**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


WASHINGTON,
      DC 20549





**FORM
      10-K**





(Mark
      one)





**[X]
      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF**


**1934**





For
      the
      fiscal year ended September 30, 2007





**[_]
      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT**


**OF
      1934**





For
      the
      transition period from ______________ to _____________





*Commission
      File Number: 0-10999*





**COMPOSITE
      TECHNOLOGY CORPORATION**





(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, 2007, the last business day of the registrant's
      most recently completed second fiscal quarter was $193,195,636 (based on the
      closing sales price of the registrant's common stock on that date as reported
      on
      the OTC Bulletin Board). 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. As of November
      30, 2007 there were
      222,995,715 shares of the registrant's common stock were issued and
      outstanding.





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, 2007 there were222,995,715 shares of Common Stock issued and outstanding.









**COMPOSITE
      TECHNOLOGY CORPORATION**





TABLE
      OF
      CONTENTS


Part
                  IItem
                  1
              Business
              1Item
                  1A
              Risk
                  Factors
              15Item
                  1B
              Unresolved
                  Staff Comments
              24Item
                  2
              Properties
              24Item
                  3
              Legal
                  Proceedings
              24Item
                  4
              Submission
                  of Matters to a Vote of Security Holders
              27Part
                  IIItem
                  5
              Market
                  for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                  Purchases of Equity Securities
              27Item
                  6
              Selected
                  Financial Data
              28Item
                  7
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              30Item
                  7A
              Quantitative
                  and Qualitative Disclosures About Market Risk
              43Item
                  8
              Financial
                  Statements and Supplementary Data
              44Item
                  9
              Changes
                  in and Disagreements With Accountants on Accounting and Financial
                  Disclosure
              86Item
                  9A
              Controls
                  and Procedures
              86Item
                  9B
              Other
                  Information
              89Part
                  IIIItem
                  10
              Directors
                  and Executive Officers of the Registrant
              89Item
                  11
              Executive
                  Compensation
              89Item
                  12
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              90Item
                  13
              Certain
                  Relationships and Related Transactions, and Director
                  Independence
              90Item
                  14
              Principal
                  Accounting Fees and Services
              90Part
                  IVItem
                  15
              Index
                  to Exhibits, Financial Statement Schedules
              90Signatures
              90Index
                  to Exhibits
              92





**CAUTION
      REGARDING FORWARD-LOOKING INFORMATION**





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, our
      ability to close prospective customer contracts, 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, negative perceptions from our Title 11 filing, the
      limited market for our stock, the volatility of our stock price, 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 2007
      fiscal year, which runs from October 1, 2006 to September 30, 2007.





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.









**PART
      I**





**I
      - BUSINESS**





**Overview**





Composite
      Technology Corporation (“CTC” or the “Company”) provides innovative energy
      efficient products and renewable energy products to the electrical utility
      industry.  We offer two primary products: electrical
      transmission cable
      conductorsand wind turbines. Our conductors use
      advanced composite materials that result in energy efficient conductors for
      electrical transmission systems. Our advanced wind turbines offer a more
      reliable, clean, renewable energy alternative
      to greenhouse gas emitting energy sources, such as fossil fuel and coal. 
Our most advanced turbines also enable simpler grid synchronization resulting
      in
      wind farms that are more reliable, efficient and easier to operate. The
      Company’s products benefit from proprietary and patented technologies that
      result in products that we believe have substantial economic benefits over
      similar, more traditional products.  Our primary products consist of our
      ACCC (Aluminum Conductor Composite Core) conductor sold under our CTC Cable
      segment (“Cable”) and our DeWind wind powered electricity generating turbines
      sold under our DeWind segment (“Wind”).




Recent
      media attention and increased governmental regulations have highlighted the
      global need for increasing the supply of clean, renewable, energy sources and
      to
      improve the efficiency of the energy delivery systems and power networks. 
The demand for energy from developing nations coupled with the increased usage
      of energy per capita in developed countries have resulted in fully loaded
      transmission grids that have higher losses and lower reliability.  Combined
      with higher energy costs due to higher fossil fuel prices, and greater
      environmental costs, and the demand to reduce greenhouse gas emissions, there
      is
      unprecedented demand for more renewable energy with better economics, with
      a
      more efficient transmission to deliver the power.  Historically low
      electrical transmission grid investment has created grid constraints which
      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 increased 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, and renewable energy portfolio
      standards.




We
      conduct our operations through two segments we refer to and account for
      separately as DeWind and CTC Cable:





The
      DeWind segment sells machines that convert wind energy into electricity known
      as
“wind turbines”, and operates under the trade name DeWind.  The DeWind
      segment represents the 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 570 wind turbines installed
      worldwide, principally in Germany and Austria.   We are positioning
      our new models of DeWind turbine as a better and more reliable wind turbine
      using an innovative and improved drive train/generator combination as compared
      to competitive wind turbines.





The
      CTC
      Cable segment sells ACCC conductor (Aluminum Conductor Composite Core), an
      advanced composite core overhead electrical transmission conductor, as well
      as
      manufactures and sells ACCC core, the composite core component of the ACCC
      conductor, along with hardware connector accessories.  We sell ACCC
      conductor and core directly and through distribution agreements both
      internationally and in North America.  We also sell ACCC conductor hardware
      and engineering design services.  We have had ACCC conductor available for
      commercial sale since June, 2005.  We are positioning our ACCC conductor as
      the most energy efficient, highest performance and overall cost efficient
      alternative to the traditional ACSR (Aluminum Conductor Steel Reinforced),
      newer
      variant ACSS (Aluminum Conductor Strength Steel), new technology ACCR (Aluminum
      Conductor Composite Reinforced), and AAC (All Aluminum Conductor).





We
      believe that the combination of DeWind and CTC Cable will 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 ACCC
      conductor sales through demand for more efficient transmission to the grid
      and
      necessary increased grid capacity investment.  For our wind turbines, we
      are in the process of incorporating our composite materials design know-how
      into
      new blade designs and making improvements to the drive train to improve their
      performance, which we believe will result in a lower cost of energy for wind
      farm developers and operators.





The
      Company was incorporated in Florida on February 26, 1980 and reincorporated
      in
      Nevada on June 27, 2001. 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.





**II.
      MARKETS AND INDUSTRY BACKGROUND**





Our
      two
      business segments place the company into two somewhat distinct energy markets
      but together make CTC an energy technology company that is globally
      environmentally friendly with significant commercial opportunities
      worldwide.   As described in greater detail below, our DeWind products
      capitalize on the current energy markets’ push towards clean and renewable
      electricity generation through the sale of our technologically efficient wind
      turbines, replacing fossil fuel generation and the resulting greenhouse gas
      emissions with clean energy.  Our CTC Cable products use a patented
      solution to provide a significantly more 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.




1




**Wind
      Market:**





The
      wind
      industry is the world's fastest growing energy sector and offers an opportunity
      to begin the transition to a global economy based on sustainable energy. A
      report published by The Global Wind Energy Council and Greenpeace in July 2005,
      has stated that there are no technical, economic or resource barriers to
      supplying 12% of the world's electricity needs with wind power alone by 2020
      -
      and this against the challenging backdrop of a projected two thirds increase
      of
      electricity demand by 2020. According to the Global Wind Energy Council, by
      the
      end of 2006 (2007 figures not currently available), the capacity of global
      wind
      energy installations had reached a level of over 74,000 MW (megawatt), an
      increase of 15,000 MW over 2005 figures. Europe accounts for 48,500MW or 65%
      of
      the total installed capacity followed by the U.S. with 15.6% or 11,600 MW and
      Asia with 10,600 MW or 14%.  In 2006, North America and Asia were the
      highest growth markets representing 33% and 53% year over year growth,
      respectively, in installed capacity.  Each of these markets is expected to
      continue to drive the worldwide growth of wind turbine installations.





By
      2010,
      the cumulative capacity of wind energy installations has been estimated to
      reach
      nearly 150,000 MW (megawatt), or more than double the present installed
      capacity.  The increase represents an annual growth rate of over 19%
      between 2006 and 2010 to 21,000 MW per year in 2010.  By 2020, it has been
      estimated that as much as 1,250 GW (gigawatt) of wind power could be installed
      worldwide, a more than 16 fold increase over 2006 installation levels. The
      total
      value of installed equipment in 2006 was approximately $1.5 million per megawatt
      for a market size of $23 billion.  At projected 2010 installation levels,
      the annual market is expected to increase to $32 billion by 2010, assuming
      prices remain constant at 2006 levels increasing to nearly $40 billion at
      expected 2010 pricing levels.





US
      growth
      is driven by the U.S. demand for clean and safe domestic energy and the
      extension of the U.S. production tax credit.  U.S. installations in 2006
      were 2,500 MW and are expected to increase to 3,500 MW per year through
      2010.  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
      1.9 cents per kWh for U.S. wind projects over the first ten years of their
      life.
      The tax credit is currently due to expire at the end of 2008, however,
      replacement proposals are being considered at this time. The American Wind
      Energy Association (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 potential for wind energy in the U.S. is
      estimated to be more than twice what is generated in the U.S.
      today.





At
      the
      State level, another strong driver of new installations has been initiatives
      taken to mandate a minimum amount of electricity to be supplied from renewable
      sources and for tax credits similar to the PTC. As of October 31, 2007, such
      renewable portfolio standards (RPS) existed in 27 states and the District of
      Columbia including the most populated states - California, Texas and New York.
      Such standards are independent to the economic incentive of the Federal
      PTC.




Certain
      international markets offer similar opportunities:





·
            The
                European market continues to be strong increasing 19% or 7,700 MW
                from
                2005 to 2006 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. Wind energy now provides 3.3% of the total EU
                electricity consumption and additional capacities of over 7,000 MW
                per
                year are expected in the EU15 through
                2010.




·
            In
                India during 2006 over 1,800 MW of generation was installed making
                India
                the fourth largest country-market with 6,270 MW. Projections from
                the
                Ministry of Non-Conventional Energy Sources indicate a total of 24,000
                MW
                will be installed by 2012, which would account for 10% of their capacity
                needs.  India creates incentives through depreciation and tax holiday
                tax breaks and RPS standards
                requirements.




·
            The
                Chinese market saw significant growth in 2006 due to the country’s new
                Renewable Energy Law, effective January 1, 2006. Over 1,300 MW were
                installed in 2006 and an additional total of 5,550 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.




·
            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.




·
            Brazil
                installed 208 MW in 2006 to a total installed capacity of 237 MW,
                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.




2




The
      current wind turbine market is principally addressed by wind turbine designs
      that have been in existence for nearly 30 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 has variable
      frequencies, and as such is then required to be modified through power
      conversion electronics in order to synchronize with the steady frequency of
      either 60 hertz or 50 hertz of an electrical transmission grid.  In the
      United States and certain other markets, one of the key barriers to entry is
      the
      necessity of either licensing from GE Energy their various patents for
      power conversion electronics or designing a power conversion system that does
      not practice the claims of their patents.





Turbine
      power sales to utilities are governed by power purchase agreements.  These
      agreements typically require up to five year warranty guarantees for power
      production under certain wind conditions or risk penalties for
      underperformance.  These penalties are then reimbursed to the wind farm
      operator as compensatory damages.  It is therefore economically
      advantageous for a turbine manufacturer to have a high performing, reliable
      turbine.  Historically various generator technologies and their
      accompanying power conversion electronics have seen high maintenance issues
      and
      failure. The power conversion electronics issues are often due to their
      electronic complexity coupled with high power handing capability and the problem
      dealing with both synchronizing with the grid and allowing reactive power from
      the grid to connect to the generator.  These problems are comparatively
      easy to fix if one has a sophisticated specialist available, since they are
      usually situated at the base of the turbine and do not require cranes to remove
      large and heavy components in the nacelle on top of the tower.  Gearbox
      failure is driven by the high shock loads experienced in the gearbox since
      it is
      situated between the very high torque of the rotor reacting to sudden gusts
      of
      wind and the stiff electrical field loading of the high speed rotation of the
      generator.  While gearbox failure is not that frequent, they are expensive
      when they occur, since they usually require cranes to remove and can involve
      significant downtime.





**Conductor
      Market:**





The
      U.S.
      and international markets for bare overhead conductors are served primarily
      by
      the current industry standard conductor called Aluminum Conductor Steel
      Reinforced, or ACSR conductor.  ACSR technology was developed over 100
      years ago.  It consists of multiple strands of steel wire in the center
      with aluminum wire stranded around the core that conducts the
      electricity.  Due to the weight of the steel strength core and the
      fact that steel is a metal that expands along with thermal heating,
      ACSR is
      subject to“line sag” when under higher power loading. Therefore, ACSR is
      required to be installed on high towers at high tension in order to preserve
      clearance levels to prevent inadvertent grounding or short circuiting.  The
      use of high tension towers requires that a significant portion of the investment
      in a transmission grid is made for these towers; in a typical new transmission
      project; the conductor represents approximately 20% of the cost while the towers
      represent nearly 80% of the cost.   Due to this cost, the towers are
      usually constructed to the minimum allowable strength and tensioning required
      by
      the engineered conductor design when originally built.  Much of the
      construction for developed nations’ grids, such as the U.S. and Europe
      transmission, occurred decades ago.  The significant increase in
      electricity demand of recent years, the result of rapid population growthin certain countries and geographical areas and the proliferation of
      air
      conditioning, computers, and other electronic devices worldwide has resulted
      in
      significant constraints in existing transmission lines and the need for grid
      capacity expansion.  The increased demand will require significant
      improvement to the transmission and distribution infrastructure just to maintain
      current levels of transmission reliability.  Even without the expected
      increased demand, the U.S. transmission grid remains at risk and is
      currently approachingcapacity constraints.





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
      costs of transmission constraints:





·
            Lost
                  Energy. Line losses increase the closer a grid is to maximum capacity
                  and have 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 called
                  line
                  losses.  For a typical U.S. grid, line losses currently average
                  approximately 9 to 10% of the total power generation so for every
                  100 MW
                  of power generated, 91 MW of power is delivered to consumers.  Line
                  losses in the U.S. are paid for by consumers through higher rates
                  and at
                  9-10% represent between $18 and $20 billion in economic losses.  The
                  average 9-10% losses are up from the approximately 4-5% expected
                  when the
                  transmission corridor was originally designed and the increase
                  of 5% to 9%
                  from 4% represents an increased efficiency loss of approximately
                  $10
                  billion - 5% of the approximately $200 billion generated value
                  of the 4.1
                  billion MWh generated in the U.S. in 2006.  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 of carbon dioxide on the European spot markets is approximately
                  $400 million.




·
            Limited
                  Grid Access. 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.  For example, in the Northeast US,
                  the Boston area often must import coal generated power at peak
                  times
                  instead of cheaper hydro power from Maine and New Hampshire simply
                  because
                  the transmission corridor is constrained.  The 2002 National grid
                  survey cites conservative estimates of congestion costs of $447
                  million
                  which represents increased electricity costs paid by consumers
                  in excess
                  of what market prices would be, assuming no constraints due to
                  transmission line
                  bottlenecks.




3




·
            Increased
                  Power Outages. 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.   Conductor sag presents problems, primarily due to
                  safety since lower sag presents serious dangers and causes them
                  to be
                  prone to short circuit when they come close to objects.  If the
                  conductor runs hot enough, the conductor will sag below minimum
                  ground
                  clearances and the transmission line will be required to be shut
                  down.  The lack of redundancy and transmission backup capacity is a
                  serious operational issue facing transmission line operators.  Unlike
                  most essential services, the world’s electrical grids operate at close to
                  capacity and there is little or no emergency backup transmission
                  capacity.
                  Traditional conductors carry electricity efficiently and safely
                  only up to
                  certain temperatures; and because new tower systems are so expensive,
                  lines are usually built with relatively exact electricity carrying
                  limits
                  in mind, which only match anticipated growth plans. High growth
                  over time
                  must be provided for by additional new lines since there is little
                  reserve
                  capacity on the grid in the event of a problem. To deal with this
                  problem
                  in recent years, operators have spent money on current line monitoring
                  systems to better measure reserve capacity and to monitor operating
                  temperatures. Even though there is 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 constraints
                  that can
                  only be fixed by adding new lines or increasing the capacity of
                  existing
                  lines. Recent blackouts in Europe were caused in part by the lack
                  of
                  additional capacity available to carry the additional current necessitated
                  by the shut down of a line over a river.  In the US, the major
                  blackouts of 2003 in the Eastern U.S. and rolling blackouts in
                  the West
                  were the result of transmission line overloads due to high temperature
                  and
                  resulting sag.  Rolling blackouts and brownouts cost worldwide
                  economies billions of dollars per year in lost
                  productivity.





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.





According
      to the Department of Energy’s 2007 Annual Energy Outlook, the U.S. electricity
      demand is expected to grow over 40% between 2005 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. Outside of the United
      States, marketing information is limited but the energy consumption growth
      rate
      far outpaces projected U.S. growth. According to the U.S. Department of Energy,
      Energy Information Agency's "International Energy Outlook 2001", consumption
      in
      the developing world was projected to grow 60% by 2010. The majority of this
      growth will consist of entirely new systems with correspondingly high capital
      requirements for new line construction. Expenditures for new line construction
      may exceed 10 times that of the expected annual U.S. expenditure. We estimate
      the market for 2008 and beyond to be in excess of $40 billion per year of which
      we believe at least $10 billion will be conductor products.





