FKI.





On
December 7, 2007 a hearing was conducted to hear arguments on FKI’s motion for
summary judgment of their claims for the FKI bond calls and the Brush claim. FKI
received approval of a summary judgment on their positions consisting of a net
judgment of 1,415,000 Euros plus interest and costs estimated at approximately
164,000 Euros on the FKI bond call claim between FKI and DeWind Holdings and
650,000 Euros plus interest and costs of approximately 115,000 Euros between FKI
and DeWind GmbH.  DeWind Holdings had a deferred purchase
consideration receivable claim of 2,359,000 Euros reduced to 363,000 Euros and
incurred liabilities totaling 2,789,000 Euros for a total loss of 4,785,000
Euros or approximately $7,700,000.





Subsequent
to the December 7, 2007 hearing, FKI and DeWind met in January, 2008 to resolve
all differences related to the FKI bond claim, the Brush Claim, and the Capital
Accounts claim. We conducted settlement talks in January, 2008 without reaching
agreement on all issues. Subsequent to these talks, the Company made a 153,000
Euro ($219,000 at January, 2008 exchange rates) progress payment on the FKI
claims in exchange for additional time to prepare a revised settlement proposal
that was provided on February 15, 2008. FKI rejected the settlement proposal. In
April, 2008 mediation meetings to explore settlement of the Brush claim were
held. No settlement was finalized at these meetings.





In April,
2008 DeWind filed an amended counterclaim for the capital reserve accounts
matter against FKI for 37,672,950 Euros ($53,047,280 at September 30, 2008
exchange rates) representing loans that DeWind contends were illegally repaid to
FKI from DeWind between June, 2004 and June, 2005, plus statutory interest
calculated since July, 2006 estimated to be in excess of 3,500,000 Euros
($4,928,000 at September 30, 2008 exchange rates), and additional attorney and
court costs estimated to be approximately 400,000 Pounds Sterling ($712,000 at
September 30, 2008 exchange rates), and inestimable restitution, tax indemnity,
and other damages.





95




In July,
2008 DeWind, FKI, related counsel, and the presiding judge of the High Court of
Justice, Queen’s Bench Division, Commercial Court in the UK conducted a case
management conference and set a tentative date for trial in April,
2009.  Court briefs and declarations were required to be filed by
November, 2008.





In
September, 2008, DeWind GmbH filed for insolvency proceedings in part due to the
impending costs of litigation against FKI and in part due to the negative
operational cash flows and cash position of the subsidiary.  Effective
in October, 2008 the appointed receiver for DeWind GmbH is now responsible for
pursuing the DeWind GmbH claim against FKI for its capital accounts
litigation.   In November, 2008 a winding up petition was filed
by FKI for DeWind Holdings, Ltd due to non-payment of a statutory demand for
1,545,596 Euros ($2,176,353 at September 30, 2008 exchange rates) filed in
January, 2008 and included in the amounts listed above that were adjudicated in
December, 2007.  On November, 21 2008 FKI filed for and received
approval to dismiss the DeWind GmbH capital accounts claim on December 10, 2008
unless a total of 110,000 Euros ($140,000 at November 30, 2008 exchange rates)
of court and legal costs are paid for by DeWind Holdings or guaranteed by
another entity.  Composite Technology Corporation is no longer
involved in the court proceedings between DeWind GmbH and the FKI parties and
neither Composite Technology Corporation nor its remaining subsidiaries has made
or guaranteed payment through December 12, 2008.  The Company is not
aware whether the DeWind GmbH receiver has made, or intends to make, any such
payment.  Upon filing for insolvency, the DeWind GmbH receiver, at
their sole direction, is responsible for the legal activity surrounding the
capital accounts claim.





FKI has
attempted to enforce collection of the funds due to FKI from two of the
Company’s subsidiaries for their adjudicated debts due from DeWind GmbH (now
insolvent) and its holding company, DeWind Holdings. DeWind Holdings’ only asset
is the share capital of DeWind GmbH.  DeWind Holdings is in turn a
wholly owned subsidiary of DeWind Turbines, Ltd. which is in turn a wholly owned
subsidiary of Composite Technology Corporation.  There are no parent
company guarantees provided by DeWind Turbines, Ltd. or Composite Technology
Corporation for either DeWind Holdings or DeWind GmbH.   Prior to
insolvency proceedings, DeWind GmbH operated substantially for the purpose of
servicing and managing the warranty liabilities related to wind turbines sold up
to June, 2005 while DeWind was under FKI control. We believe that the DeWind
GmbH Insolvency will have a minimal impact on the expected future
operations of our wind segment.





The
resolution of the capital reserve accounts issues is not reasonably estimable at
this time and no contingent asset has been recorded to date for any future funds
potentially receivable from FKI, if any, to resolve the capital reserve account
issues.





Composite
Technology Corporation and CTC Cable Corporation v. Mercury Cable & Energy,
LLC, Ronald Morris, Edward Skonezny, Wang Chen, and “Doe” Defendents 1-100
(“Mercury”)





On August
15, 2008 the Company filed suit in the Superior Court of the State of
California, County of Orange, Central Justice Center (Case No. 30-2008 00110633)
against the Mercury parties including multiple unknown “Doe” defendents,
expected to be named in discovery proceedings, claiming Breach of Contract,
Unfair Competition, Fraud, Intentional Interference with Contract, and
Injunctive Relief.    Several of the Mercury parties had
filed a claim under the Company’s Chapter 11 bankruptcy proceedings which was
settled during the bankruptcy and which provided for certain payments for sales
made to China.  The settlement agreement included non-compete
agreements and stipulated the need to maintain confidentiality for the Company’s
technology, processes, and business practices.  The Company claims
that the Mercury parties have taken actions, which violate the Settlement
Agreement and the Bankruptcy Court Order, including the development of and
attempting to market similar conductor products and disclosing confidential
information and the Company further claims that the Settlement Agreement was
entered into with fraudulent intent.  The Company claims that the
Mercury parties engaged in unlawful, unfair, and deceptive conduct and that
these actions were performed with malice and with intent to cause injury to the
Company.  The Company is asking for actual damages, punitive damages,
and attorney fees.  No estimate of such damages can be made at this
time and no accrual for such fees is included in the Company’s financial
statements at September 30, 2008.





NOTE
18 - RELATED PARTY TRANSACTIONS





During
fiscal 2006, the Company received $62,000 in cash from its CEO and Chairman of
the Board of Directors in anticipation of the exercise of an option granted in
2001. Pursuant to company policy, the Compensation Committee of the Board of
Directors must approve all option exercises by company executives. Prior to the
meeting of the Compensation Committee, Mr. Wilcoxon wished to rescind his option
exercise, and the balance was repaid to Mr. Wilcoxon in February
2007.





The
Company has contracts with two companies owned by its director, Michael
McIntosh: a legal services agreement with The McIntosh Group (TMG) for legal and
intellectual property services and a consulting agreement with Technology
Management Advisors, LLC (TMA) for strategic business advisory services related
to technology and international patent and intellectual property filings. The
initial agreements were executed on March 1, 2002 for a term of three years and
were renewed in 2005.





On July
3, 2006 these agreements were cancelled and replaced with three agreements as
follows:





·
            An
      agreement between TMG and CTC Cable, a wholly owned subsidiary operating
      as the “cable” segment of the Company to provide legal and intellectual
      property services for that segment.·
            An
      agreement between TMG and EU Energy, a wholly owned subsidiary operating
      as the “wind” segment of the Company to provide legal and intellectual
      property services for that segment.·
            An
      agreement between TMA and the Company to provide management services
      related to the Company’s technology protection and
    management.





96





Each of
these agreements is for $250,000 per year, payable in equal installments at the
beginning of each calendar month. Each Agreement will terminate on July 3, 2009,
provided that it may be terminated at the end of each anniversary of its
effective date upon 90 days prior written notice to the other
party.





For the
fiscal year ended September 30, 2008 we recorded fees of $250,000 and patent
filing fees of $64,000 for TMG, and fees of $250,000 and incidental expenses of
$112,000 for TMA. All of these expenses were recorded to Research and
Development expense.





As of
September 30, 2008 the Company had outstanding balances due to TMA and TMG of
$51,000 and $65,000 respectively, included in accounts payable.





NOTE
19 - SEGMENT INFORMATION
  The
Company conducts its operations in the following two business segments: CTC
Cable Segment and DeWind Turbine Segment. The segments have been organized on
the basis of products. All of each segment’s product revenues relate to external
customers. See also the analysis in Item 7 Management Discussion and
Analysis.
  CTC Cable
Segment
 Located
in Irvine, California with sales personnel located near Portland Oregon and
Atlanta, Georgia, the CTC Cable segment produces and sells ACCC conductor and
related ACCC hardware products for the electrical transmission market. ACCC
conductor production is a two step process. The Irvine operations produce the
high strength, light weight composite “core” (ACCC core) which is then shipped
to one of four cable manufacturers in Canada, Belgium, China, or Bahrain where
the core is stranded with conductive aluminum wire to become ACCC conductor.
ACCC conductor is sold both through a distribution agreement with General Cable
in the US and Canada, into China through our distribution agreement with Far
East Composite Cable,  as well as directly by CTC Cable to utility
customers worldwide.  ACCC conductor has been sold commercially since
2005 and is currently marketed worldwide to electrical utilities and
transmission companies.
  DeWind
Segment
 The
DeWind segment operates under the brand name DeWind, which has manufactured and
sold wind turbines since 1995 from Lubeck Germany.  Currently, DeWind
is operated from the Company’s Irvine offices with sales operations in Dallas,
Texas and Lubeck, Germany along with Engineering and R&D operations in
Lubeck, Germany.  The DeWind segment produces, services, and sells
DeWind turbines in the 1.25 and 2.0 Megawatt range worldwide. We acquired DeWind
during the EU Energy acquisition on July 3, 2006.  Accordingly, we
have incorporated DeWind’s operations into our financial results since that
date.
  The
accounting policies of the reportable segments are the same as those described
in Note 1. The Company evaluates the performance of its operating segments
primarily based on revenues and operating income. Prior to June 30, 2006, the
Company operated under one segment and allocated some corporate costs to the CTC
Cable Segment.
  Segment
information for the years ended Septmeber 30, 2008, 2007 and 2006 is as
follows:
  In thousands
                        