**III.
      OUR SOLUTIONS AND COMPETITIVE ADVANTAGES:**




DeWind:


Our
      DeWind D8.2 wind turbine eliminates power conversion electronics used by nearly
      all other competing wind turbines. We have taken the approach to replace the
      traditional variable speed generator and power electronics combination with
      a
      unique mechanical Voith WinDrive® that controls the speed so that we can use a
      fixed speed synchronous generator with direct high voltage output to the grid.
      By doing so, 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 and are often problematic to maintain. The
      synchronous generator produces power with the same electrical signature of
      nearly all other power generation units including gas turbine, nuclear steam
      powered generators, hydropower, and fossil fuel generated power. The mechanical
      device used is a hydrodynamic torque converter that we have placed in line
      between the gearbox and the synchronous generator. We believe that this new
      approach will result in a more grid friendly, reliable and efficient wind
      turbine. Our development efforts are focusing on enhancing our drivetrain and
      increasing our rotor size to increase energy capture.




Our next
      initiative is to improve upon the design of the blades. Our new blade currently
      under development, will use strong, lightweight composite materials that are
      designed to allow us to significantly increase the wind capture area of our
      blades without adding significant weight and increased cost. Our blade
      innovation, expected to be commercially available at the start of calendar
      2009
      is intended to allow our turbines to be sold at increased prices into currently
      marginal wind environments which have been requested for extensions of projects
      proposed in discussions with potential customers.




CTC
      Cable:


For
      our
      ACCC conductor, we have replaced the heavy steel core strength component
      of the traditional ACSR conductor, with a lightweight composite carbon
      fiber and glass fiber core that allows our higher capacity, more efficient
      ACCC
      conductor to be the same diameter and weight as the standard ACSR sizes. It
      can
      be installed on existing tower structures with the same set of linemen tools
      using nearly identical installation practices. For an identically sized
      conductor, the weight which has been removed from the traditional steel cored
      conductor is replaced with additional conductive aluminum wire, so that our
      ACCC
      conductor has approximately 28% more conductive aluminum area than the
      traditional ACSR. The additional aluminum allows our conductor to transmit
      electricity between 30% and 36% more efficiently than traditional ACSR using
      industry standard calculations. We have verified these modeled figures with
      real
      world measurements from a utility that measured over 32% lower line losses
      using
      our ACCC conductor over a 6 month measurement period. Additionally, since the
      ACCC core is a composite of carbon and glass fibers, our conductor has
      significantly less conductor sag characteristics as compared to ACSR. The
      reduced sag and additional aluminum allow our conductor to operate at much
      higher operating temperatures than traditional ACSR which then allows up to
      two
      times as much power to be transmitted in the same size line. This is important
      for reserve capacity to allow for a much greater peak electrical transmission
      capacity as compared to traditional ACSR as well as capacity for system
      emergencies.




4




ACCC
      conductor provides a solution for the problem of constrained transmission
      corridors that historically could only be addressed by creating expensive and
      time consuming new transmission corridors or corridor upgrade retrofits. Either
      of these historical solutions could require years of planning, sourcing new
      lands, environmental impact surveys, and permitting. By comparison, the
      identical weight characteristics of ACCC conductor vs. ACSR conductor allow
      for
      a very easy retrofit on existing towers without significant engineering and
      permitting. An ACCC conductor retrofit of an identically sized ACSR conductor
      would result in a conductor corridor that provides a 30-36% efficiency gain,
      would increase peak ampacity throughput by up to 200% over traditional ACSR,
      and
      could be installed quickly rather than the long time required for a major
      construction project. The efficiency gains are manifested by lower line losses
      on the line. If we assume that consumer demand is constant, the efficiency
      gains
      brought by ACCC conductor would allow the reduction in power generation yet
      still provide the same power to the consumer. The reduction should reduce the
      requirement to generate power from fossil fuel plants and thereby reduce
      greenhouse gas emissions, and should allow for improved delivery of power
      generated from renewable sources such as solar, wind, geothermal, and hydro
      plants. To quantify the value proposition that this efficiency gain brings,
      if
      we model a highly constrained 40 mile 230kV transmission line running at Maximum
      Apparent Power of 1,100 amperes using a “Drake” sized ACCC conductor, using an
      efficiency gain of 34% over traditional Drake sized ACSR and calculate the
      value
      of the cost to produce power at the 2006 U.S. national average $0.05 per
      kilowatt hour we see the following economics:





·
            Cost
                to retrofit install 40 miles with ACCC conductor = $5.0
                million


·
            Annual
                line loss efficiency savings = $2.7
                million


·
            Metric
                tons of CO2 reduced annually = 34,000 (using average rate of Coal
                and
                Natural Gas emissions rates)


·
            Value
                of CO2 reduction on European spot market = $1.1 million (November
                13, 2007
                spot price)





Comparing
      the economics of an ACSR upgrade retrofit to a larger size under the same
      environmental conditions, shows that due to the cost of the required tower
      enhancements for the ACSR retrofit, the increased capital costs for traditional
      ACSR match are typically in excess of the efficiency gains obtained. This
      results in a negative or slightly positive internal rate of return on the
      investment for ACSR, as compared to a 40% to 65% internal rate of return for
      an
      ACCC conductor upgrade retrofit. We believe that our ACCC 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.





**IV.
      PRODUCTS AND SERVICES**




**DeWind
      Wind Energy Turbine Generator Products:**


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 a total of 571 turbines installed representing approximately 547
      megawatts of electricity generation. 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 50 Hz and 60 Hz . We are beginning
      commercial sales of our new 2.0 megawatt D8.2 model, with 50 Hz models installed
      in Germany and recently in Argentina, and with the first 60 Hz model being
      prepared for installation in Texas by early 2008. All three versions are
      engineered to be one of the more reliable wind turbines on the market resulting
      in more availability during productive winds.





**DeWind
      D6 Series Turbines** :
      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. The turbines operate at variable
      rotational speeds and are equipped with a combination of hydraulic central
      pitching and single blade pitching. The series has an aerodynamic main brake
      system as well as forcibly actuated disk brakes that act like parking brakes.
      There are 110 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.





**DeWind
      D8 Series Turbines:** 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 either 80
      or
      100 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 and
      tailor-made components; each set of blades, drive train, gearbox and inverter
      are tuned to one another for optimum performance. There are 51 installations
      of
      the D8, primarily in Germany, Austria and Belgium.





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.




5




**DeWind
      D8.2 Turbine:** The D8.2
      incorporates the chassis and many of the components of the D8 turbine, which
      was
      first deployed in 2002, but significantly modifies the drive system and
      generator. The D8.2 turbine provides an innovative alternative to power
      conversion electronics by eliminating the electronics due to the use of a
      mechanical device to control the speed and therefore the frequency output of
      the
      generator. To management’s knowledge, the D8.2 would be 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 AG was established in Germany
      over
      156 years ago and is known for their highly engineered products. Over the past
      57 years, Voith has experience in excess of 38 year “mean time between failure”
on their Vorecon technology.





The
      speed
      controlling ability of the torque converter provides constant rotational speed
      to the grid-friendly synchronous electricity generator of the type used by
      nearly all non-wind generation systems such as steam, or gas, or hydro driven
      turbines. Use of a synchronous generator has the following advantages as
      compared to double fed induction generators used by our D6 and D8 units as
      well
      as other competing wind turbines:





·
            Synchronous
                generated power allows for direct and immediate synchronization with
                the
                power grid at high voltage without power conversion electronics or
                requiring step-up transformers, or power conditioning units such
                as VAR
                units or low voltage ride-through
                units.





·
            Synchronous
                power is well known in the power industry and it typically has a
                lower
                service cost for the generators.




·
            Other
                generator systems require the conversion to direct current and
                re-conversion to alternating current at a fixed frequency before
                attempting to synchronize with the electrical 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.





·
            Grid
                synchronization for typical other generator wind turbine systems
                usually
                takes much longer after prototype commissioning to work out various
                software modifications before they can be placed on fully automatic
                unattended operation, often resulting in delays for bringing new
                turbines
                to market.





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. Grid
      synchronization for our D8.2 prototype was complete and error free at our German
      prototype facility within two weeks of the prototype commissioning.We
      believe that once the D8.2 turbine is introduced commercially and its improved
      reliability and efficiencies are confirmed that it could command a premium
      price
      over existing and competing turbines of similar sizes.





During
      fiscal 2007 we made substantial progress in completing our D8.2 turbine and
      to
      make it commercially available for sale and delivery. In December, 2006 we
      installed a 50 Hz version D8.2 prototype at a test facility in Cuxhaven,
      Germany. The turbine was fully commissioned in January, 2007 and was operated
      under real world conditions until it was certified to German standards in July,
      2007. Then in August, 2007, we decommissioned and disassembled the turbine
      and
      checked the key components for wear and failure potential. We determined that
      there were no wear issues and the turbine was reassembled and re-commissioned
      in
      September, 2007 without incident. During 2007, we also built a 60Hz prototype,
      which was shipped to our contract assembly operation at TECO Westinghouse Motor
      in Texas for final assembly and testing. It was then sent to the National
      Renewable Energy Laboratory (NREL) in November 2007, where it was connected
      to a
      special 2.5 megawatt test system in order to independently verify the power
      output of 13.8kV at 60Hz and the power output performance at various speeds
      and
      torque in order to produce a measured “power output graph” of the generator. In
      December 2007, the 60 Hz prototype will be shipped to our demonstration site
      being set up at Sweetwater, Texas, where it is expected to be installed by
      early
      January 2008, and demonstrated for certification of our 60Hz model for the
      United States market. We expect that based on the success of the 50Hz prototype,
      the tests conducted at the NREL lab, and since the D8.2 does not have the same
      complications that turbines requiring power conversion electronics have, that
      full certification should be complete in the first half of 2008. In September
      2007, we shipped our first commercial D8.2 50Hz turbine which was installed
      in
      November 2007 at 4,000 meters elevation for a customer in South America.





We
      started commercial production at TECO Westinghouse Motor in Round Rock, Texas
      in
      December 2007 and we anticipate our initial D8.2 deliveries to begin in
      February, 2008.




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. The focus of the Service
      and Maintenance segment is to provide operational readiness, reliability and
      maximum yield, and consequently ensure the highest possible income for the
      wind
      park operator.





In
      October, 2006 our European turbine service company, EU Energy Service &
Maintenance GmbH, entered into a joint venture agreement with Enertrag AG,
      one of Germany’s most successful wind farm developers and operators. The
      European turbine service company is now called E Energy Service GmbH, and has
      approximately 900 turbines under service contracts, making it one of the largest
      independent wind turbine service companies in Europe. It is now jointly managed
      by the two former heads of our former service company and Enertrag’s former
      service company. In January, 2007 we sold an additional 25% ownership of EU
      Energy Service. We ceased consolidating the results of these operations in
      January, 2007.




6




Product
      Service and Warranties: Most of our turbines are sold with a warranty for key
      parts and services, typically 2 to 5 years in length, along with a mechanical
      availability guarantee. 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. In addition
      to servicing and maintaining the existing base of DeWind turbines, the Company
      has expanded in Europe to provide services for the operators of wind farms
      using
      the turbines of other manufacturers, as well as for the ancillary components
      connected with wind energy production including the towers. The portfolio
      offered to the customer includes cleaning and regular maintenance, conditioning
      and plant monitoring, software updates and also installation support, and
      commissioning work.





**CTC
      Cable Conductor Products:**





Our
      ACCC
      conductor product was developed in response to the California energy crisis
      when
      for the first time there was public awareness that, contrary to conventional
      wisdom, the crisis was not due to a shortage of power generation, but rather
      due
      to constraints in certain transmission corridors. Our founders determined that
      a
      more efficient and effective solution could exist by incorporating a composite
      core to replace the heavy steel wire core used in traditional conductors. The
      goal included producing a conductor that would be operational at much greater
      temperature, thereby providing the opportunity to transmit more power on peak
      demand days and to produce a conductor that would save on capital expenditures
      on capacity upgrades as compared to traditional solutions. We believe that
      our
      ACCC conductor addresses all of these desired outcomes and also provides for
      a
      significant improvement in efficiency. Our ACCC conductor product is a high
      performance transmission conductor designed to increase electrical efficiency
      and increase electricity transmission capacity as compared to same sized
      competing transmission conductor products.





The
      key
      to our ACCC product is in the high strength core. The innovation arises from
      the
      use of a stronger, lightweight, and sag resistant composite core, designed
      to
      replace the traditional and much heavier steel core that provides the strength
      component of ACSR. The ACCC 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 ACCC core is
      then
      shipped to an outsourced contract manufacturer where it is stranded with
      trapezoidal aluminum wire around the core. The resulting ACCC conductor is
      then
      sold to utilities either by CTC Cable or by the contract manufacturer if they
      have a distribution agreement for installation in overhead line applications
      and
      is generally known as a bare overhead electrical conductor.





As
      part
      of our product offering, we also design and manufacture the hardware required
      to
      connect the ACCC conductor to the tower structures and for splicing lines
      together. We deliberately designed ACCC hardware so it can be installed in
      a
      manner consistent with ACSR using the same tools used by linemen around the
      world. While ACCC conductor does require attention to certain differences in
      handling than ACSR, ACCC conductor installations do not require more than
      traditional tools and are installed in the same amount of time.





**V.
      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 develop and 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.





·
            Business
                  Selection. 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.





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


·
            Quality
                  Control. We use operational disciplines and process
                  methodologies, tools, and resources to execute more effectively
                  on a daily
                  basis to provide our customers with the most reliable and highest
                  possible
                  quality products at the lowest possible cost to
                  produce.





·
            Strategic
                  Relationships. 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.





We
      supply
      a product that is sold, often indirectly, to transmission or distribution
      customers. Electricity transmission and distribution is a service considered
      both dangerous and vital to a nation’s economy and is often highly regulated by
      one or more governmental or private agencies. In the U.S. market, we have spent
      the past three years working through and completing the technical sales
      requirements necessary to allow our conductor to be considered for larger scale
      installations. We now anticipate taking our efficiency message to the senior
      utility executives who have the decision making ability to include ACCC
      conductors as part of a strategic buying decision.





7





**VI.
      SALES & MARKETING**




DeWind





The
      recent increase in petroleum prices and the recent media push towards renewable
      energy has resulted in a significant increase in the purchase price of
      electricity generated from wind by nearly twofold over
      the
      past twelve months.As a result, even without significant technical
      improvements to turbines, the economics of wind farms has increased
      significantly, as has the demand for wind turbines in the market. It is expected
      that this seller’s market will continue through 2009.





We
      are
      focusing our marketing efforts for our new DeWind D8.2 turbine in North and
      South America primarily due to the rapid growth and high demand for wind
      turbines and renewable energy in that region. 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 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 United States. The
      sales process for turbine sales is lengthy and due to the value 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.





Our
      sales
      efforts in 2007 were hampered by a lack of certification of our D8.2 unit until
      July, 2007 for our 50 Hz unit, the type used in Europe and other areas of the
      world. We expect to receive certification for our 60 Hz unit, of the type used
      in North America and Brazil, in the first half of 2008. Certification is
      typically required to obtain the necessary insurance and bank financing required
      to finance a wind farm development. We have recently received the approval
      from
      one major wind farm insurer, that based on our 50Hz certification that wind
      farms our turbines are deployed on will qualify for their insurance. We expect
      that this barrier to the commercialization of the D8.2 unit will soon be
      eliminated.





DeWind’s
      strategy in 2007 was to begin the commercialization of the D8.2 model in the
      Americas and to leverage these efforts into sales in 2008 and beyond after
      the
      company’s ability to source key supply chain components increased. We targeted
      larger sized wind farm opportunities in the U.S. and South America altering
      the
      selling strategy of the business away from the small scale wind farms in
      Continental Europe to large-scale wind farm developments with 100 or more
      turbines in areas with rapidly growing wind energy needs and the geographic
      space to accommodate them. This strategy allows DeWind to benefit substantially
      from leveraging its technical abilities across larger economies of scale.





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 the most environmentally friendly
      package of wind turbines and highly efficient transmission
      conductor.





·
            Direct
                  Selling Approach. For North America and for other
                  geographies outside of China and India, we are taking a direct
                  selling
                  approach. We are using a solution selling approach to include the
                  wind turbine coupled with ACCC conductor to provide the most efficient
                  renewable energy delivery to the grid. The goal of the solution
                  is to
                  provide a
                  “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. We are focusing our sales efforts on North America,
                  Mexico and Brazil.




8




·
            Wind
                  Farm Equity Interest. 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. We
                  will consider taking such positions only after a thorough review
                  of the
                  economics of the development and only if such positions provide
                  a superior
                  economic return.