                        Corporate
                        
                        
                        Cable
                        
                        
                        Turbine
                        
                        
                        Total2008:Revenues
                        
                        $
                        —
                        
                        
                        $
                        32,715
                        
                        
                        $
                        41,426
                        
                        
                        $
                        74,141Operating
      income/(loss)
                        
                        
                        (7,418
                        )
                        
                        
                        1,391
                        
                        
                        
                        (24,898
                        )
                        
                        
                        (30,925
                        )Total
      assets
                        
                        
                        16,085
                        
                        
                        
                        15,803
                        
                        
                        
                        133,552
                        
                        
                        
                        165,440Goodwill
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        24,218
                        
                        
                        
                        24,218Capital
      expenditures
                        
                        
                        —
                        
                        
                        
                        1,959
                        
                        
                        
                        1,063
                        
                        
                        
                        3,022Depreciation
      & amortization
                        
                        
                        —
                        
                        
                        
                        776
                        
                        
                        
                        3,174
                        
                        
                        
                        3,9502007:Revenues
                        
                        $
                        —
                        
                        
                        $
                        16,008
                        
                        
                        $
                        18,859
                        
                        
                        $
                        34,867Operating
      loss
                        
                        
                        (6,291
                        )
                        
                        
                        (4,362
                        )
                        
                        
                        (12,444
                        )
                        
                        
                        (23,097
                        )Total
      assets
                        
                        
                        16,606
                        
                        
                        
                        11,538
                        
                        
                        
                        95,693
                        
                        
                        
                        123,837Goodwill
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        24,218
                        
                        
                        
                        24,218Capital
      expenditures
                        
                        
                        —
                        
                        
                        
                        642
                        
                        
                        
                        4,528
                        
                        
                        
                        5,170Depreciation
      & amortization
                        
                        
                        —
                        
                        
                        
                        799
                        
                        
                        
                        905
                        
                        
                        
                        1,7042006:Revenues
                        
                        $
                        —
                        
                        
                        $
                        3,554
                        
                        
                        $
                        4,335
                        
                        
                        $
                        7,889Operating
      loss
                        
                        
                        (5,535
                        )
                        
                        
                        (8,384
                        )
                        
                        
                        (2,808
                        )
                        
                        
                        (16,727
                        )Total
      assets
                        
                        
                        187
                        
                        
                        
                        6,557
                        
                        
                        
                        92,510
                        
                        
                        
                        99,254Goodwill
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        25,469
                        
                        
                        
                        25,469Capital
      expenditures
                        
                        
                        —
                        
                        
                        
                        467
                        
                        
                        
                        27
                        
                        
                        
                        494Depreciation
      & amortization
                        
                        
                        —
                        
                        
                        
                        793
                        
                        
                        
                        296
                        
                        
                        
                        1,089


97


The
Company operates and markets its services and products on a worldwide basis with
its principal markets as follows:
  allocation by geographic region based on location
of customer:
  Twelve Months Ended
      September 30,In
    thousands
                
                2008
                
                2007
                
                
                2006Cable
                
                Turbine
                
                Consolidated
                
                Cable
                
                Turbine
                
                Consolidated
                
                
                Cable
                
                
                Turbine
                
                
                ConsolidatedEurope
                
                
                $
                6,896
                
                
                $
                17,806
                
                
                $
                24,702
                
                
                $
                50
                
                
                $
                11,519
                
                
                $
                11,569
                
                
                $
                —
                
                
                $
                265
                
                
                $
                265China
                
                
                
                24,900
                
                
                
                18,117
                
                
                
                43,017
                
                
                
                12,857
                
                
                
                7,340
                
                
                
                20,197
                
                
                
                1,693
                
                
                
                4,070
                
                
                
                5,763South
                  America
                
                
                
                68
                
                
                
                3,404
                
                
                
                3,472
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —North
                  America
                
                
                
                851
                
                
                
                2,
      099
                
                
                
                2,950
                
                
                
                3,101
                
                
                
                —
                
                
                
                3,101
                
                
                
                1,861
                
                
                
                —
                
                
                
                1,861Total
                  Revenue
                
                
                $
                32,715
                
                
                $
                41,426
                
                
                $
                74,141
                
                
                $
                16,008
                
                
                $
                18,859
                
                
                $
                34,867
                
                
                $
                3,554
                
                
                $
                4,335
                
                
                $
                7,889
  September
      30, 2008
                          
                          
                          September 30, 2007Cable
                          
                          
                          Turbine
                          
                          
                          Consolidated
                          
                          
                          Cable
                          
                          
                          Turbine
                          
                          
                          ConsolidatedLong-lived
      assets (including goodwill and intangible assets) by geographic region
      based on location of operations:Europe
                          
                          $
                          —
                          
                          
                          $
                          50,292
                          
                          
                          $
                          50,292
                          
                          
                          $
                          —
                          
                          
                          $
                          54,504
                          
                          
                          $
                          54,504United
      States
                          
                          
                          3,430
                          
                          
                          
                          —
                          
                          
                          
                          3,430
                          
                          
                          
                          2,283
                          
                          
                          
                          —
                          
                          
                          
                          2,283Total
      long-lived assets (including goodwill and intangible
    assets)
                          
                          $
                          3,430
                          
                          
                          $
                          50,292
                          
                          
                          $
                          53,722
                          
                          
                          $
                          2,283
                          
                          
                          $
                          54,504
                          
                          
                          $
                          56,787
 
 For the
current fiscal year ending September 30, 2008, three customers in China
represented 58.0% of revenues (two customers from our DeWind segment and one
customer from our Cable segment at 24.4% and 33.6%, respectively) and three
customers in Europe with 26.3% of revenues (two customers from our DeWind
segment and one customer from our Cable segment at 17.5% and 8.8%,
respectively). For the prior fiscal year ending September 30, 2007, three
customers in China represented 57.9% of revenues (two customers from our DeWind
segment and one customer from our Cable segment at 21.1% and 36.9%,
respectively), three customers in Europe with 29.6% of revenues (all from our
DeWind segment), and one customer from North America with 6.1% of revenues (from
our Cable segment). For
fiscal year ending September 30, 2006, two customers in China represented 69% of
revenues (one customer from our DeWind segment and one customer from our Cable
segment, at 47% and 22%, respectively) and one customer in North America
represented 20% of revenues (from our Cable segment).No other customer
represented greater than 5% of consolidated revenues.
 
 The
following Unaudited Pro-forma Segment information for the years ended September
30, 2006 is provided to show the effect if the operating results of DeWind had
been included from the beginning of fiscal 2006:
 
 In thousands
                              
                              Corporate
                              
                              
                              Cable
                              
                              
                              Turbine
                              
                              
                              Total2006:Revenues
                              
                              $
                              —
                              
                              
                              $
                              3,554
                              
                              
                              $
                              11,296
                              
                              
                              $
                              14,850Operating
      loss
                              
                              
                              (6,337
                              )
                              
                              
                              (7,582
                              )
                              
                              
                              (4,797
                              )
                              
                              
                              (18,716
                              )Total
      assets
                              
                              
                              187
                              
                              
                              
                              6,557
                              
                              
                              
                              92,510
                              
                              
                              
                              99,254Goodwill
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              25,469
                              
                              
                              
                              25,469Capital
      expenditures
                              
                              
                              —
                              
                              
                              
                              467
                              
                              
                              
                              27
                              
                              
                              
                              494Depreciation
      & amortization
                              
                              
                              —
                              
                              
                              
                              793
                              
                              
                              
                              873
                              
                              
                              
                              1,666
  98
  NOTE
20 – SUBSEQUENT EVENTS
 
 On
October 7, 2008 the Company’s DeWind segment entered into an agreement with
Higher Perpetual Energy LLC to form DeWind SWI Wind Farms, LLC to develop four
wind farms totaling up to 620 megawatts of electrical energy
capacity.  DeWind had paid $130,000 prior to year end for expenses
related to this project which are recorded as prepaid expenses on the balance
sheet at September 30, 2008.


NOTE
21 - SUPPLEMENTAL FINANCIAL INFORMATION


Supplemental
Quarterly Financial Information (unaudited)
 
 In
thousands
  Fiscal year ended September 30, 2008
                      
                      December 31
                      
                      
                      March 31
                      
                      
                      June 30
                      
                      
                      September 30Revenue
                      
                      $
                      17,586
                      
                      
                      $
                      21,166
                      
                      
                      $
                      20,501
                      
                      
                      $
                      14,888Gross
      profit
                      
                      
                      4,220
                      
                      
                      
                      3,569
                      
                      
                      
                      796
                      
                      
                      
                      834Loss
      before income taxes
                      
                      
                      (5,183
                      )
                      
                      
                      (8,351
                      )
                      
                      
                      (11,587
                      )
                      
                      
                      (10,193
                      )Net
      loss
                      
                      
                      (7,361
                      )
                      
                      
                      (11,343
                      )
                      
                      
                      (13,191
                      )
                      
                      
                      (13,658
                      )Basic
      and diluted net loss per share
                      
                      $
                      (0.03
                      )
                      
                      $
                      (0.05
                      )
                      
                      $
                      (0.06
                      )
                      
                      $
                      (0.05
                      )
  Fiscal year ended September 30, 2007
                      
                      December 31
                      
                      
                      March 31
                      
                      
                      June 30
                      
                      
                      September 30Revenue
                      
                      $
                      7,938
                      
                      
                      $
                      8,442
                      
                      
                      $
                      12,406
                      
                      
                      $
                      6,081Gross
      profit (Loss)
                      
                      
                      797
                      
                      
                      
                      998
                      
                      
                      
                      2,913
                      
                      
                      
                      (1,177
                      )Loss
      before income taxes
                      
                      
                      (3,851
                      )
                      
                      
                      (6,154
                      )
                      
                      
                      (3,837
                      )
                      
                      
                      (9,255
                      )Net
      loss
                      
                      
                      (6,949
                      )
                      