·
            License
                  Arrangement in China. In China, we licensed certain
                  technology to a limited, targeted number of Chinese players who
                  are
                  looking to enter the emerging wind turbine market. This also provides
                  an
                  immediate income stream to fund short term development and operations.
                  We
                  have signed license agreements with two manufacturers in China
                  to produce
                  the existing 50Hz models of the D6 or D8 for sale to the Chinese
                  market.





·
            Analysis
                  of India Opportunity. In India, we recognized that much of
                  the wind opportunity 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.





Sales
      of
      turbines are governed by several documents. Initially for larger orders such
      as
      larger wind farms, a turbine reserve agreement (TRA) is completed which
      typically governs the overall relationship, identifies the turbines to be
      purchased and sets annual delivery figures. Turbine supply agreements (TSA)
      are
      typically entered into on an annual basis under the guidelines of the TRA or
      as
      stand-alone documents for smaller orders, document the purchase on a greater
      technical level of detail, identify specific deliverable dates, and are
      generally a much more binding contract involving substantial penalty clauses.
      In
      2007, we changed our determination of order backlog to only include those fully
      executed purchase documents where a cash deposit of 5% or more is provided.
      As
      of September 30, 2007, DeWind has approximately $41 million worth of agreements
      that call for turbines to be delivered in 2008, consisting of 7 D6 units, 13
      D8
      units, and one D8.2 unit. All of these units are expected to be shipped by
      September 30, 2008. We believe that the increasing demand for renewable energy
      and the shortage of wind turbines on the world market, coupled with the expected
      increased reliability of our D8.2 model will create increased pricing for our
      turbines.





CTC
      Cable:





Our
      ACCC
      conductor targets an industry which is mature in most industrialized countries
      such as those in North America and Europe but developing in other countries,
      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 and China. Our U.S. sales are
      made both as finished ACCC conductor directly to the customer and as ACCC core
      sales directly to our stranding licensee who in turn sells ACCC conductor to
      the
      end user customer. In 2007, we sold ACCC conductor internationally as a product
      ready to be installed, however, it is anticipated that in the next fiscal year
      international ACCC core sales to licensed conductor stranders will become a
      significant portion of our international sales.





Prior
      to
      mid 2007, we marketed our ACCC conductor for its ability to reduce the overall
      capital costs for transmission project upgrade installations through the
      reduction in tower construction costs or tower upgrade costs. In mid 2007,
      we
      began to change our marketing message to incorporate the additional efficiency
      benefits that were verified from a 15 mile installation with one of our initial
      customers in the US. Our improved message states that ACCC conductor is the
      most
      cost effective transmission conductor available since it reduces line losses
      by
      between 30 and 36% over the same sized ACSR as well as being the lowest cost
      solution to upgraded capacity. The efficiency message will be communicated
      to
      utility customers in addition to the regulatory bodies that act as the
      utilities’ customer advocates, such as the state utility commissions and the
      Federal Energy Regulatory Commission. We believe that the communication of
      this
      new marketing message to utilities and regulatory bodies, and our two year
      history of successful commercial installations may accelerate the acceptance
      of
      ACCC conductor.





We
      sell
      our conductor in the U.S. and internationally through a direct sales force
      with
      operations in Irvine, California, and Dallas, Texas, and through distribution
      agreements with our conductor stranding entities. 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 ACCC
      conductor sales and then to transition those sales to selling ACCC core to
      our
      stranding and distribution relationships. We believe this strategy has several
      advantages to the product acceptance of ACCC within these
      geographies:


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




·
            By
                allowing ACCC conductor to be wrapped within a market, the total
                value
                content of the ACCC conductor will allow the product to be sold as
                a local
                product, rather than as a product imported from the United
                States.





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





·
            By
                eliminating the necessity of stranding of the ACCC 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.






9




As
      of
      September 30, 2007, we had agreements with four manufacturers, General Cable
      in
      La Malbaie, Canada; Lamifil, NV in Belgium; Midal Cable in Bahrain; and Jiangsu
      Far East 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: (i) launch ACCC conductor commercially; (ii) give us openings
      with General Cable's preferred and regular customers in the U.S. and Canada;
      (iii) provide a certain assurance to the market regarding security of supply
      since General Cable is one of the largest conductor manufacturers and has the
      capacity to meet anticipated customer demand for the product; (iv) give us
      a
      firm basis to ensure that the ACCC conductor will be produced when required;
      (v)
      allow us to reduce a number of planned marketing costs; and (vi) give further
      impetus to the marketing efforts already undertaken by raising the profile
      of
      our company and products. Under the Distribution Agreement, General Cable was
      appointed a non-exclusive distributor for the marketing and sale of all ACCC
      conductor stranded by General Cable that conforms with applicable industry
      standards for the U.S. and Canadian markets only. This agreement terminates
      on
      December 31, 2007. We expect to continue our relationship with General Cable
      under a non-exclusive relationship.





In
      January, 2007 we announced a three year manufacturing and distribution agreement
      with Jiang-Su Far East where they agreed to the purchase of a minimum of 600
      kilometers of ACCC conductor 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 ACCC 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 Jiangsu
      Far
      East to become certified to strand ACCC conductor at their plant in China.
      Jiangsu passed the required certifications in September 2007 and we began
      selling them ACCC core for stranding in China for local distribution.





To
      date,
      our agreements with Lamifil and Midal have been primarily stranding
      manufacturing agreements resulting in these companies stranding ACCC core with
      aluminum on a contract basis for shipments to our customers. We expect to
      enhance these relationships moving forward to include sales or distribution
      agreements. 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.





Our
      challenge for marketing ACCC conductors is to convince the industry to put
      additional capital into reducing electrical losses and increasing reliability
      while encouraging them to rethink many of the traditional parameters used to
      design transmission and distribution lines. Conductors are currently considered
      as, 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 ACCC conductor solution effectively, we must speak
      to and educate various participants in the decision making process regarding
      the
      ACCC conductor's ability to solve line problems including the technical staff.
      In this respect, CTC 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
      has created a sales and engineering tool, called PLAT, Power Line Analysis
      Tool,
      that performs electrical throughput, structural calculations and financial
      cost
      benefit analysis on ACCC conductors. This analysis of ACCC conductors, when
      viewed in terms of “cost per delivered kilowatt” presents a compelling value
      proposition under most operating conditions.





To
      offset
      the risk averse, conservative barriers to the adoption of a new conductor by
      the
      U.S. market, we provide through a third-party insurance company, a three-year
      Original Equipment Manufacturer Warranty (parts and labor) on all ACCC conductor
      products currently produced by CTC and General Cable and sold in the U.S. and
      Canada. The warranty covers the repair or replacement of the ACCC 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 our ACCC 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 is an excellent incentive by reducing much of the
      uncertainty of adopting the new product.





Our
      key
      milestones that demonstrate our CTC Cable sales successesto date include:





·
            2003-2004
                - first trial installations of ACCC
                conductor.


·
            October,
                2004 - signed distribution and manufacturing agreement with General
                Cable.


·
            June,
                2005 - received first commercial sales in U.S from American Electric
                Power
                and Pacificorp, and first trial sales to
                China.


·
            November,
                2005 first commercial installation in
                U.S.


·
            2006
                - follow-on orders for American Electric Power and Pacificorp. First
                commercial sales to China.


·
            November,
                2006 - completed manufacturing agreement with Lamifil
                NV.


·
            January,
                2007 - signed three year contract with Jiangsu Far East for 2,400
                kilometers/year, valued at over $20 million per
                year.


·
            March,
                2007 - signed manufacturing and distribution agreement with Midal
                Cable,
                implemented sales agent program in
                U.S.


·
            September,
                2007 - expanded relationship with Jiangsu to include manufacturing
                agreement.




**VII
      CONNECTIVITY AND**  **ACCC
      CONDUCTOR SYNERGIES WITH DEWIND WIND TURBINES**




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. Many wind farms must limit generation due to the capacity of the
      infrastructure to carry the energy from the wind farm to the grid. The reality
      is that for wind farms to succeed, the grid interconnects need to be improved
      and enhanced. These interconnects can benefit from ACCC conductor and CTC is
      well placed to exploit the opportunity to provide these benefits. In addition,
      the increased efficiencies due to lower line losses of ACCC 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 ACCC conductor
      provides a significant economic incentive either through higher revenues or
      lower capital costs, or both. 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 ACCC ** conductor,
      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
      ACCC conductor is a powerful solution to fundamental wind industry
      needs.




10




**VIII
      MANUFACTURING**





DeWind:
      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 4 turbine
      units per week for an estimated capacity of approximately 400 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. TECO
      already has relationships with common parts suppliers and we expect that by
      the
      middle of 2008, TECO will manage a significant portion of our supply chain
      requirements.





We
      expect
      to leverage TECO's in place infrastructure and that this will allow for turbine
      parts cost savings and improved purchasing terms. During the year, we worked
      actively to organize our supply chain to allow for an efficient hand-off to
      TECO
      once we receive our initial turbine orders. During 2007, we assembled our DeWind
      Turbines in limited quantities in our Lübeck, Germany facilities as we restarted
      our turbine supply chain.





CTC
      Cable: We produce the composite core component of the ACCC conductor through
      CTC
      Cable Corporation in Irvine, California, 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 for
      manufacturing composites 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. 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 2008 at present. We
      currently have 8 pultruder machines in production, each capable of producing
      approximately 48 miles of ACCC core per month. We have room for approximately
      12
      additional pultruders in our Irvine facility and additional pultruders can
      be
      installed with three months notice from order to commercial operation. We
      anticipate no problems with obtaining parts and materials to build additional
      pultruders.





In
      addition, we also produce parts for and license the production of the special
      hardware accessories required to hang ACCC conductor and ensure that the
      hardware supply will match conductor sales requirements.




**Raw
      Materials**





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. While some of these parts are of standard sizes and
      specifications, certain key parts are customized. 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 our
      key
      turbine components. Certain of our key parts are sole-source vendors, including
      Voith Ag which supplies our WinDrive® torque converter. Due to the expected
      limited number of WinDrive® torque converters available from Voith and a
      worldwide shortage of other components, specifically gearboxes and bearings,
      during calendar 2008, we have identified vendors and arranged for the
      supply of 120 component sets for delivery to our TECO facility for use in
      production during 2008. We are negotiating with our vendors for 2009 components
      parts deliveries but we expect to be able to purchase more than two times that
      for 2009. The number of vendors with available production for certain key
      components, such as our gearboxes, is limited due to the increased demand for
      both our wind turbines and those of our competitors. Such competition may also
      result in increased costs associated with these parts. In addition, some of
      our
      parts are sourced from vendors located in countries outside of the United
      States. We currently do not hedge the foreign currency in these countries and
      our ultimate costs may increase as a result of losses due to differences in
      the
      values of these foreign currencies. We are in the process of transitioning
      our
      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.




11




CTC
      Cable: The principal raw materials in the production of the ACCC core are glass
      and carbon fibers, combined with specific polymer resins. Our conductor
      stranding manufacturers use aluminum rod materials usual 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. The preferred supplier for carbon
      is Toray Industries; however, to ensure an uninterrupted supply of carbon in
      June, 2007 we certified a second carbon supplier. We currently have sufficient
      capacity with our existing machinery to handle our anticipated production needs
      for the next year. We are providing for additional process developments to
      improve our production efficiency.





If
      the
      supply of a key or single-sourced material to us were to be delayed or
      curtailed, our ability to produce or ship related products in desired quantities
      and in a timely manner could be adversely affected. Our business could also
      be
      adversely affected depending on the time required to obtain sufficient
      quantities from the original source, or to identify and obtain sufficient
      quantities from an alternative source. In addition, many of our parts for our
      turbines require a substantial down payment to reserve the capacity resulting
      in
      additional requirements for working capital. If we do not have sufficient
      working capital and such advance payments are not made, we could lose our rights
      to these parts and our business may be negatively impacted.





**IX.
      INTELLECTUAL PROPERTY**




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





DeWind,
      Inc and its wind turbine affiliates are currently pursuing patent protection
      for
      a number of developments. Four PCT international applications have entered
      the
      national phase and have subsequently issued in select countries which, depending
      on the application, include Japan, United States, Spain, Germany and Austria.
      One application based on a PCT application issued in the U.S. on October 17,
      2007 (U.S. Patent No. 7,291,937) and one is still currently pending before
      the
      European Patent Office (EP1540811A1). Generally, these patents and applications
      are directed toward wind energy systems and methods of operation and towers
      for
      wind power installations. CTC 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 described below.





In
      connection with our ACCC conductor business, we currently have five issued
      U.S.
      patents, one U.S. patent application that has been issued a Notice of Allowance
      and is pending issuance, two pending U.S. continuation-in-part applications,
      and
      two pending U.S. applications each claiming priority to a PCT international
      application. 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, eight applications have been granted
      and three applications are proceeding to acceptance and are pending issuance.
      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. We plan to continue filing and
      supplementing these patent applications with new information as it is developed.
      The issued and the pending patents, if issued, have patent terms that will
      end
      within the period of 2022 to 2024, 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 we continue 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.




On
        October 6, 2006 DeWind (then known as EU Energy) entered into a Patent License
        Agreement with GE Infrastructure Technology LLC and GE Infrastructure
        International Inc. (collectively, “GE”) in which GE licensed certain patents
        (“GE Patents”) related to wind turbines manufactured and sold by the GE Wind
        Energy GmbH and GE Wind Energy LLC to DeWind. In return for certain royalty
        payments, GE granted DeWind a nonexclusive license under the GE Patents to
        make,
        use, sell, service and dispose the D6 and D8 wind turbines and components,
        and
        other products that could be deemed to incorporate the GE Patents. DeWind
        was
        also granted the right to sublicense the GE Patents on a limited basis. The
        license extends throughout the countries that the GE Patents were issued.
        Unless
        terminated for breach, the term of the license expires on the date that the
        last-to-expire of the GE Patents expires.
 
 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.
      RESEARCH AND 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 90-93 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. There is also
      potential to increase the rated output from 2.0 MW to up to 2.6MW using present
      technology.





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 ACCC 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 ACCC conductor technologies.




12




We
      spent
      $7,332,238, $4,855,175, and $5,413,787 on research and development activities
      in
      fiscal years 2007, 2006, and 2005, respectively.




**XI.
      COMPETITION**





**DeWind
      Turbine Competition:**


The
purchasingdecision 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 and Mitsubishi. GE is the largest wind turbine supplier in
      North
      America, with over 7,500 wind turbine installations, comprising more than 9,800
      MW of capacity, and representing 48% of the US deliveries in 2006 (2007 data
      not
      yet available).





We
      believe that our DeWind turbines offer a comparably priced product per megawatt
      of generation that has excellent performance and reliability compared to the
      competition and our innovations with our D8.2 model should result in reduction
      in the component failure rate of our competition’s products.





The
      ability to use a fixed speed high voltage synchronous generator, as opposed
      to a
      variable speed generators with power conversion electronics required by other
      turbines, results in a much more grid–friendly
      AC power
      output at a higher voltage that can be connected directly to the grid. This
      allows the D8.2 to meet the Grid Code standards published by the
      Federal Energy Regulation Commissional (FERC) as a synchronous generator,
      without additional power conditioning and low voltage right through protection
      equipment.





**CTC
      Cable Competition**





We
      believe that ACSR is our primary competition. 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.
      suppliers of ACCC core stranding. Thus far in this document, we have focused
      our
      description of our products and product advantages by comparing ACCC conductor
      to ACSR conductor since it is the industry standard and represents our greatest
      opportunity for market penetration. During our analysis, we also compared ACCC
      conductor with other conductor product innovations, each briefly described
      below
      and compared against ACCC conductor and ACSR in the table
      following.




·
            ACSS
                or Aluminum Conductor Strength Steel is an annealed aluminum conductor
                using a similar design as ACSR but also which uses a higher strength
                steel
                alloy as its core. ACSS can operate at a higher temperature than
                ACSR but
                has similar weight to ACSR unless one considers the ACSS/TW trapezoidal
                wire version which requires additional aluminum resulting in a heavier
                conductor than ACSR, requiring greater tensioning and potentially
                heavier
                duty or taller tower construction. Additionally, it requires increased
                tower height or towers placed closer together if one would like to
                operate
                it at higher temperature, since it still displays temperature induced
                sag
                similar to other metals due to similar thermal expansion. We consider
                ACSS
                to be an extension of ACSR since its operating properties are a marginal
                improvement to ACSR conductor.





·
            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
                ACCC conductor since it is prone to brittle fracture if it is handled
                incorrectly, requires special reel for transportation, requires special
                tools and handling for its installation, has greater thermal sag
                than ACCC
                conductor, has less performance as compared to ACCC conductor, and
                is more
                expensive on a per foot and a total cost of installation basis. ACCR
                has
                been on the market for a number of years, marketed by 3M with more
                resources than ACCC conductor, yet has a limited commercial installation
                base to date as compared to the installation base of ACCC
                conductor.





·
            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 AAC and AAAC
                conductors are still very soft and prone to high levels of thermal
                sag
                which requires shorter spans between towers, resulting in a more
                expensive
                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
                ACCC
                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 ACCC conductor. Buried cables
                cost
                over ten times the total installation costs and are typically not
                used for
                transmission lines due to insulation, maintenance and cooling issues.
                Superconductors are even more prohibitively expensive to install,
                in the
                millions of dollars per mile and consequently have had very limited
                government sponsored trial very short installations, primarily in
                extremely congested city areas. The few installations of superconductors
                have been paid for by governmental grants and not from commercial
                utilities.






13




·
            In
                past years, we have reviewed other conductors such as STACIR made
                by the
                Korea Electric Power Corporation and GAP, originally introduced by
                Sumitomo. We continue to monitor the progress of these products but
                do not
                consider these products to be competitive threats. Please refer to
                our
                fiscal 2005 and 2006 Form 10-K filings for additional information
                about
                these products.





The
      following table compares the operational properties of the various conductors.
      The calculations were made using industry standard calculations on a modeled
      40
      mile (67 km) constrained transmission line using “Drake” sized conductor with
      Maximum Apparent Power of 1,150 amps and standard environmental conditions
      as
      would be seen in the continental United States for a typical transmission line.
      Line loss values are per year and are calculated at the U.S. average to produce
      power of $0.05 per KWh. CO2 values are calculated at the European carbon
      exchange spot prices and the U.S. average CO2 emissions rate for electricity
      generation.





ACCC
            ACSR
            ACSS
            ACCR
            AAACAluminum
                cross section in kcmil
            1,020
            795
            795
            795
            927Peak
                power - 180C in Amps
            1,733
            (over
                limit)
            1,546
            1,557
            (over
                limit)Operating
                Temperature
            90C
            108C
                (over 100C limit)
            106C
            105C
            107C
                (over 75C limit)%
                line losses vs ACCC conductor
            --
            35%
            32%
            30%
            33%Additional
                cost for line losses vs. ACCC conductor
            --
            $2,760,000
            $2,490,000
            $2,350,000
            $2,570,000Additional
                CO2 emissions vs. ACCC conductor - in metric tons
            --
            34,400
            30,100
            29,300
            32,000Cost
                of CO2 on Europe spot market
            --
            $1,130,000
            $1,020,000
            $960,000
            $1,050,000





We
      believe ACCC conductor has two disadvantages compared to our competition. First,
      our ACCC conductor is a relatively new product that incorporates technology
      that, while proven in other industrial applications, has limited installations
      in the utility markets. At present, over 2,000 kilometers of ACCC conductor
      have
      been installed world wide, primarily in China, an increase from 230 kilometers
      a
      year ago. However, the ACSR product we anticipate replacing has been in
      existence for 100 years, is familiar with 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 may have difficulty in convincing traditional utility buyers.
      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.





**XII.
      GOVERNMENTAL REGULATION**




While
      there 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 ACCC 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 ACCC conductor. Certain markets
      also require conductor and turbine manufacturers to be audited and production
      methods and raw material supplies approved.





**XIII.
      BANKRUPTCY PROCEEDINGS AND SUMMARY OF REORGANIZATION
      PLAN**




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 our Form 10-K for fiscal year ending September 30, 2005 and footnote 2
      of
      Item 8 in this filing for additional information.




XIV.
      CUSTOMERS


DeWind:
        For the year ended September 30, 2007, we had five customers who each accounted
        for 18% to 23% of our total DeWind revenue, including SEC and Brehna who
        accounted for $3,986,000 and $4,046,000, of our revenue, respectively.
 
 CTC
        Cable: For the year ended September 30, 2007, we had two customers – Jiangsu
        Far East
        and General Cable — who
        accounted for
        $12,175,000 and $2,939,000 of our revenue, respectively. This constituted
        approximately 76% and 18% of our CTC Cable revenue and 30% and 7% of our
        total
        revenue.




14




**XV.
      EMPLOYEES**





As
      of
      November 15, 2007, we had a total of 135 full time employees including 69
      employees in the United States and 66 employees in Europe. We also used the
      services of 7 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.





**XVI.
      AVAILABLE INFORMATION**




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 2007 Annual Report on Form 10-K may
      also be obtained without charge by contacting Investor Relations, Composite
      Technology Corporation 2026 McGaw Ave. Irvine, California92614.




**ITEM
      1A. RISK FACTORS**





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.





We
      have
      recorded approximately $20.5 million in ACCC product sales since inception
      and
      we have $30.5 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. Our
      accumulated deficit as of September 30, 2007 and 2006 was $139,609,437 and
      $95,125,955, respectively.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.




OUR
      INDEPENDENT AUDITORS HAVE ISSUED A QUALIFIED REPORT AS OF AND FOR THE YEAR
      ENDED
      SEPTEMBER 30, 2007 WITH RESPECT TO OUR ABILITY TO CONTINUE AS A GOING CONCERN,
      AND WE MAY NEVER ACHIEVE PROFITABILITY.





Since
      inception, 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 year ended September 30, 2007, we had a net
      loss of $44,483,482 and negative cash flows from operations of $21,839,550.
      For
      the year ended September 30, 2006, we had a net loss of $28,523,192 and negative
      cash flows from operations of $6,263,703. For the fiscal year ended September
      30, 2005, we had a net loss of $40,163,407 and negative cash flows from
      operations of $12,449,211. As of September 30, 2007, our accumulated deficit
      was
      $139,609,437.





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
      reluctant to accept new technologies. We made our ACCC available and entered
      into our first commercial agreement in 2003. We recently acquired our wind
      energy division in July 2006.




15




Our
      electric cable conductor 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.





IF
      OUR
      CONDUCTOR AND TURBINE PRODUCTS ARE NOT ACCEPTED BY OUR POTENTIAL CUSTOMERS,
      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 and efficient 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 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 liberating capital
      funding to acquire our products that can overall reduce costs in power
      transmission; and




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




Because
      of these and other factors, our products may not gain market acceptance or
      become the industry standard for the electrical utility industry. The failure
      of
      utility 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 NOT BEEN SUCCESSFULLY OPERATED IN REAL WORLD WIND
      GENERATION APPLICATIONS IN ALL OF OUR POTENTIAL MARKETS. THE WINDRIVE TM DRIVETRAIN IS UNPROVEN IN FULLY COMMERCIAL WIND GENERATION
      APPLICATIONS.





The
      DeWind D8.2 model incorporates the Voith WinDrive® component as a key
      modification to our existing turbine technology. However, we have not
      successfully completed the tests required to obtain certification to utilize
      this technology in wind generation applications in 60 Hertz, the frequency
      used
      in the United States and other key growth markets. 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.




WE
          ARE
          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 TECHNICAL INSOLVENCY.
 
 We
          have
          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 certain of the UK subsidiaries for reimbursement of bond guarantees
          claimed by DeWind customers in 2005 and has successfully obtained judgments
          against these UK subsidiaries for 2.2 million Euros. If the Company
          defaults on these payments, if the Company does not successfully prevail
          on the
          claim of the improper loan repayments, and if the CTC parent does not elect
          to
          support the subsidiaries through capital infusions, certain of the UK and
          German
          subsidiaries may be forced into technical insolvency under German and UK
          corporate law. 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
          a
          liability for the 2.0 million Euros but has not recorded a receivable for
          the funds claimed to be owed by FKI.


ALTHOUGH
      OUR DEWIND SUBSIDIARY HAS SUCCESSFULLY PRODUCED WIND TURBINES IN THE PAST,
      DEWIND HAS NOT PRODUCED A TURBINE COMMERCIALLY FOR OVER A YEAR AND HAS LIMITED
      OPERATIONAL PRODUCTION CAPABILITY.




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
      occured in late calendar year 2007. This lack of production experience and
      know-how may result in additional costs or delays when commercial production
      is
      resumed. We are currently evaluating our commercial production options including
      the use of contract facilities at various locations around the world. 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.




16




OUR
      DEWIND PRODUCTS UTILIZE TECHNOLOGY AND 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
      our
      legacy turbine installations and our D6 and D8 commercial turbine models, we
      are
      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.





OUR
      WIND
      TURBINES HAVE VERY LONG SALES AND PRODUCTION CYCLES AND OUR TURBINES ARE
      TYPICALLY FINANCED BY BANKS AND OTHER LENDING INSTITUTIONS. 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 and 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, reliable wind speeds 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.





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 in 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.





OUR
      INABILITY TO RAISE ADDITIONAL WORKING CAPITAL AT ALL 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.




While
      we
      have raised significant capital in the past through our debt offerings and
      private equity placements, we anticipate that the sales of our ACCC 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 in the public or private markets will
      be
      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 is low. 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.





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.




17




WE
      MUST
      PROTECT OUR PROPRIETARY RIGHTS TO 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.





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 and D.J. Carney, our Chief
      Financial Officer. If Messrs. Wilcoxon, Sepe, or Carney were unable to provide
      services to us for whatever reason, our business would be adversely affected.
      Neither Mr. Wilcoxon, Mr. Sepe, nor Mr. Carney 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.




A
        FAILURE
        TO ESTABLISH AND MAINTAIN RELATIONSHIPS WITH STRATEGIC SUPPLIERS, CONTRACTORS,
        AND LICENSEES MAY HARM OUR BUSINESS.
  Our
        success is dependent upon establishing and maintaining relationships with
        strategic contractors, suppliers and licensees, such as our relationships
        with
        General Cable, Lamifil, Midal, and Jiangsu as our conductor wrapping licensees
        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
        strategic relationships 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 strategic supplier or licensee 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 contractors and suppliers to bear retooling costs
        associated with producing our products; and
  (iv)
        we
        must successfully transfer technical know-how to our suppliers, contractors,
        and
        licensees.
  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 strategic licensees will be selling our products that may compete with
        their
        existing or future conductor products. Our licensees 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 strategic
        suppliers, contractors, and licensees; (ii) our cable licensees fail to achieve
        significant sales of ACCC conductor or products incorporating our technology;
        (iii) we fail to successfully transfer the supply chain management and knowledge
        transfer to our TECO turbine assembly contractor, (iv) we fail to maintain
        our
        relationship with Voith for our WinDrive® supply, or (v) we otherwise fail to
        implement our business strategy successfully.


18





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





Our
      principal ACCC conductor raw materials are glass and carbon fibers, plus various
      polymer resins and aluminum. Our wind turbine products use industrial metals
      such as steel and aluminum along with carbon 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 OUR KEY SUPPLIES 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. 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.





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





As
      of
      November 30, 2007, Benton H Wilcoxon, our Chairman of the Board, Chief Executive
      Officer and Michael Porter, former majority shareholder of EU Energy in the
      aggregate beneficially own or control approximately 16% of the 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. 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, 2007 one customer
      in
      China represented approximately 76% of our recorded revenues and one customer
      represented 18% 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, three customers in Europe amounted to 27%, 13%, and
      13% of 2007 revenues and two customers in China amounted to 16% and 14% 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 the 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.





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, 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 ACCC core in the United States for delivery to our
      wrapping partners under manufacturing and distribution agreements for ACCC
      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:




19




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




(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 and
      foreign 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 a material 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. This may result in the loss of such credits to the developer
      In the United States and elsewhere around the world; provided that, 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 US, 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.




20




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 offer our products are 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 or less
      competitive. 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.





OUR
      INTEGRATION OF THE EU ENERGY/DEWIND ACQUISITION IS CONTINUING AND MAY CONTINUE
      TO CONSUME SIGNIFICANT RESOURCES AND MANAGEMENT TIME





Management
      spent a significant amount of time and effort on the integration of the EU
      Energy/DeWind acquisition and additional work to complete the integration is
      expected to continue into 2008. If we cannot integrate the products effectively
      or if management spends too much time on integration issues, it could harm
      our
      business, financial condition and results of operations. The difficulties,
      costs
      and delays involved in integrating the companies, which could be substantial,
      include the following:





-
                distraction
                    of management and other key personnel from the business of the
                    combined
                    company;


-
            integrating
                technology, product lines, services and development
                plans;


-
            inability
                to demonstrate to customers and suppliers that the business combination
                will not result in adverse changes in product standards or business
                focus;


-
              inability
                  to retain and integrate key
                  personnel;


-
            disruptions
                in the combined sales forces that may result in a loss of current
                customers or the inability to close sales with potential
                customers;


-
            expending
                time, money and attention on integration that would otherwise be
                spent on
                developing either company's own products and
                services;


-
            additional
                financial resources that may be needed to fund the combined operations;
                and


-
            impairment
                of relationships with employees and customers as a result of changes
                in
                management.




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 which will require the investment of additional
      resources to mitigate and resolve. Prior to the acquisition
      on July 3, 2006, DeWind was a UK company that was not previously
      subject to the requirements of the Sarbanes-Oxley Act of 2002. The operations
      of
      DeWind are material to the results of the post-acquisition combined entity
      and
      management’s initial assessment of the DeWind
      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.




21




WE
      ARE
      CURRENTLY INVOLVED IN SECURITIES RELATED LITIGATION THAT MAY RESULT IN THE
      ISSUANCE OF COMMON SHARES OR COMMON SHARE DERIVATIVE INSTRUMENTS.





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.
      The Company represents that the market value on the date of the issuance of
      $1.06 was equal to the fair value of the consideration. Enable alleges that
      the
      fair value of the consideration was approximately $0.02 per share and thereby
      triggers additional anti-dilution protection for the warrants still held by
      the
      former convertible debt holders. If the Claim figure were to be upheld, a
      consideration of $0.02 per share would result in the required issuance of
      approximately 40,000,000 additional common shares and common share equivalents,
      representing approximately 20% of the current issued and outstanding share
      amount. The Company believes the Claim has no merit and has not recorded a
      liability. The Company has retained legal counsel and intends to vigorously
      defend its position. If the Company were to lose the Claim, this would result
      in
      substantial dilution of your equity interests.





OUR
      TITLE
      11 PROCEEDINGS MAY RESULT IN A NEGATIVE PUBLIC PERCEPTION OF US THAT MAY
      ADVERSELY AFFECT OUR RELATIONSHIPS WITH CUSTOMERS, AS WELL AS OUR BUSINESS,
      RESULTS OF OPERATIONS AND FINANCIAL CONDITION.





Although
      our plan of reorganization was confirmed by the Bankruptcy Court and we have
      exited bankruptcy, our Title 11 filing may hinder our ongoing business
      activities and our ability to operate, fund and execute our business plan
      by:




(i)
      impairing relations with existing and potential customers;




(ii)
      negatively impacting our ability to attract, retain and compensate key
      executives and associates and to retain employees generally;




(iii)
      limiting our ability to obtain additional funding; and




(iv)
      impairing present and future relationships with strategic partners.





**Risks
      Related 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.




22




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 $2.22 to a low of $0.76. Fluctuations in the
      trading price or liquidity of our common stock may adversely affect our ability
      to raise capital through future equity financings.





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, 2007, 55,798,262 Common Shares are issuable upon exercise of all
      outstanding options, warrants and conversion of convertible notes for less
      than
      the market price of $1.86 per share which is significantly more than our average
      daily volume of stock traded on the public markets. Full exercise and conversion
      of these below market shares would result in us receiving cash proceeds of
      $52,056,085 and would increase the outstanding common shares by 25.0% to
      approximately 277,794,000 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 depress the prevailing 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;




23




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




(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 ACCC conductor demand brought on by
      excess conductor inventory and lower average selling prices for ACCC 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.





**ITEM
      1B. UNRESOLVED STAFF COMMENTS**




None.





**ITEM
      2 - PROPERTIES**





We
      do not
      own any real estate. We lease operations facilities in Irvine, California
      and Lubeck, Germany.





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 at $48,817
      per month.




**ITEM
      3 - LEGAL PROCEEDINGS**





The
      following are legal proceedings we are currently involved in or resolved during
      the fiscal year ended September 30, 2007.




Enable
      Growth Partners et.al v. 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.
      The Company represents that the market value on the date of the issuance of
      $1.06 was equal to the fair value of the consideration. Enable alleges that
      the
      fair value of the consideration was approximately $0.02 per share and thereby
      triggers additional anti-dilution protection for the warrants still held by
      the
      former convertible debt holders. If the Claim figure were to be upheld, a
      consideration of $0.02 per share would result in the required issuance of
      approximately 40,000,000 additional common shares and common share equivalents,
      representing approximately 20% of the current issued and outstanding share
      amount and further trigger additional anti-dilution for subsequent financing
      rounds resulting in further warrant price reductions and reductions of existing
      conversion prices for existing convertible debt. The Company believes the Claim
      has no merit and has not recorded a liability. The Company promptly filed a
      claim under its E&O insurance policy to cover potential damages and legal
      costs, retained legal counsel and intends to vigorously defend its position.
      On
      July 11, 2007 the Company filed a motion to dismiss the claim. On July 31,
      2007
      Enable filed an opposition to the motion to dismiss. On July 31, 2007 the
      Company received confirmation that the matter is covered under our primary
      E&O policy of $5,000,000. Coverage is subject to a $200,000 retention for
      legal fees. Amounts in excess of this up to our policy limits are covered.
      On
      August 28, 2007 we requested a stay of discovery until oral arguments were
      heard
      on the motion to dismiss and this stay was granted on September 20, 2007. On
      November 7, 2007 oral arguments were heard on the motion to dismiss and the
      presiding judge reserved decision on the motion, extended our stay of discovery,
      and did not provide guidance on the timing of his decision regarding the motion
      to dismiss. No additional hearings are scheduled in this matter at this
      time.