                      
                      (11,058
                      )
                      
                      
                      (8,123
                      )
                      
                      
                      (18,353
                      )Basic
      and diluted net loss per share
                      
                      $
                      (0.04
                      )
                      
                      $
                      (0.06
                      )
                      
                      $
                      (0.04
                      )
                      
                      $
                      (0.09
                      )
  Fiscal year ended September 30, 2006
                      
                      December 31
                      
                      
                      March 31
                      
                      
                      June 30
                      
                      
                      September 30Revenue
                      
                      $
                      573
                      
                      
                      $
                      1,030
                      
                      
                      $
                      1,785
                      
                      
                      $
                      4,501Gross
      profit (Loss)
                      
                      
                      251
                      
                      
                      
                      53
                      
                      
                      
                      533
                      
                      
                      
                      (28
                      )Loss
      before income taxes
                      
                      
                      (7,234
                      )
                      
                      
                      (6,516
                      )
                      
                      
                      (4,206
                      )
                      
                      
                      (8,648
                      )Net
      loss
                      
                      
                      (7,235
                      )
                      
                      
                      (6,518
                      )
                      
                      
                      (4,206
                      )
                      
                      
                      (10,564
                      )Basic
      and diluted net loss per share
                      
                      $
                      (0.04
                      )
                      
                      $
                      (0.06
                      )
                      
                      $
                      (0.04
                      )
                      
                      $
                      (0.06
                      )
  99


ITEM
9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
 
 None.
 
 ITEM
9A - CONTROLS AND PROCEDURES
 
 Management's
Report on Assessment of Internal Control over Financial Reporting
 
 Management
is responsible for establishing and maintaining adequate internal control over
financial reporting for the Company, as such term is defined under Rule
13a-15(f) promulgated under the Securities Exchange Act of 1934, as amended. In
order to evaluate the effectiveness of internal control over financial
reporting, as required by Section 404 of the Sarbanes-Oxley Act, management has
conducted an assessment, including testing, using the criteria in Internal
Control — Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Because of its inherent
limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
 
 A
material weakness is a control deficiency (within the meaning of PCAOB Auditing
Standard No. 5), or combination of control deficiencies, that results in a more
than remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected on a timely basis by
employees in the normal course of their assigned functions.




100




Fiscal 2008 Assessment.





During
management's review of our internal control structure under Sarbanes-Oxley
section 404, for the fiscal year ending September 30, 2008, we determined the
following to be material weaknesses:





Entity
level Processes and weaknesses. As of September 30, 2008, the following material
weaknesses existed related to general processes and weaknesses for the entity
taken as a whole:





o Proper
segregation of duties and inadequate training did not exist as well as an
inadequate number of accounting and finance personnel staff at fiscal year
end.





o The
Company currently has a two member Audit Committee, a two member Compensation
Committee, and has had a designated financial expert on the Board of Directors
since January of 2006. Until December, 2005 we only had a two person
non-independent Board of Directors and from January, 2006 through November, 2006
we had one independent director and two non-independent directors comprising our
Board of Directors.  In October, 2007 we added one additional
independent director who also serves on the Audit and Compensation
committees.





o The
Company did not have an independent internal audit function due to the small
size of the organization.





These
material weaknesses related to the entity as a whole affect all of our
significant accounts and could result in a material misstatement to our annual
or interim consolidated financial statements that would not be prevented or
detected.





Information
Technology Controls (ITCs). ITCs are policies and procedures that relate to many
applications and support the effective functioning of application controls by
helping to ensure the continued proper operation of information systems.




Information
Technology General Controls (ITGC'S). ITGC'S include four basic information
technology (IT) areas relevant to internal control over financial reporting:
program development, program changes, computer operations, and access to
programs and data. As of September 30, 2008, a material weakness existed
relating to our information technology general controls, including ineffective
controls relating to:





o Access
to programs and data including (1) user administration, (2) application and
system configurations, and (3) periodic user access validation





Inventory
Processes. As of September 30, 2008, the following material weaknesses existed
related to ineffective controls over our inventory processes:





o
Perpetual Inventory records: Ineffective controls to (a) accurately record the
raw materials inventory moved out of inventory stores and into manufacturing
production and later into finished goods, (b) accurately record manufacturing
variances, (c) properly reconcile in sufficient detail all inventories for
turbine parts  owned by the Company but held at third
parties.





Procure
to Pay process. During our fiscal 2008 assessment of the Company’s procure to
pay (cash payments and disbursements) cycle, we determined that there were
numerous significant control deficiencies relating primarily to inventory
purchasing and related purchasing and payable system control deficiencies. If
assessed on an individual basis, none of these deficiencies were determined to
be material weaknesses. However, taken in the aggregate we believe the following
constitute a material weakness:





i) There
were inadequate system driven matching controls over the receiving function for
inventory parts and supplies. Receiving tolerances for inventory related pricing
and quantities received are not established systematically.





ii) There
were inadequate vendor management duties and responsibilities during the
year





iii)
There was a lack of sufficient purchasing reports for management
review.