24




FKI
      Companies v. DeWind




On
      May 3,
      2007,  the Company and certain of its wind segment subsidiaries (hereafter
      referred to as “DeWind”) entered into a settlement agreement with FKI
      Engineering Ltd., FKI plc, and Brush Electrical Machines Ltd (collectively
      “FKI”). Under the terms of the agreement, DeWind and FKI agreed to take all
      necessary steps to effect a stay of all of the disputes listed below in A and
      B.
      effective until September 15, 2007 or other such date as the parties agree
      to in
      writing in order to allow sufficient time to effect the settlement
      agreement.  As part of the settlement agreement, the parties have agreed to
      use their best efforts to cause or procure the auditors of a German subsidiary
      of the Company to complete their audit of such German subsidiary’s statutory
      accounts for the fiscal years ending March 31, 2003, 2004, and 2005. It is
      expected that as part of the process of the completion of such audits, the
      auditors will identify any issues relating to the capital reserve accounts
      of
      the German subsidiary that are the subject of the disputes listed in A.2 below
      and the counterclaim listed in A.1.b&c below.  The DeWind and FKI
      parties have further agreed as part of the settlement agreement that if further
      assurance is required on possible legal issues regarding the German subsidiary’s
      capital structure and / or in relation to payments made into and / or out of
      the
      capital reserve account, then the legal counsel of DeWind and FKI shall meet
      with a view to preparing a mutually acceptable statement regarding the capital
      account or hire an independent reputable and suitably experienced German law
      firm to prepare the statement that sets out the capital reserve accounts issues.




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.   Assuming DeWind’s satisfaction with the statement referred
        to above, in May, 2007, DeWind agreed to make payments totaling 1,500,000
        Euros
        ($2,128,000 at September 30, 2007 exchange rates) in two equal installments,
        one
        within seven days after the agreed upon capital account statements have been
        issued and one 90 days after the first installment.   These payments
        shall serve to settle all remaining claims currently existing between FKI
        and
        DeWind.  In the event that the auditors cannot complete their audit due to
        issues relating to the capital account of the German subsidiary or in the
        event
        that no statement as referred to above, and if required, is forthcoming,
        then
        the payments referred to above will not be made and the German subsidiary
        will
        have to pursue litigation to correct discrepancies in its capital reserve
        accounts. During the quarter ended March 31, 2007, since the balance due
        was
        probable and reasonably estimable, the Company recorded a litigation settlement
        accrual under the guidance of SFAS 5 and expensed the accrual to other expense
        in the statement of operations of 1,452,000 Euros ($1,936,000 at March 31,
        2007
        exchange rates) to properly accrue for the settlement balance of 1,500,000
        Euros. Between May, 2007 and November, 2007 work was performed on the statutory
        audits which have not been completed pending resolution of the capital accounts
        issue.
 
 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 described below in
        A.1
        and the Brush claim described in B below. FKI received approval of a summary
        judgment on their positions consisting of a net judgment of 1,415,000 Euros
        on
        the FKI bond call claim and 650,000 Euros for the Brush claim plus net interest
        and costs of approximately 181,000 Euros for a total judgment of approximately
        2,246,000 Euros ($3,290,000 at December 7, 2007 exchange rates). DeWind may
        either appeal the summary judgments within 28 days or is obligated to pay
        50% of
        the balances due within 14 days of the date of the summary judgment. Subsequent
        to the hearing, FKI and DeWind agreed to meet in January, 2008 to resolve
        all
        differences related to the FKI bond claim, the Brush Claim, and the Capital
        Accounts claim. During the quarter ended September 30, 2007 DeWind accrued
        an
        additional 514,000 Euros in addition to the 1,500,000 Euros already accrued
        to
        reflect an additional estimate of the amounts payable under the FKI and Brush
        claims and recorded 232,000 Euros into the December, 2007 period expense.
        No
        amount was recorded related to the Capital Accounts counter-claim since it
        is
        not reasonably estimable at this time. DeWind is obligated to pay 50% of
        the
        summary judgment within 14 days of the summary judgment date or to file for
        an
        appeal within 28 days of the summary judgment date in which case a payment
        stay
        is in effect. We are also seeking a payment stay with FKI pending the January,
        2008 settlement discussions with FKI relating to the German Capital account
        claim described in A.2 below.


**A.**  **FKI
      Engineering Ltd. and FKI plc. ("The FKI Companies”) v. DeWind Holdings Ltd and
      DeWind GmbH; and DeWind GmbH v. FKI Engineering Ltd.**





There
      are
      two related legal actions against subsidiaries of the Company: the first action
      is by FKI Engineering and FKI plc commenced in England against DeWind Holdings
      Ltd and DeWind GmbH (“first action”) and the second action is by DeWind GmbH
      against FKI Engineering Ltd commenced in Germany (“second action”).





1.
      FKI
      Engineering Ltd. and FKI plc. v. DeWind Holdings Ltd and DeWind
      GmbH





On
      July
      6, 2006 FKI Engineering Ltd. and FKI plc. (The “FKI Companies”) filed a suit
      with the High Court of Justice, Queen’s Bench Division, and Commercial Court,
      Royal Court of Justice in England against both DeWind Holdings Ltd. and DeWind
      GmbH claiming as follows:


a.
      FKI
      Engineering Ltd. claims against DeWind Holdings Ltd.: (1) $2,113,555, further
      or
      alternatively damages for breach of contract; and (2) Interest in the amount
      of
      $112,355;




25




b.
      FKI
      Engineering Ltd. and FKI plc claim against DeWind GmbH: (1) a declaration that
      neither FKI Engineering Ltd. nor FKI plc is liable to DeWind GmbH as set out
      in
      the Draft Proceedings or at all; (2) damages; (3) a declaration that FKI Ltd.
      and/or FKI plc would be entitled to repayment upon demand from DeWind GmbH
      of
      any amount which they may be ordered to pay to DeWind GmbH by reason of the
      matters set out in the second action commenced by DeWind GmbH in Germany as
      described below) or otherwise; and finally,


c.
      FKI
      Engineering Ltd. further claims against DeWind Holdings Ltd.: (1) damages,
      alternatively payment of $72,095,285; and (2) interest to be
      assessed.


d.
      On
      September 22, 2006 DeWind Holdings Ltd. filed a counterclaim claiming against
      FKI Engineering Ltd. as follows: (1) payment of $430,000; alternatively damages
      for breach of contract; (2) contractual interest; alternatively statutory
      interest to be assessed.





In
      formulating the claims mentioned under letter “b.” above, the FKI Companies are
      seeking a negative declaratory judgment against DeWind GmbH in connection with
      the claims delivered by DeWind GmbH against FKI Engineering Ltd, that are now
      the subject of the second action filed by DeWind GmbH against FKI Engineering
      Ltd in Lübeck Germany. This action is further described below. The FKI Companies
      are seeking declaration that DeWind GmbH has no claims against them out of
      capital reserve agreements or unlawful repayments. Furthermore, the FKI
      Companies seek declaration that any payment obligations towards DeWind GmbH
      would result in a claim of repayment of the FKI Companies against DeWind GmbH
      in
      the same amount. In this connection, the Company has contested the
      jurisdictional competency of the English court since it is not apparent that
      it
      does have jurisdiction according to Art. 2 et seqq. and Art. 6 Nr. 1 of the
      European Council Regulation (EC) No. 44/2001.





The
      claims mentioned under letter “c.” above are contingent on the finding that the
      claims that are now the subject of the above mentioned second action filed
      by
      DeWind GmbH against FKI Engineering Ltd in Lübeck, Germany for payment of $95.8
      million, as further described below, are valid.





The
      counterclaim mentioned under letter “d.” above is based on the argument that FKI
      Engineering Ltd. has failed to pay DeWind Holdings Ltd. the sum of $430,000
      although it was obliged to do so under the SSA, by reason whereof DeWind
      Holdings Ltd. has suffered loss and damage in such sum.





In
      respect of all claims mentioned, DeWind GmbH and DeWind Holdings Ltd. have
      filed
      their defense. The FKI Companies, in turn, have filed and served a Reply to
      Defense and a Defense to the counterclaim. From December 11, 2006 until December
      13, 2006, an oral hearing was held in front of the English High Court regarding
      the competency of the English court to hear the cases. On January 25, 2007
      the
      High Court rendered a judgment holding that it had competence to hear also
      the
      claim against DeWind GmbH. DeWind GmbH sought leave to appeal this decision
      and
      put its submissions in writing by February 8, 2007. The High Court furthermore
      held that DeWind GmbH had to pay a maximum of 90 % of FKI's costs of the
      application contesting jurisdiction. On December 7, 2007, a summary judgment
      was
      issued as described above.





2.
      DeWind GmbH v. FKI Engineering Ltd.





On
      July
      20, 2006 DeWind GmbH filed a claim against FKI Engineering Ltd. (with FKI plc
      being a “third party noticed”) at the District Court of Lübeck, Germany seeking
      that: a. FKI Engineering Ltd. shall be ordered to pay to DeWind GmbH the sum
      of
      $72,525,350; b. FKI Engineering Ltd. shall be ordered to pay to DeWind GmbH
      interest on the above mentioned sum of a value of 5 per cent point above the
      respective base lending rate since the pending of the action; and c. it shall
      be
      declared that FKI Engineering Ltd. has the obligation to refund possible taxes
      to DeWind GmbH, which may be evaluated against DeWind GmbH, if the tax
      authorities deem the aforementioned claim for payment as extraordinary gains
      liable to tax, which cannot be settled with DeWind’s accumulated
      deficit.





The
      claim
      was filed based on a review of DeWind GmbH’s March 31, 2006 year end audit which
      indicated that FKI Engineering Ltd. as a former shareholder of DeWind GmbH
      had
      not duly paid capital reserves in the amount of the claim. The Company asserts
      that FKI either did not pay the capital reserves as in accordance with the
      Capital Reserve Agreement signed pursuant to the acquisition of DeWind by EU
      Energy in July, 2005 or had, after receipt of money by DeWind GmbH, immediately
      claimed the funds back on the grounds of undefined loans. Such practices are
      illegal under German law. The Company further asserts that loan contracts of
      this magnitude were never concluded between DeWind GmbH and FKI Engineering
      Ltd.
      On September 12, 2006 FKI Engineering Ltd. filed its acknowledgement of defense
      and filed its detailed statement of defense during the quarter ended March
      31,
      2007. Settlement discussions were held in November, 2007 and are scheduled
      to
      continue in January, 2008. A hearing is scheduled for February, 2008.





**B.**  **Brush
      Electrical Machines Ltd. v. DeWind GmbH**





On
      October 6, 2006, Brush Electrical Machines Ltd., an FKI Engineering Ltd.
      affiliate, served a notice of an action with the High Court of Justice, Queen’s
      Bench Division, Commercial Court, Royal Court of Justice   in England on
      DeWind GmbH. According to this notice of action, Brush is claiming payment
      of an
      amount of GBP 692,438 (approximately $1.36 million at December 31, 2006 exchange
      rates) from DeWind GmbH. The claim is based on an alleged breach of contract
      with regard to an agreement between the parties dated 30 June 2005 concerning
      the asset transfer to DeWind GmbH resulting from the sale of DeWind UK by
      agreement dated July 4, 2005 and/or a further agreement concluded on 13 July
      2005. The Company received the particulars of this claim on November 24, 2006.
      On January 11, 2007 DeWind GmbH filed its defense and a contingent counterclaim
      for damages. In the defense, DeWind GmbH admitted to owe an amount of at least
€
143,000 ($184,755) to Brush and paid this sum in January, 2007. On December
      7,
      2007, a summary judgment was issued as described above.




26




**C.**  **Zephyr
      GmbH & Co. KG v. DeWind GmbH**





On
      January 06, 2006 Zephyr filed a suit against DeWind GmbH with the District
      Court
      of Düsseldorf, Germany for payment of an amount of $1,300,533 plus interest
      based on the argument that DeWind GmbH had allegedly failed to comply with
      a
      guarantee of availability under a turbine sales contract. Furthermore, Zephyr
      sought a declarative judgment that DeWind GmbH had to come up for a potential
      purchase tax obligation in an amount of $208,085. On August 08, 2006, the
      District Court rendered a judgment by default against Zephyr dismissing the
      case. Zephyr filed an objection against this judgment on August 29, 2006. DeWind
      GmbH responded by filing a written pleading on October 04, 2006. A
      hearing
      is schedule for March 4, 2008. The
      Company has fully reserved net receivables of $914,690 in respect of this
      dispute and has assumed that the $720,590 cash paid to Zephyr as a result of
      their calling of performance bonds will not be recovered





**ITEM
      4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**





No
      matters were submitted to a vote of our security holders during the fourth
      quarter of our fiscal year ended September 30, 2007.




**PART
      II**





**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 2006/2005**





HIGH
            LOWDecember
                31, 2005
            $2.11
            $1.08March
                31, 2006
            $2.11
            $0.82June
                30, 2006
            $1.61
            $0.75September
                30, 2006
            $1.42
            $0.72





These
      quotations reflect inter-dealer prices, without retail mark-up, mark-down or
      commission, and may not represent actual transactions. As of November 30, 2007,
      there were approximately 540 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
      of Unregistered Securities**




On
        December 12, 2007, the Company issued 3,161,423 shares of its common stock
        for
        cash exercises of a like number of common stock warrants, as follows. A total
        of
        757,576 shares of common stock, registered for resale under a Form S-3, were
        issued to one accredited investor for warrants exercised for cash at an exercise
        price of $1.39 per warrant for total proceeds of $1,053,030. The warrants
        were
        originally issued in June, 2007 as part of the June, 2007 Common Stock Private
        Placement. A total of 2,403,847 shares of common stock, registered for resale
        under a Form S-3, were issued to one accredited investor for warrants exercised
        for cash at an exercise price of $1.11 per warrant for total proceeds of
        $2,668,270. The warrants were originally issued in February, 2007 as part
        of the
        February, 2007 Convertible Debenture Placement.
 
 We
        relied
        upon the exemption from registration as set forth in Section 4(2) of the
        Securities Act of 1933, as amended (the "Securities Act"), for the issuance
        of
        these securities. All of the recipients took their securities for investment
        purposes without a view to distribution and had access to information concerning
        the Company and its business prospects, as required by the Securities Act.
        In
        addition, there was no general solicitation or advertising for the acquisition
        of these securities.




27


**ITEM
        6 - SELECTED FINANCIAL DATA**
  **SELECTED
        FINANCIAL 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, 2007,
      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 dollars)
                
                Year
                    Ended September 30,2003
                
                2004*
                
                2005
                
                2006
                
                2007Statement
                    of Operations Data
                
                
                
                RestatedTotal
                    Revenue
                
                
                --
                
                $
                2,500,000
                
                $
                1,008,970
                
                
                10,135,314
                
                
                40,778,466Cost
                    of Revenues
                
                
                --
                
                
                314,548
                
                
                650,563
                
                
                10,379,039
                
                
                42,920,732Gross
                    Margin
                
                
                --
                
                
                2,185,452
                
                
                358,407
                
                
                (243,725
                )
                
                (2,142,266
                )Operating Expenses
                
                
                6,645,752
                
                
                15,748,802
                
                
                17,063,288
                
                
                17,734,863
                
                
                31,499,588Operating
                    income (loss)
                
                
                (6,645,752
                )
                
                (13,563,350
                )
                
                (16,704,881
                )
                
                (17,978,588
                )
                
                (33,641,854
                )Interest
                    expense, net of Interest income
                
                
                --
                
                
                (395,001
                )
                
                (2,527,280
                )
                
                (2,901,364
                )
                
                (6,883,040
                )Other
                    income (loss) **
                
                
                (105,500
                )
                
                (729,524
                )
                
                (20,931,246
                )
                
                (7,638,984
                )
                
                (4,005,014
                )Income/(loss)
                    before Income Taxes and cumulative effect of change in accounting
                    principles
                
                
                (6,751,252
                )
                
                (14,687,875
                )
                
                (40,163,407
                )
                
                (28,518,936
                )
                
                (44,529,908
                )Provision
                    for Taxes
                
                
                --
                
                
                --
                
                
                --
                
                
                4,256
                
                
                (46,426
                )Income/(loss)
                    before cumulative effect of change in accounting principles
                
                
                (6,751,252
                )
                
                (14,687,875
                )
                
                (40,163,407
                )
                
                (28,523,192
                )
                
                (44,483,482
                )Cumulative
                    effect of change in accounting
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --Net
                    income (loss)
                
                
                (6,751,252
                )
                
                (14,687,875
                )
                
                (40,163,407
                )
                
                (28,523,192
                )
                
                (44,483,482
                )Preferred
                    Stock Dividends
                
                
                20,000
                
                
                --
                
                
                --
                
                
                --
                
                
                --Net
                    Loss Available to Common Shareholders
                
                
                (6,771,252
                )
                
                (14,687,875
                )
                
                (40,163,407
                )
                
                (28,523,192
                )
                
                (44,483,482
                )Basic
                    net income per common share
                
                $
                (0.07
                )
                $
                (0.
                    14
                )
                $
                (0.35
                )
                $
                (0.20
                )
                $
                (0.24
                )





*
      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.





**
      For
      fiscal 2007; for this presentation, a $10,718 minority interest gain is included
      in other income.




28


At
                  September 30,(All
                  figures are presented in dollars)
              
              2003
              
              2004
              
              2005
              
              2006
              
              2007Audited
              
              Audited
              
              Audited
              
              Audited
              
              Audited(Restated)Balance
                  Sheet DataCash
                  and cash equivalents
              
              $
              1,130,498
              
              
              2,930,615
              
              $
              807,815
              
              $
              2,578,347
              
              $
              22,656,834Restricted
                  Cash
              
              
              --
              
              
              10,010,060
              
              
              --
              
              
              --
              
              
              --Accounts
                  Receivable, net of allowance
              
              
              --
              
              
              2,501,994
              
              
              56,998
              
              
              11,502,790
              
              
              10,618,544Inventory
              
              
              --
              
              
              788,799
              
              
              1,233,334
              
              
              23,891,867
              
              
              38,595,362Prepaid
                  expenses and other current assets
              
              
              79,036
              
              
              378,052
              
              
              395,978
              
              
              3,433,936
              
              
              3,242,234Investment
                  in Unconsolidated Subsidiary
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              2,109,394Property
                  and Equipment, net of accumulated depreciation and
                  amortization
              
              
              200,733
              
              
              1,253,123
              
              
              2,765,609
              
              
              4,714,084
              
              
              7,942,677Other
                  Assets
              
              
              9,000
              
              
              218,600
              
              
              511,581
              
              
              515,800
              
              
              305,466Goodwill
                  and Intangibles
              
              
              --
              
              
              --
              
              
              --
              
              
              49,616,000
              
              
              46,777,139Total
                  Assets
              
              
              1,419,267
              
              
              18,081,243
              
              
              5,771,315
              
              
              96,252,824
              
              
              132,247,650Liabilities
                  and Shareholders Equity (Deficiency)Accounts
                  Payable and other accrued liabilities
              
              
              969,307
              
              
              2,278,286
              
              
              4,700,553
              
              
              12,965,468
              
              
              20,645,794Accrued
                  legal settlement
              
              
              --
              
              
              --
              
              
              14,244,792
              
              
              --
              
              
              --Deferred
                  Revenues and Customer Advances
              
              
              --
              
              
              564,750
              
              
              621,748
              
              
              20,112,701
              
              
              36,717,471Warranty
                  Provision
              
              
              --
              
              
              --
              
              
              --
              
              
              14,654,204
              
              
              15,815,465Capital
                  Leases Payable
              
              
              
              
              
              734,382
              
              
              847,887
              
              
              397,688
              
              
              109,021Convertible
                  Debentures *
              
              
              
              
              
              8,901,106
              
              
              10,860,442
              
              
              6,023,250
              
              
              9,247,453Stockholders
                  Equity (Deficit)
              
              
              449,960
              
              
              5,602,719
              
              
              (25,504,107
              )
              
              42,099,513
              
              
              49,712,446Total
                  Liabilities and Shareholders Equity (Deficit)
              
              
              1,419,267
              
              
              18,081,243
              
              
              5,771,315
              
              
              96,252,824
              
              
              132,247,650Supplemental
                  information (unaudited)Working
                  capital (deficiency) **
              
              $
              240,227
              
              $
              14,267,312
              
              $
              (1,564,485
              )
              
              (3,277,190
              )
              
              3,444,697Total
                  long-term debt ***
              
              
              --
              
              
              9,635,488
              
              $
              11,708,329
              
              $
              6,420,938
              
              $
              9,247,453





*
      In
      2005, as a consequence of the Chapter 11 bankruptcy, the Company recorded a
      $4.80 million carrying value to the Convertible Debentures. In 2005, Debenture
      holders converted $4.14 million of their convertible debenture holdings into
      common stock of the company.





**
      Amounts payable in company stock are excluded from the calculation of working
      capital for fiscal year end September 30, 2005. Current portion of long term
      debt is excluded from the calculation of working capital for fiscal year end
      September 30, 2006.





***
      Substantially all of our long term debt at September 30, 2006 represents debt
      with maturities in August, 2007 and is classified as current on the September
      30, 2006 balance sheet. All of our long term debt at September 30, 2007
      represents debt with maturities in January, 2010 and is properly classified
      as
      long-term on the September 30, 2007 balance sheet.





29




**ITEM
      7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF
      OPERATION**





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, 2007 reflects the beginning
      of our successful execution on the Company’s growth and profitability strategy
      in the Cable segment and progress on our growth strategy for the Wind segment.
      During the year, we saw substantial revenue growth from $10.1 million in fiscal
      2006 to $40.7 million in fiscal 2007. The revenue growth was driven by an
      increase of $12.5 million to $16 million for the Cable segment and an increase
      by $17.8 million to $24.7 million for the Wind segment. We also improved our
      cash position, primarily the result of raising $22.8 million in February, 2007
      through a convertible debt offering and $25.0 million in June, 2007 through
      a
      private equity placement, ending the year with $22.6 million in cash and cash
      equivalents, an increase of over $20 million from September 30, 2006. Our
      order book increased substantially as we gained customer traction in our Cable
      segment and began the commercialization of our D8.2 wind turbine to over $50
      million in turbine and $13 million in cable order backlog at September
      30, 2007.





Our
      Wind
      segment progress was the result of the continued liquidation of the acquired
      turbine inventory and progress on sales of our new and existing turbines.
      Excluding service revenue of $7.1 million for 2007 and $3.5 million for 2006,
      our turbine revenues increased from $3.1 million in 2006 to $17.6 million in
      2007, the result of four quarters of operations compared to one quarter for
      2006
      and the push to complete the liquidation of the acquisition inventory. Included
      in our $50 million order backlog at September 30, 2007 are 21 turbines,
      including our first commercial D8.2 model shipped in September, 2007 and
      installed in November, 2007. We believe that we are executing on our market
      strategy for our next generation D8.2 model turbine and substantial progress
      was
      made in our turbine development and operations including advances in the
      development of the turbine supply chain and the successful technical
      certification of our D8.2 turbine by July, 2007.


DeWind
        has entered into non-binding term sheets for the sale of wind energy products
        with a potential purchaser based in the U.S. for 125 turbines, hubs, switch
        gears and other related products (“Turbine Products”). If the parties execute
        definitive agreements with DeWind, and each party performs all obligations
        in
        accordance with the term sheet provisions in a timely manner, then DeWind
        would
        receive revenues of approximately $10 million in 2008 and $240 million in
        2009
        from such customer. This customer also wishes to receive an option to purchase
        up to 375 additional turbines provided that it deposit 5% of the purchase
        price
        with DeWind by July 1, 2008, and that DeWind is not required to deliver more
        than 125 turbines per year.
 
 Another
        purchaser located in Brazil has entered into a non-binding term sheet with
        DeWind to purchase 76 Turbine Units. If the parties execute definitive
        agreements with DeWind, and each party performs all obligations in accordance
        with the term sheet provisions in a timely manner, then DeWind would receive
        revenues of $180 million in 2008 from the Brazilian customer.


Our
      Cable
      segment success was primarily due to the execution of a three year distribution
      agreement with Jiangsu Far East in China in January, 2007. This agreement calls
      for a minimum of 600 kilometers of ACCC product ordered per calendar quarter,
      in
      2007, representing wrapped ACCC product value of between $7 million and $12
      million per quarter. During the year we delivered 800 km of product to our
      Chinese partner representing revenues of $11.3 million and as of September
      30,
      2007 we have over 1,000 km on order backlog representing $13.1 million in
      revenues projected to be recognized in the December 2007 and March 2008
      quarters. On revenues of approximately 400 kilometers delivered to China, in
      the
      June quarter, the Cable segment generated operating profits during the June
      quarter of over $200,000 or nearly $600,000 excluding non cash charges. While
      the Cable segment did not generate operating profit for the September quarter,
      due primarily to timing of stranded conductor cable deliveries to our customer
      in China, our existing backlog and visibility into our December, 2007 quarter
      deliveries indicate that this segment will return to profitability for the
      December, 2007 quarter.





The
      Company made some key management changes during the year. In October, 2007,
      subsequent to year end, 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 April, 2007 Michael Porter, the Company’s President and
      formerly the majority owner of DeWind retired and entered into a consulting
      arrangement with the Company. The Company promoted Marv Sepe to Chief Operating
      Officer of the Company. Mr. Sepe joined the Company in 2006 as President of
      CTC
      Cable, a position that he continues to hold. In April, the Company
      promoted Domonic
      “DJ” Carneyto Chief Financial Officer. Mr. Carney joined the
      Company in 2005 and was formerly VP of Finance. During the year we also hired
      key additions to management in both the cable and wind businesses.




We
      have
      enhanced and improved our information technology systems supporting finance,
      sales, marketing and administration. We believe these infrastructure
      improvements will improve efficiency and enhance our compliance with the
      requirements of the Sarbanes Oxley Act and in August, 2007 we began an
      Information Technology update, expected to be completed in phases by April,
      2008. We are also in the process of transitioning the management of our turbine
      supply procurement systems to our TECO 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.





**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.




30




**RECENT
      DEVELOPMENTS**





Recorded
      product revenues for the fiscal year ended September 30, 2007 included sales
      from three D8 turbines and four D6 turbines representing $10.1 million in
      revenues and turbine parts totaling $7.6 million in revenues. Gross margin
      on
      the acquired turbines are reflective of costs accounted for under acquisition
      accounting which approximate liquidation value and which are not necessarily
      reflective of gross margins expected for future commercial turbine sales for
      turbines produced subsequent to the acquisition. 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. In
      June, 2007 we signed a contract to deliver five D8 turbines to a customer
      located in Chile and this customer ordered another 5 units in August, 2007.
      The
      turbines are scheduled for delivery in June, 2008 and will be produced out
      of
      the TECO facility in Texas. We received a cash deposit of $9.4 million upon
      the
      signature of this order, recorded to deferred revenues as of September 30,
      2007.
      With this order, we currently have firm turbine orders for approximately $40
      million representing deliveries of thirteen D8 units, one D8.2 unit, and seven
      D6 units primarily scheduled for delivery in fiscal 2008. We expect to deliver
      all of these turbines in fiscal 2008, primarily in the June and September
      quarters. We successfully completed the first commercial installation of the
      50
      Hz D8.2 in December, 2007 at a mining site situated at over 4,000 meters of
      elevation in Argentina. This customer is the same customer who ordered the
      ten
      D8 units for a site in Chile between June and August, 2007. In addition to
      our
      turbine backlog, we have orders for approximately $10 million for D6 parts
      that
      will be sold to existing DeWind customers and to our Chinese licensing
      relationships for a total September 30, 2007 firm order backlog figure of $50
      million.





Our
      revenues during the year ended September 30, 2007, consisted of sales of our
      turbine inventory acquired as part of the acquisition of EU Energy, now known
      as
      DeWind. Under US GAAP accounting rules, we are required to revalue acquired
      turbine inventory to “liquidation” value, which approximates sales value and
      which results in little or no income statement profit margin. Our revenues
      also
      included sales of parts for our D6 model to our licensees in China. The sale
      of
      these parts carried normal profit margin, but also provided strategic benefits
      by providing for much needed purchasing flow through our supply chain which
      in
      turn helped improve our relationships with our D8 and D8.2 supply chain vendors
      through increased purchasing activity. We do not expect that sales of turbine
      parts will be a substantial portion of our business past the middle of fiscal
      2008.





The
      $50
      million order book does not include the turbines for XRG Development Partners
      LLC. In March, 2007, we signed our first order for D8.2 turbines for delivery
      in
      the United States with XRG Development Partners LLC. The order was for 18 D8.2
      turbines at $2.2 million per turbine for a total order of approximately $40
      million and the contract called for payments of $6 million in April, 2007 and
      $4
      million in May, 2007. XRG did not make any payments and DeWind formally notified
      XRG of a payment default in May, 2007. Under the terms of the contract, after
      30
      days notice the contract could be cancelled by DeWind and contract was cancelled
      in June, 2007. The loss of this contract was a primary reason why the Company
      raised additional funds through the private equity placements in June. Beginning
      in March, 2007, upon signature of the contract, DeWind began to commit to the
      supply chain for these units and was required to spend a significant amount
      of
      working capital to ensure that sufficient materials would be delivered in time
      to complete the turbines for the XRG order.





Our
      operational focus for the DeWind segment during the year was to position
      ourselves to demonstrate and produce our next generation D8.2 wind turbine
      to
      fulfill expected orders from other wind farm operators and utilities for
      delivery in 2008 and beyond. The effort consisted of the installation and
      successful certification of our 50 hertz D8.2 prototype, building a 60 hertz
      D8.2 prototype for installation at a test site in Sweetwater, Texas, and working
      with our TECO Westinghouse strategic relationship, as well as our supply chain
      vendors, to secure adequate turbine parts for our D8.2, D8, and D6 turbines.





We
      are
      currently in significant negotiations with several parties for the sale of
      our
      projected 2008 capacity of 120 D8.2 turbines for deliveries expected to begin
      in
      March, 2008. To date, we have signed non-binding term sheets with these
      customers and have received cash hold fees that are returnable in the event
      that
      the turbine supply contracts are not finalized. Our current policy is that
      we do
      not consider a turbine order to be in backlog until we have received an initial
      cash payment, can verify funds payable to DeWind, and we have a signed, binding
      turbine supply agreement. If we successfully negotiate and execute these turbine
      supply agreements, the potential revenues for the turbines under non-binding
      term sheets for which we have received cash fees is in excess of $150 million
      for turbines to be delivered in calendar year 2008. We do not consider these
      turbines to be firm orders as yet since we have not received sufficient cash
      deposits and we do not have signed and enforceable turbine supply agreements.
      We
      have started full commercial production at the TECO Westinghouse facility in
      Round Rock, Texas in November, 2007 and we anticipate our initial D8.2
      deliveries to begin in March, 2008.





Prototypes:
      In January, 2007 we commissioned our D8.2 50 hertz prototype at the Cuxhaven,
      Germany, test site of the DEWI-Offshore Certification Centre. We conducted
      a
      battery of tests on the prototype in live, real world conditions culminating
      in
      our achievement of type certification in July, 2007. After the certification
      was
      achieved, we decommissioned the prototype and performed microscopic analyses
      of
      the key wear points on the new drive train to ensure that there were no abnormal
      wear patterns on the gearbox and the torque converter. No such wear patterns
      were found and in August, 2007, we re-commissioned the 50 hertz prototype and
      reconnected it to the electrical grid, where it continues to operate as
      designed. After the review of the 50 Hz prototype, in September, 2007 we began
      assembly of the 60 Hz prototype. The 60 Hz prototype was shipped to the TECO
      facility 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 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 is to be shipped to a test site in Sweetwater, Texas where
      it
      is to be installed on a tower and commissioned by January, 2008, where final
      tests prior to the expected D8.2 60 Hz model certifications. These
      certifications are expected by July, 2008.




31




Production
      and Supply Chain: At September 30, 2006 we had limited capacity for turbine
      production in our Lübeck, Germany facility and we realized that an alternative
      production solution was required for turbines for delivery outside of Europe.
      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. 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 4 turbine units
      per
      week for an estimated capacity of approximately 400 turbines per year; b) TECO
      will assist us in servicing our D8.2 units by leveraging their existing service
      teams, since they service large electrical generators worldwide and already
      have
      the infrastructure to service similar wind generators in the US; c) TECO will
      assist us in developing and optimizing our turbine supply chain, since they
      already have relationships with common parts suppliers and we expect that by
      the
      middle of 2008, TECO will manage a significant portion of our supply chain
      requirements. We expect to leverage their in place infrastructure and that
      this
      will allow for turbine parts cost savings and improved purchasing terms. During
      the year, we have worked actively to organize our supply chain to allow for
      an
      efficient hand-off to TECO once we receive our initial turbine orders. In
      November, 2007 TECO began initial commercial production of our
      turbines.





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 current 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.





To
      address the cash flow issues, our turbine purchase agreement contracts called
      Turbine Supply Agreements or TSAs are written to attempt to match the upfront
      cash payment to vendors with upfront cash payments from our customers.
      Historically, DeWind has received and we expect to receive advance payments
      consisting of 5-50% of the turbine price as a “hold” fee a year in advance of
      turbine delivery in addition to other payment advances made periodically up
      to
      and through turbine assembly that, including any hold fees, total 90 to 95%
      of
      the total aggregate sale price by the time the turbine is delivered to a wind
      farm site for commissioning. All advance payments are recorded as deferred
      revenues until the revenue cycle is complete, typically upon delivery or turbine
      commissioning, as dictated in the customer contract. Any costs associated with
      turbines built under the Turbine Supply Agreements are recorded to work in
      progress inventory and costed to product costs at the end of the revenue cycle.
      Finally, our customers typically hold back a retention amount of 5 to 10%
      payable within six to twelve months after commissioning to allow for any
      unforeseen turbine operational problems that arise and are typically found
      and
      resolved within three months after a turbine is commissioned.