101




Equity
Administration Process. During our 2008 assessment, we noted a lack of
segregation of duties over tracking and recording stock related
activity.




Accounting
personnel.  During our 2008 assessment, we determined that we do not
have a sufficient number of accounting personnel trained in Generally Accepted
Accounting Principles working in our DeWind subsidiary.




In fiscal
2008 we focused on resolving the issues identified in fiscal 2007 for both of
our businesses.  For our US operations, primarily CTC Cable,
Corporate, and DeWind US operations, we implemented a series of improvements to
our companywide accounting and CTC Cable manufacturing IT systems in the
U.S.  Most of these enhancements were finalized in October, 2008 after
year end and therefore not effective for fiscal 2008.  For the DeWind
Europe material weaknesses identified, the nature of the material
weaknesses were generally categorized as relating to the management and tracking
of turbine parts and turbine component inventory and the related controls over
purchasing and procurement of these inventories and information technology used
to manage these inventories as described below.





During
fiscal 2008, the following events transpired that will impact our internal
control structure for future periods.





During
the year, we elected to defer any improvements over the DeWind
European material weaknesses since we made the strategic decision to close
our German production facility, which was undertaken in July,
2008.  We have transitioned the sourcing of our turbine nacelle units
to outside vendors including TECO Westinghouse.   We began to
transition our turbine nacelle supply chain to TECO’s operations and systems
during the year.   The transition was  incomplete as of
fiscal year end and which resulted in a material weakness described above
relating to reconciliation of turbine parts, primarily small unit dollar value,
with TECO system counts.





In
October, 2006 we sold 50% of our ownership of the service business of
DeWind.  With the further sale of another 25.1% of the service
business in January, 2007, the service entity’s accounting and internal control
structure came under the control of our partner, Enertrag.  We
completed the sale in April, 2008.  As such, we have excluded the
service entity from the scope of our internal control assessment.





During
the year, we also continued to improve the US internal controls.  We
hired additional supporting accounting staff to further separate duties between
accounting and operational functions.  We implemented additional
review procedures of complex transactions and established and enforced
additional policies and procedures.  Throughout 2008 we worked on
enhancements to our accounting and management information systems culminating in
October, 2008.  Finally, in October, 2007, we appointed an additional
independent director who serves on the audit committee and compensation
committees.





Management
believes that our controls and procedures will continue to improve as a result
of the further implementation of these measures.





The
Company's management has identified the steps necessary to address the material
weaknesses existing in 2008 described above, as follows:





102




(1)
Hiring additional accounting and operations personnel and engaging outside
contractors with technical accounting expertise, as needed, and reorganizing the
accounting and finance department to ensure that accounting personnel with
adequate experience, skills and knowledge relating to complex, non-routine
transactions are directly involved in the review and accounting evaluation of
our complex, non-routine transactions;





(2)
Involving both internal accounting and operations personnel and outside
contractors with technical accounting expertise, as needed, early in the
evaluation of a complex, non-routine transaction to obtain additional guidance
as to the application of generally accepted accounting principles to such a
proposed transaction;





(3)
Documenting to standards established by senior accounting personnel and the
principal accounting officer the review, analysis and related conclusions with
respect to complex, non-routine transactions;





(4)
Requiring senior accounting personnel and the principal accounting officer to
review complex, non-routine transactions to evaluate and approve the accounting
treatment for such transactions.





(5)
Interviewing prospective new independent Directors for our Board including
members willing to serve on the Audit and Compensation committees.





(6)
Evaluating the internal audit function in relation to the Company's financial
resources and requirements. We expect to pursue a strategy of outsourcing our
internal audit function in fiscal 2009;





(7)
Develop and maintain an effective inventory reconciliation process between
DeWind’s accounting records and TECO Westinghouse records.





The
Company began to execute the remediation plans identified above in the first
fiscal quarter of 2009.





Except
for the beginning of the transition of control of our DeWind inventory to
TECO/Westinghouse in the fourth fiscal quarter of 2008, there was no change in
our internal control over financial reporting during the year ended September
30, 2008 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting, other than the
remediation measures which are described above.





SingerLewak
LLP, our independent registered public accounting firm, has audited management's
assessment of the effectiveness of the Company's internal control over financial
reporting as of September 30, 2008 as stated in their report which appears
in this Annual Report on Form 10-K.




Evaluation ofEffectiveness of Disclosure Controls and Procedures





Under the
supervision and with the participation of our management, including our Chief
Executive Officer/ and our Chief Financial Officer, we evaluated the
effectiveness of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
ineffective as of September 30, 2006, 2007, and 2008 because of the material
weaknesses identified above.





ITEM9B-OTHERINFORMATION





None.





103




PART
III




ITEM10.DIRECTORS,EXECUTIVEOFFICERSAND CORP ORATEGOVERNANCE





The
information required by Item 10 of Form 10-K is incorporated by reference from
the information contained in the sections captioned "DIRECTORS AND EXECUTIVE
OFFICERS", "CORPORATE GOVERNANCE" and "SECTION 16(A) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE" in the Proxy Statement that will be delivered to our
shareholders in connection with our March 3, 2008 Annual Meeting of
Shareholders.





ITEM11.EXECUTIVECOMPENSATION





The
information required by Item 11 of Form 10-K is incorporated by reference from
the information contained in the section captioned "EXECUTIVE COMPENSATION:
COMPENSATION DISCUSSION AND ANALYSIS" in the Proxy Statement that will be
delivered to our shareholders in connection with our March 3, 2009 Annual
Meeting of Shareholders.





ITEM12.SECURITYOWNERSHIPOFCERTAINBENEFICIAL OWNERSAN DMANAGEMENTANDRELATED STOCKHOLDERMATTERS





The
information required by Item 12 of Form 10-K is incorporated by reference from
the information contained in the section captioned "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS" in the
Proxy Statement that will be delivered to our shareholders in connection with
our March 3, 2009 Annual Meeting of Shareholders.





ITEM13.CERTAINRELATIONSHIPSANDRELATEDTRANSA CTIONS,AND DIRECTORINDEPENDENCE





The
information, if any, required by Item 13 of Form 10-K is incorporated by
reference from the information contained in the sections captioned "CORPORATE
GOVERNANCE" and "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" in the Proxy
Statement that will be delivered to our shareholders in connection with our
March 3, 2009 Annual Meeting of Shareholders.





ITEM14.PRINCIPALACCOUNTANTFEESAND SERVICES





The
information required by Item 14 of Form 10-K is incorporated by reference from
the information contained in the section captioned "INDEPENDENT ACCOUNTANTS" in
the Proxy Statement that will be delivered to our shareholders in connection
with our March 3, 2009 Annual Meeting of Shareholders.




PARTIV





ITEM15.EXHIBITS,FINANCIAL STATEMENTSCHEDULES





The
following documents are filed as part of this report:




(1)
Financial Statements - See Index to Consolidated Financial Statements under Item
8 above.









(3)
Exhibits - See Index to Exhibits following the signatures to this
report.




104




COMPOSITE
TECHNOLOGY CORPORATION AND SUBSIDIARIES
 SCHEDULE II — VALUATION AND QUALIFYING
ACCOUNTS
 FOR
EACH OF THE THREE YEARS
 IN
THE PERIOD ENDED SEPTEMBER 30, 2008
 (In
thousands)
 
 Balance
      at
                beginning
                of
      year
              
              Reserves
                Acquired
              
              Additions
                charged
      to
                costs
      and
                expenses
              
              Payment
      or
                utilization,
              
              Balance
      at
                end
      of yearFY2008Allowance
      for doubtful accounts
              
              $
              421
              
              
              
              
              
              $
              266
              
              
              $
              -
              
              
              $
              687Inventory
      reserve
              
              
              1,495
              
              
              
              -
              
              
              
              338
              
              
              
              -
              
              
              
              1,833Warranty
      reserve
              
              
              1,235
              
              
              
              -
              
              
              
              812
              
              
              
              (90
              )
              
              
              1,957FY2007Allowance
      for doubtful accounts (current)
              
              $
              2,500
              
              
              
              
              
              
              $
              421
              
              
              $
              (2,500
              )
              
              $
              421Inventory
      reserve
              
              
              258
              
              
              
              -
              
              
              
              1,237
              
              
              
              -
              
              
              
              1,495Warranty
      reserve
              
              
              323
              
              
              
              -
              
              
              
              1,010
              
              
              
              (98
              )
              
              
              1,235FY2006Allowance
      for doubtful accounts
              
              $
              2,500
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              2,500Inventory
      reserve
              
              
              235
              
              
              
              -
              
              
              
              24
              
              
              
              -
              
              
              
              258Warranty
      reserve
              
              
              -
              
              
              
              323
              
              
              
              -
              
              
              
              -
              
              
              
              323




105




SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.




COMPOSITETECHNOLOGYCORPORATION




By:
                  /s/
      Benton H WilcoxonBenton
      H WilcoxonChief Executive
Officer




Dated:December 23,2008





Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.




/s/ Benton H WilcoxonBenton
      H WilcoxonChief
      Executive Officer andChairman (Principal Executive Officer)




Dated:December 23,2008




By:
                    /s/
      Domonic J. CarneyDomonic
      J. CarneyChief
      Financial Officer (Principal Financial and Accounting
      Officer)
  Dated:December 23,2008




/s/ D. Dean
      McCormick IIID. Dean
      McCormick IIIDirector




Dated:December 23,2008




/s/
      Michael D. McIntoshMichael
      D. McIntoshDirector




Dated:December 23,2008




/s/
      John P. MitolaJohn
      P. MitolaDirector




Dated:December 23,2008




106




EXHIBITINDEX





Number
                        
                        Description3.1(1)
                        
                        Articles
      of Incorporation of the Company3.2(2)
                        
                        Certificate
      of Amendment to Articles of Incorporation3.2(3)
                        
                        Bylaws
      of Composite Technology Corporation, as modified January 6,
      200610.1(4)
                        
                        Agreement
      by and among Enertrag AG and EU Energy Ltd. dated as of September 27,
      200610.2(5)
                        