Turbine
      Service, Turbine Warranties, and Related Turbine Costs





In
      fiscal
      2006, DeWind had owned 100% of EU Energy Service & Maintenance GmbH, the
      subsidiary which serviced all of DeWind’s turbines. In October, 2006 DeWind sold
      50% of EU Energy Service & Maintenance GmbH to Enertrag AG. Enertrag had
      previously been one of our largest turbine and service customers. In January,
      2007 we sold another 25.1% of the Service group reducing our ownership to 24.9%.
      The revised service joint venture was therefore controlled by Enertrag from
      January through the fiscal year end. The sale of the additional 25.1% in early
      January was required due the capital condition of the company prior to the
      closing our February, 2007 convertible debt offering. In January, 2007, a
      sizable capital infusion was required by the service entity and due to our
      limited capital reserves we were unable to provide this infusion without causing
      significant delays in the rapid expansion of our Cable segment. In exchange
      for
      the sale of the additional portion of the venture, we were not obligated to
      provide this infusion. Unfortunately, this resulted in the control of the
      venture shifting to our venture partner who managed the venture’s priorities
      differently than if under our control. As a result, our turbines under warranty
      did not receive the same level of service response time as in the past and
      delays in parts ordering related to our turbine resulted in delays in turbine
      servicing under warranty from January, 2007 onward. This in turn lead to greater
      than expected warranty related costs incurred and increased down time of
      turbines under warranty. Further, where in past periods our management and
      staff
      were focused on servicing our own turbines, staff with less training and
      knowledge of our turbines was assigned resulting in further service delays,
      improper service, and damage to one of our gearboxes for one of our D8 units
      under warranty. To compound the issue, the wind speeds during this time lead
      to
      significantly higher availability issues. While in the course of business we
      typically dispute all availability penalties, we are required to accrue the
      expense related to these penalties as they are incurred and based on our best
      estimate of the penalties. Lastly, we had warranty related claims against our
      turbines for certain parts that were provided in 2005 by vendors that had
      sub-warranties provided by these now insolvent vendors and which resulted in
      additional expense accruals. We have been addressing these issues aggressively
      since they came to management’s attention however; the impact to the cost of
      service was significant and is described in greater detail below. We expect
      these impacts to be limited in nature going forward and non-recurring in
      nature.





**CTC
      Cable Segment**


Located
      in Irvine, California with sales operations in Dallas, Texas; Lubeck, Germany;
      and Shanghai, China, 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 three cable manufacturers in Canada, Belgium, 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 Jiangsu
      Far East, 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.




32




**RECENT
      DEVELOPMENTS**





Our
      Cable
      segment ended fiscal 2007 with over $16 million in recorded revenues
      representing over 500% year over year revenue growth and over $13 million in
      order backlog for a total of $27.5 million in sales orders for the year. The
      increase represents a significant increase over fiscal 2006 orders of $4.5
      million including $3.0 million in revenues and $1.5 million in ending order
      backlog. Gross margins were 28.6% as compared to 21.7% margins in 2006. While
      the product mix in 2007 and 2006 was consistent and reflective of sales of
      primarily ACCC conductor, 2006 included a sale dictated by the bankruptcy court
      at margins below 10%.





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





Our
      greatest success during the year was the signing of a multi-year supply
      agreement with a distributor in China. In January, 2007 we executed a three
      year
      distribution agreement with Jiangsu New Far East Cable Corporation’s subsidiary,
      Far East Composite Technology Company, where they agreed to purchase of a
      minimum of 600 kilometers of ACCC conductor or ACCC core per quarter for year
      one with increases to 900 kilometers and 1,200 kilometers per quarter in years
      two and three. Expected revenues per quarter under the contract are dependent
      on
      the size of the conductor ordered, whether it is ACCC conductor or ACCC core,
      and the timing of delivery but we expect revenues to average between $7 and
      $12
      million per quarter for the first year of this arrangement for ACCC conductor
      sales and between $3.5 and 6 million per quarter for higher margin ACCC core
      sales. To date, Jiangsu has ordered over 2,000 km of ACCC product representing
      over $30 million in value. In November, 2007 Jiangsu successfully passed
      certification of several of the more common sizes of core and purchased their
      first order of ACCC core. We expect full certification in the March, 2008
      quarter after sufficient quality review procedures are completed.





We
      continue to aggressively sell and market our ACCC products in the US. In March,
      2007 we continued to leverage our internal sales efforts by announcing that
      we
      had signed sales representation agreements with three separate sales
      organizations which focus on selling products into the US transmission market.
      These agreements add an additional 21 sales people across 17 states and allow
      us
      to sell our product in areas that we previously had little or no sales coverage.
      We are beginning to see a greater volume of qualified sales leads from this
      relationship and we are working through the technical requirements, quotations,
      and proposal documents required to bid these projects.





In
      April,
      2007 we announced that our ACCC conductor’s design polynomials would be
      installed in the next version of PLS CADD transmission design software. This
      software is used by transmission design engineers during the design phase of
      transmission projects. The inclusion of ACCC conductors will allow our
      conductors to be compared directly with other conductor products during
      transmission line design.





At
      the
      end of the September, 2007 quarter we obtained real-world evidence on the
      efficiency of our ACCC conductor when one of our installations reported line
      loss savings of 32% as compared to identically sized ACSR conductor. This
      realization provided credibility to our message that ACCC is the most efficient
      conductor on the market. We are enhancing this marketing message by creating
      sales and marketing tools that demonstrate that our ACCC conductor can reduce
      the line losses typical of current ACSR conductors in transmission lines by
      over
      30%. We are also beginning to lobby governmental entities to present this
      message that ACCC conductors promotes greenhouse gas emission reduction by
      improving the power throughput of power lines since less generation is required
      to deliver the same amount of power to customers. We continue to focus on the
      engineering and design firms often responsible for the overall line design
      and
      component selection for transmission and electrical distribution projects.
      These
      firms are usually engaged by smaller utilities and providers that do not possess
      extensive in house engineering groups. We believe their understanding of the
      uses and benefits of ACCC conductor will provide a number of design-in
      opportunities. Our commitment to our new marketing approach was demonstrated
      by
      the hiring of our new Chief Strategy and Business Development Officer, Tom
      Smith, in November, 2007 who has experience and prior relationships with high
      level executives in the US Utility industry.





Elsewhere
      in the world, we developed relationships that we believe may lead to turn into
      conductor orders in fiscal 2008 and beyond. In October, 2006 we certified
      Lamifil N.V. as a strander. In April, 2007, we certified Midal in Bahrain as
      a
      certified conductor strander as our third supplier and successfully shipped
      ACCC
      conductor in April with this supplier. We believe that this relationship will
      eventually result in additional ACCC conductor sales in the Middle East’s hot
      climates due to ACCC conductor’s ability to operate more efficiently and at much
      higher temperatures than the ACSR alternative. In May, 2007 we announced that
      our ACCC conductor was successfully installed at the United Kingdom’s National
      Grid test facility in Nottingham, UK. We have had ACCC conductor under
      evaluation by the National Grid since 2005 and this installation represents
      an
      important milestone in the approval process in the UK. We are also actively
      marketing ACCC conductor in France, Eastern Europe, South America, Indonesia,
      India and Australia, with several projects quoted throughout the regions, as
      part of our strategy of partnering with key suppliers and engineering
      organizations that enjoy substantial market positions for bare overhead
      conductor.




The
      focus
      of our CTC cable operations during the year ending September 30, 2007, has
      been
      to increase production to manage the large influx of orders from our China
      agreement and to continue to manage our key materials suppliers. In November,
      2006 we obtained ISO 9001:2000 certification of our production plant in Irvine,
      California which demonstrates our commitment to product consistency and quality.
      We continue to work with our key carbon supplier and actively improve our
      relationship with that supplier and other carbon suppliers. We have received
      increased carbon allocations from our primary supplier during the year and
      we
      qualified a second carbon vendor during the year. . We currently have three
      stranding suppliers available and we are working with our distributor in China
      to begin the procedures required for them to become a certified strander so
      that
      there is additional stranding capacity.




33




**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, 2007, September 30, 2006, and September 30,
      2005




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





Cash
      used
      by operations during the year ended September 30, 2007 of $21,839,550 was
      primarily the result of net losses of $44.5 million, offset by non-cash
      charges of $13.1 million primarily non-cash interest of $5.4 million,
      depreciation and amortization of $3.1 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, Goodwill Impairment of $0.9 million amortization
      of
      prepaid expenses paid in cash of $0.4 million and warrant modification charges
      of $0.4 million; and net working capital increase of $9.6 million, in particular
      cash received for customer advances for DeWind turbines of $15.9 million and
      accounts payable increases of $11.4 million offset by net inventory purchases
      of
      $17.9 million and receivable increases of $1.5 million. Cash used by investing
      activities of $5,833,992 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 $47,752,029 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.





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 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 of
      that operating segment for 2008. Our stock price is volatile and we may be
      required to raise funds at prices below the current conversion prices of our
      two
      debenture issuances. Such a financing will 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, 2006 of $6,263,703 was
      primarily the result of operating losses of $28.5 million, offset by non-cash
      charges of $13.7 million including stock issuances for settlements of $3.6
      million, a carrying value adjustment to convertible debentures of $2.6 million,
      issuance of stock and warrants at fair value for services of $1.4 million,
      $1.4
      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 $8.6
      million, in particular cash received for customer advances for DeWind turbines
      of $7.6 million. Cash provided by investing activities of $398,859 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 $7,635,376 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.





Cash
      used
      by operations during the year ended September 30, 2005 of $12,449,211 was
      primarily the result of operating losses of $40.2 million, offset by non-cash
      charges of $26.6 million including litigation accruals payable in stock of
      $14.5
      million, carrying value adjustment to convertible debentures of $4.8 million,
      receivable reserve of $2.5 million, issuance of stock and warrants at fair
      value
      for services of $2.3 million and non cash interest expense of $1.3 million;
      and
      net working capital recovery of $1 million. Cash provided for by investing
      activities of  $8,387,578 was related to the purchase of computer hardware
      and software, and equipment put in service in anticipation of manufacturing
      activities and the release of $10 million of restricted cash in November, 2004.
      Cash provided by financing of $1,938,833 was primarily due to the cash proceeds
      from option and warrant exercises net of principal payments made on capital
      lease obligations.





Bankruptcy
      and related activity:





On
      April
      14, 2005, the Company was served with notice that pursuant to the Acquvest
      litigation, the Orange County Superior Court granted an attachment of the
      Company’s assets totaling $2.55 million. The Court had denied two prior
      applications by defendants and cross-complainants for Writs of Attachment.
      The
      Company immediately filed a Notice of Appeal on April 14, 2005 and an Emergency
      Writ on April 18, 2005 with the California Courts of Appeal to challenge the
      Court's decision to grant the Writs of Attachment and to stay the Writs of
      Attachment.





On
      May 5,
      2005 we filed for Chapter 11 bankruptcy protection, in part to release this
      cash
      so that we had it available for operations. In June, 2005, the entire $2.55
      million attached pursuant to the Acquvest litigation was released back to
      us.




34




Our
      reorganization plan was approved by the Court subsequent to year end, on October
      31, 2005. Our bankruptcy plan of reorganization had several impacts on our
      operating cash flows including:





i.
      the
      cash interest payment on our Debentures for interest accrued from April 1,
      2005
      through September 30, 2005 was paid in common stock in November, 2005. Prior
      to
      the bankruptcy filing we paid our debenture holders $225,000 per quarter in
      cash.





ii.
      any
      litigation related claims settled or resolved under the bankruptcy plan were
      paid in company common stock rather than in cash or property. As of September
      30, 2005, we had accrued $14,116,500 in accrued litigation paid in stock in
      full
      subsequent to year end.





iii.
      we
      had approximately $1,100,000 in accounts payable as of the date of the filing
      that was payable at the direction of the US Trustee and there were additional
      restrictions on cash payments while we were in bankruptcy
      proceedings.





iv.
      prior
      to the bankruptcy we were spending approximately $300,000 per month or
      approximately 30% of our negative operating cash flow for the quarter ending
      March 31, 2005 in legal fees, primarily for litigation related activities.
      The
      bankruptcy resulted in part in the acceleration of the settlement of
      substantially all of our litigation activity.




As
      of
      December 12, 2007 the Company had approximately $12.2 million in cash. We
      believe our cash position as of November 30, 2007 and expected cash flows
      from existing revenue orders will not be sufficient to fund operations for
      the
      next four calendar quarters. We anticipate that additional cash is needed either
      from a large wind turbine order or from a capital raise to fund operations
      beyond February, 2007 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.





**Results
      of Operations**





Comparison
      of fiscal 2007 to 2006 and 2005





For
      fiscal 2005, operating activity consisted of the development and sale of ACCC
      cable products. 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 2007 saw an entire
      year of DeWind activity as
      compared to one quarter from the July 3, 2006 acquisition date to September
      30,
      2006 for fiscal 2006.







September
                30, 2007
            
            September
                30, 2006
            
            Sep
                30, 2005Cable
                Segment
            DeWind
                Segment
            Total
            
            Cable
                Segment
            DeWind
                Segment
            Total
            
            TotalProduct
                Sales -Cable
            $
                16,008,198
            $
                --
            $
                16,008,198
            
            $
                3,004,436
            $
                --
            $
                3,004,436
            
            $
                1,008,970Product
                Sales - Turbines
            --
            17,646,195
            17,646,195
            
            --
            3,123,282
            3,123,282
            
            --Other
                Turbine Related Revenue
            --
            7,124,073
            7,124,073
            
            --
            3,457,596
            3,457,596
            
            --Consulting
            --
            --
            --
            
            550,000
            --
            550,000
            
            --Total
                Revenues
            16,008,198
            24,770,268
            40,778,466
            
            3,554,436
            6,580,878
            10,135,314
            
            1,008,970Cost
                of Sales - Cable
            $
                11,424,895
            $
                --
            $
                11,424,895
            
            $
                2,353,039
            $
                --
            $
                2,353,039
            
            $
                650,563Cost
                of Sales - Turbines
            --
            19,124,237
            19,124,237
            
            --
            3,074,471
            3,074,471
            
            --Cost
                of Sales - Turbine Service
            --
            12,371,600
            12,371,600
            
            --
            4,646,742
            4,646,742
            
            --Cost
                of Sales - Consulting
            --
            --
            --
            
            304,787
            --
            304,787
            
            --Total
                Cost of Sales
            11,424,895
            31,495,837
            42,920,732
            
            2,657,826
            7,721,213
            10,379,039
            
            650,563Gross
                Margin - Cable
            4,583,303
            --
            4,583,303
            
            651,397
            --
            651,397
            
            358,407Gross
                Margin % - Cable
            28.6%
            --
            28.6%
            
            21.7%
            --
            21.7%
            
            35.5%Gross
                Margin - Turbines
            --
            (1,478,042)
            (1,478,042)
            
            --
            48,811
            48,811
            
            --Gross
                Margin % - Turbines
            --
            -8.4%
            -8.4%
            
            --
            1.6%
            1.6%
            
            --Gross
                Margin - Turbine Service
            --
            (5,247,527)
            (5,247,527)
            
            --
            (1,189,146)
            (1,189,146)
            
            --Gross
                Margin % - Turbine Service
            --
            -73.7%
            -73.7%
            
            --
            -34.4%
            -34.4%
            
            --Gross
                Margin - Consulting
            --
            --
            --
            
            245,213
            --
            245,213
            
            --Gross
                Margin % - Consulting
            --
            --
            --
            
            44.6%
            --
            44.6%
            
            --Total
                Gross Margin
            $
                4,583,303
            $
                (6,725,569)
            $
                (2,142,266)
            
            $
                896,610
            $
                (1,140,335)
            $
                (243,725)
            
            $
                358,407Total
                Gross Margin %
            28.6%
            -27.2%
            -5.3%
            
            25.2%
            -17.3%
            -2.4%
            
            35.5%




35




PRODUCT
      REVENUES. Product revenues increased $27.5 million to $33.6 million in fiscal
      2007 and $5.1 million from $1.0 million in fiscal 2005 to $6.1 million in fiscal
      2006. The fiscal 2007 increase of revenue was due to a $13.0 million increase
      in
      ACCC conductor sales over 2006 and $14.5 million increase in wind turbine
      revenue, primarily due to the incorporation of an entire year of revenue bearing
      activity in fiscal 2007 from our DeWind segment 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. The fiscal 2006 increase was due to a $2.0 million increase in
      ACCC
      conductor sales over 2005 and $3.1 million due to turbine sales from our
      acquired wind subsidiary.