                        Agreement
      by and among EU Energy Inc., GE Infrastructure Technology, LLC and GE
      Infrastructure Technology International Inc. dated as of October 6,
      200610.3(6)
                        
                        Strategic
      Alliance Agreement by and between the Registrant and TECO-Westinghouse
      Motor Company dated as of November 27, 200610.4(7)
                        
                        Modification
      of Agreement dated September 27, 2006 by and among Enertrag and the
      Registrant’s wholly owned subsidiary DeWind Turbines regarding E. Service
      GmbH dated as of January 19, 2007 (English translation)10.5(8)
                        
                        Distribution
      Agreement by and between the Registrant’s wholly owned subsidiary CTC
      Cable Corporation and Far East Composite Technology Company dated as of
      January 30, 200710.6(9)
                        
                        Securities
      Purchase Agreement dated as of February 12, 2007 by and among the
      Registrant and the investors set forth therein10.7(9)
                        
                        Form
      of Senior Convertible Debenture10.8(9)
                        
                        Form
      of Warrant10.9(9)
                        
                        Registration
      Rights Agreement dated as of February 12, 2007 by and among the Registrant
      and the investors set forth therein10.10(10)
                        
                        Consulting
      Agreement dated as of April 1, 2007 between the Registrant and
      Michael Porter. Appointment of Officers10.11(11)
                        
                        Settlement
      agreement dated as of May 3, 2007 between DeWind GmbH and De Wind
      Holdings Limited, each subsidiaries of EU Energy Ltd. which was acquired
      by the Registrant in July 2006 and FKI plc, FKI Engineering Limited, and
      Brush Electrical Machines Limited10.12(12)
                        
                        Securities
      Purchase Agreement dated as of June 11, 2007 by and among the Registrant
      and the investors set forth
therein




10.13(12)
                  
                  Form
      of Warrant10.14(12)
                  
                  Registration
      Rights Agreement dated as of June 11, 2007 by and among the Registrant and
      the investors set forth therein10.15(13)
                  
                  Securities
      Purchase Agreement dated as of June 18, 2007 by and among the Registrant
      and the other parties listed therein10.16(13)
                  
                  Form
      of Warrant10.17(13)
                  
                  Registration
      Rights Agreement dated as of June 18, 2007 by and among the Registrant and
      the other parties listed therein10.18(13)
                  
                  Wind
      Turbine Agreement, dated as of June 15, 2007, by and between DeWind, Inc.
      and Enerserve Limited10.19(14)
                  
                  Letter
      Agreement dated as of October 31, 2007 between the Registrant and John P
      Mitola10.20(14)
                  
                  Option
      Agreement dated as of October 31, 2007 between the Registrant and John P
      Mitola10.21(15)
                  
                  Factoring
      agreement by and between the Registrant and Bradley Rotter dated as
      of December 31,
2006





10.22(16)
                  
                  Sales
      Agreement, effective as of January 30, 2008 by and between S&M CZ
      s.r.o. and DeWind Ltd. (English translation)10.23(17)
                  
                  Financing
      Agreement, effective as of May 5, 2008 by and between the Registrant and
      ACF CTC, L.L.C




107




10.24(17)
                    
                    Form
      of Warrant10.25(17)
                    
                    Subscription
      Agreement, effective as of May 9, 2008 by and between the Registrant and
      Credit Suisse Securities (Europe) Ltd10.26(17)
                    
                    Call
      Option Deed by and between the Registrant and Credit Suisse Securities
      (Europe) Ltd.10.26(18)
                    
                    Subscription
      Agreement, effective as of June 26, 2008 by and between the Registrant and
      Credit Suisse Securities (Europe) Ltd10.27(19)
                    
                    Promotion
      Letter, executed on September 3, 2008, by and between Composite Technology
      Corporation and Robert Rugh.23.1(20)
                    
                    Consent
      of SingerLewak LLP31.1(20)
                    
                    Rule
      13a-14(a) / 15d-14(a)(4) Certification of Chief Executive
      Officer31.2(20)
                    
                    Rule
      13a-14(a) / 15d-14(a)(4) Certification of Chief Financial
      Officer32.1(20)
                    
                    Section
      1350 Certification of Chief Executive Officer32.2(20)
                    
                    Section
      1350 Certification of Chief Financial
Officer




(1)
Incorporated herein by reference to Form 10-KSB filed as a Form 10-KT with the
U. S. Securities and Exchange Commission on February 14, 2002.





(2)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on December 18, 2007.





(3)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on January 12, 2006.





(4)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on September 27, 2006.





(5)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on October 6, 2006.





(6)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on November 30, 2006.





(7)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on January 25, 2007.





(8)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on February 2, 2007.





(9)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on February 13, 2007.





(10)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on April 10, 2007.





(11)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on May 9, 2007.





(12)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on June 14, 2007.





(13)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on June 21, 2007.





(14)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on November 6, 2007.





(15)
Incorporated herein by reference to Form 10-Q filed with the U.S. Securities and
Exchange Commission on February 14, 2007.





(16)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on February 5, 2008.





(17)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on May 9, 2008.





(18)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on July 2, 2008.





(19)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on September 9, 2008.





(20)
Filed herewith.




108