SERVICE
      REVENUES. Prior to our July, 2006 acquisition of EU Energy, we had no service
      revenues. In October, 2007 we sold 50% of the service subsidiary of DeWind
      into
      a joint venture, accounted for as a variable interest entity (VIE) and
      consolidated into operations through December, 2007 since we considered DeWind
      to be the primary beneficiary of the VIE. In January, we sold an additional
      25.1% of the VIE and no longer consolidated the operations of the VIE but rather
      accounted for the net profit of the entity under the equity method. Prior to
      the
      formation of the VIE, the service subsidiary provided services to DeWind
      customers only. As of the October, 2007 date, additional customers were serviced
      from the VIE partner’s customer base and all service was conducted by the
      service VIE. Fiscal 2007 revenues consist of the December, 2006 quarter of
      service in addition to the fiscal 2007 amortization of deferred maintenance
      revenue associate with free maintenance that was in deferred revenue as of
      the
      acquisition date. The increase of $3.6 million from $3.5 million in fiscal
      2006
      to $7.1 million in fiscal 2007 is due to the combination of the nearly doubling
      of the customer base for the December quarter and $1.6 million representing
      an
      entire year of amortized deferred maintenance. The fiscal 2006 increase from
      $0
      to $3.5 million was due to the acquisition of wind turbines under
      service.





CONSULTING
      REVENUES. Consulting revenues in 2006 represent $550,000 related to the City
      of
      Kingman contract as described above. There was no consulting revenue for 2005.
      No consulting contracts were completed during either the 2005 or 2007 fiscal
      years.





COST
      OF
      PRODUCT REVENUES. Cost of product revenues for 2005 of $651,000 represented
      material, labor, and overhead costs to produce and ship ACCC conductor products
      sold and recognized as revenues. For 2006 and 2007, our costs include the costs
      to produce and ship ACCC conductor products and costs to complete and ship
      turbines and turbine parts acquired through the DeWind acquisition. Fiscal
      2007
      costs increased $25.1 million from $5.4 million to $30.5 million due to
      increased costs related to the ACCC revenue increase and increased costs related
      to the turbine and turbine parts shipments. Fiscal 2006 costs increased $4.8
      million to $5.4 million due to the increase in ACCC revenues and the shipment
      of
      two EU turbines.





Cost
      of
      product revenues by segment for fiscal 2007 were $11.4 million for cable
      products and $19.1 million for turbine products representing gross margins
      of
      $4.6 million or 28.6% for cable products and ($1.5) million or (8.4%) for
      turbine products. Cost of product revenues by segment for fiscal 2006 were
      $2.4
      million for cable products and $3.1 million for turbine products representing
      gross margins of $0.6 million for cable products or 21.7% of revenues and
      $49,000 or 1.6% of revenues for turbine products.





Cable
      margins increased to 28.6% in 2007 from 21.7% due to a low revenue sale
      pertaining to a bankruptcy settlement recorded in 2006. Cable margins for 2007
      reflect primarily sales of stranded ACCC conductor. Wind turbine margins 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 service related costs along with the net impact of
      warranty and related retrofit and availability liability expense accruals.





Cost
        of
        service increased from $0 in fiscal 2005 to $4.6 million in fiscal 2006 and
        $12.4 million in fiscal 2007 and resulted in a negative gross margin of $1.2
        million and $5.2 million for 2006 and 2007, respectively. For 2006, included
        in
        the service revenue costs was approximately $0.4 million in additional
        availability reserves recorded during the quarter and fiscal year ending
        September 30, 2006 as the result of additional estimated availability penalties
        caused by a parts shortage for installed turbines remaining under warranty.
        The
        negative margin consisted of losses on service business of $0.8 million and
        the
        availability accrual of $0.4 million. The $5.2 million negative margin is
        reflective of losses on the service business of $0.8 million for the quarter
        that was consolidated, and additional warranty and availability expense of
        $4.4
        million. The additional warranty and availability provisions include $0.7
        in
        additional incurred availability penalties in excess of previously accrued
        balances amortized against expense in 2007, $0.7 million in accruals for
        an
        extended warranty option exercised by a customer in August, 2007, $0.9 million
        in additional future availability accruals due to an increase in the estimated
        rate used, $1.0 million in additional retrofit accruals related to older
        D6
        units, $1.0 million of additional warranty work required related to D6 gearboxes
        caused by the failure of a sub-warrantied vendor going out of business and
        $0.1
        million related to additional warranty costs related to the extended warranty
        of
        20 units in August, 2007. The rate increases for the availability estimate
        increase was caused by the increase in the availability penalties in 2007
        being
        higher on an average basis than in 2006 and which resulted from our poor
        service
        performance during fiscal 2007 for our legacy turbine install
        base.





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.




36




Cost
      of
      contract revenue since inception consisted of costs related to the single
      consulting contract that was completed during the year ending September 30,
      2004. No consulting contracts were completed during the year ended 2005 and
      accordingly, no costs of contract revenue were recorded for the respective
      quarters. Cost of contract revenue for fiscal 2006 represents costs capitalized
      as of September 30, 2005 related to the deferred revenue described
      above.





Operating
      Expenses:





September
                30, 2007
            
            September
                30, 2006
            
            Sep
                30, 2005Corporate
            Cable
            DeWind
            Total
            
            Corporate
            Cable
            DeWind
            Total
            
            TotalOfficer
                Compensation
            $
                1,864,369
            $
                --
            $
                --
            $
                1,864,369
            
            $
                566,593
            $
                --
            $
                --
            $
                566,293
            
            $
                246,838General
                and Administrative
            4,427,271
            1,649,995
            4,118,888
            10,196,154
            
            4,333,267
            1,735,654
            1,677,444
            7,746,365
            
            8,446,097Research
                and Development
            --
            3,661,138
            3,671,100
            7,332,238
            
            --
            4,290,670
            564,505
            4,855,175
            
            5,413,787Sales
                and Marketing
            --
            2,544,554
            6,418,839
            8,963,393
            
            --
            1,659,317
            920,767
            2,580,084
            
            1,121,789Depreciation
                and Amortization
            --
            798,821
            2,344,613
            3,143,434
            
            --
            793,219
            558,325
            1,351,544
            
            559,084Reorganization
                Expense and Fees
            --
            --
            --
            --
            
            635,402
            --
            --
            635,402
            
            1,275,693Total
                Operating Expenses
            $6,291,640
            $8,654,508
            $16,553,440
            $31,499,588
            
            $5,534,962
            $8,478,860
            $3,721,041
            $17,734,863
            
            $17,063,288





Our
      overall operating expenses increased by $13.4 million from $17.7 million in
      fiscal 2006 to $31.5 million for fiscal 2007. $12.8 million or 93% of the
      increase in operating expenses from prior fiscal year was primarily due to
      a
      full year of DeWind operations, compared to three months of operations since
      its
      acquisition in July 2006, combined with increased Corporate and Cable operating
      expenses of $757,000 and $176,000, respectively. The increase in Cable was
      due
      to increased sales and marketing expenses of $885,000, which contributed to
      our
      increased revenues, offset by expected decreases in G&A and R&D expenses
      of $86,000 and $630,000, respectively. The R&D expense decrease is due to
      increased allocation of labor and overhead from R&D expense in 2006 to
      production related expenses that were capitalized into inventory in 2007 and
      expensed into cost of sales. The increase in Corporate was due primarily to
      increased officer compensation of $1.3 million due to a greater number of
      officers and related SFAS 123R expenses, offset by the reorganization expense
      decrease of $635,000 from the prior year resolution of our litigation and
      bankruptcy action in the first fiscal quarter of 2006. During the year, we
      also
      eliminated some of the general and administrative overhead expenses of DeWind
      and increased our expenditures in research and development efforts relating
      to
      our D8.2 prototypes and future development efforts along with an increase in
      our
      sales and marketing efforts for our D8.2 products. Non-Cash
      Expenses consisting of depreciation and amortization and stock compensation
      charges was $5.5 million, $2.3 million, and $0.8 million for fiscal 2007, 2006,
      and 2005 respectively.





The
      increase from fiscal 2005 to fiscal 2006 was due to an increase of $3.7 million
      of the DeWind operating expenses, including $0.3 million of amortized
      intangibles, offset by a decrease in the Cable and corporate operating expenses
      of $3.1 million. The Cable and Corporate decrease was primarily due to a
      reduction of $2.5 million in bad debt expense, $2.0 million in combined
      litigation and bankruptcy related legal expenses, reflecting the impact of
      resolving our litigation and bankruptcy action in the first fiscal quarter
      of
      2006 and resulting in much lower legal spending than fiscal 2005, offset by
      an
      increase in SFAS 123R stock option compensation charges of $1.0 million,
      corporate G&A expenditures of $0.6 million, financing fees increase of $0.7
      million, and an expense decrease caused by the increase in the operating
      expenses allocated to cable inventory and cost of cable sold of $1.1
      million.





OFFICER
      COMPENSATION: Officer Compensation represents CTC Corporate expenses and
      consists primarily of salaries and the fair value of stock grants issued to
      officers of the Company. Officer compensation increased 235% or $1.3 million
      to
      $1,864,369 in fiscal 2007. The fiscal 2007 increase was due to increases of
      $684,000 in stock compensation expense and $614,000 in officer salaries
      resulting from an increase in the number of officers during the year. The fiscal
      2006 increase from 2005 was due to $189,000 in stock compensation expense and
      the addition of one officer in 2006.





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 32% or $2.4 million from
      $7.7 million in fiscal 2006 to $10.1 million in fiscal 2007. The increase was
      due almost entirely to a $2.4 million increase from DeWind resulting from a
      full
      year of DeWind G&A expenses, as reduced by our cost reduction efforts in the
      DeWind G&A cost structure.





The
      CTC
      Cable decrease from fiscal 2005 to fiscal 2006 is the net effect of a $2,500,000
      reduction in bad debt expense offset by the following increases: stock
      compensation charges of $560,000, Sarbanes Oxley related expense increase of
      $200,000, headcount related costs of $200,000, board of directors fees of
      $90,000, and expenses related to the Media Relations contract paid in stock
      of
      $290,000, and other corporate expense increase of $130,000.





37




RESEARCH
        AND DEVELOPMENT: Research
        and 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. R&D expenses
        increased 51% or $2.5 million from $4,855,175 in fiscal 2006 to $7,332,238
        in
        fiscal 2007, and decreased 10% or $559,000 from $5,413,787 in fiscal 2005
        to
        $4,855,175 in fiscal 2006 on a consolidated basis.





The
      fiscal 2007 increase is due to the combined effect of an increase of $3.1
      million related to the DeWind operations, offset by a $630,000 decrease in
      the
      CTC Cable product development expenses to $7,332,238. 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.





The
      fiscal 2006 decrease is the combined effect of an increase of $564,000 related
      to the DeWind operations and a $1,123,000 decrease in the CTC Cable product
      development expenses to $4,201,425. The CTC Cable decrease from fiscal 2005
      to
      fiscal 2006 is attributable to an increase in stock compensation costs of
      $184,000 offset by a decrease in employee headcount expense of $266,000, an
      increase in patent related expenses of $89,000 and a $1,100,000 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. During 2006, we were in commercial production for the entire year
      as
      compared to partial months during the last quarter of fiscal 2005.





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 247% or $6.4 million from $2,580,084 in 2006 to $8,963,393
      in
      2007. The increase was due to a full year of DeWind sales and marketing costs
      of
      $6.4 million and increased spending on CTC Cable sales of $885,000. The DeWind
      sales and marketing expenses for 2007 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 including $533,000
      of employee stock option expense, up $512,000 from prior year of $21,000. The
      fiscal 2006 increase from fiscal 2005 was due to DeWind sales and marketing
      costs of $920,000, together with increased CTC Cable spending over fiscal 2005
      of $537,000 from sales expansion efforts as mentioned above.





DEPRECIATION
      AND AMORTIZATION: Depreciation and amortization expense consists of depreciation
      related to the depreciation and amortization of the Company's capitalized
      assets. Depreciation expense increased $1.8 million or 133% from fiscal 2006
      to
      $3,143,434 in fiscal 2007. The increase was attributable almost entirely to
      the
      operations of DeWind, increasing $1.8 million from the three months of
      operations in fiscal 2006 to a full year’s expenses of $2,344,613 in fiscal
      2007, including $1,586,000 of amortization of acquired intangibles compared
      to
      $326,000 in prior year. The fiscal 2006 increase from fiscal 2005 was due to
      $558,000 of depreciation and amortization from DeWind operations, including
      $326,000 of amortization of acquired intangibles, and an increase in CTC Cable
      and Corporate assets.





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 had no similar costs in 2007. See also bankruptcy and litigation section
      below and the bankruptcy footnote disclosure.




INTEREST
      EXPENSE: Interest expense consists of interest paid and payable on the Company's
      capital lease obligations, the cash interest payable on 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 increase of 145% or $4.2 million from $2,931,184 in
      fiscal 2006 to $7,175,354 in fiscal 2007 was due to an increase of $2.6 million
      to $4,596,000 in non-cash amortization of debt discount and an increase of
      $1.6
      million to $2,436,000 for interest payable in cash. As of September 30, 2007
      our
      debt balance consisted of approximately $12.2 million principal at 6% interest,
      with $2.9 million of unamortized debt discounts, for a net debt balance of
      $9.2
      million. The increase of 13% or $344,000 from $2,587,272 in fiscal 2005 to
      $2,931,184 in fiscal 2006 was due to an increase of $281,000 to $1,895,000
      in
      non-cash amortization of debt discount and an increase of $63,000 to $1,036,000
      for interest payable in cash.





INTEREST
      INCOME Interest income increased from $29,820 in 2006 to $292,314 in 2007.
      The
      respective changes from year to year were due to the change in the underlying
      cash balances. Interest income decreased $30,000 from fiscal 2005 to $29,820
      in
      fiscal 2006 due to cash balance changes.





EXPENSE
      RELATED TO INDUCEMENT OF CONVERTIBLE DEBT Expenses related to inducement of
      convertible debt of $3,586,236 in fiscal 2006 consists of the fair value of
      the
      stock issued to settle certain issues including waiver of antidilutive 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 2005 or 2007 and
      we
      do not expect these expenses to recur.




38




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
      $323,000 from $696,350 in fiscal 2006 to $374,000 in fiscal 2007. The current
      fiscal year expense resulted from the events related to our February, 2007
      and
      June, 2007 financings, as described in Note 13 to the Financial Statements.
      The
      expense represents 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.
      In October, 2005, concurrent with the $6.0 million convertible debt offering,
      we
      reset the exercise price of the warrants associated with the $15 million
      convertible debt offering and recorded an expense of $388,691. 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 and recorded
      an expense of $307,659.





**REORGANIZATION
      EXPENSES AND ITEMS:**





Bankruptcy
      legal fees: Under bankruptcy accounting, we are required to segregate the legal
      and professional fee expenses related to the bankruptcy filing. We incurred
      $635,402 and $1,275,693 in bankruptcy related expenses for fiscal 2006 and
      2005
      respectively. We incurred no bankruptcy related professional fees in fiscal
      2007. All bankruptcy related fees were corporate in nature.





Carrying
      value adjustment of convertible debt: Under bankruptcy accounting, as of the
      date of the bankruptcy filing, all liabilities are required to be adjusted
      to
      their expected settlement amount. This treatment resulted in the acceleration
      to
      expense of our recorded debt discount for debt incurred or brought into our
      bankruptcy. During Fiscal 2006, we sold $6 million in convertible notes while
      still under Chapter 11 bankruptcy protection and recorded a discount of
      $1,834,092 to the October, 2005 notes and triggered an additional discount
      of
      $788,148 on the remaining principal balance of the $15M August, 2004 debentures.
      The combined $2,622,240 was immediately expensed under bankruptcy accounting.
      For Fiscal 2005, we determined on the bankruptcy filing date of May 5, 2005
      that
      we expected to pay the convertible debentures at 100% of their principal balance
      of $15,000,000 as of that date. We had previously recorded a discount to our
      $15
      million convertible debt in the amount of $6,364,063, increased this by
      $1,993,253 in November, 2004 as the result of the issuance of warrants to
      release restricted cash, and had amortized $265,169 in fiscal 2004 and
      $1,614,692 in fiscal 2005 through the bankruptcy filing date of May 5, 2005
      for
      a balance of $6,477,455 as of the bankruptcy date. We immediately expensed
      the
      $6,477,455 remaining balance to other expense on the date of the
      bankruptcy. We had no similar expenses in fiscal 2004.




BANKRUPTCY
      AND CLAIMS SETTLEMENTS:





We
      recorded $3,148,077 in expenses related to litigation settlements in fiscal
      2007
      consisting of a) $165,720 representing the fair value of 300,000 warrants issued
      to CVI related to the settlement of a dispute relating to antidilution rights
      on
      CVI’s March, 2006 Series A warrants as described in the Equity footnote and the
      accrual of 2.2 million Euros related to the FKI litigation. See the Litigation
      footnote for additional information regarding this accrual.





We
      recorded $802,000 in expenses related to bankruptcy and litigation settlements
      in fiscal 2006 including




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.





We
      recorded $14,464,417 in expenses related to such settlements as follows in
      fiscal 2005:





1)
      $12,675,000 recorded for an estimate of the Acquvest litigation settlement
      approved by the bankruptcy court subsequent to year end and paid in 6,500,000
      shares of Common Stock in fiscal 2006. The estimate was made using the closing
      market price of the company stock of $1.95 on the day prior to settlement
      date





2)
      $1,396,000 recorded for the settlement of the Ascendiant litigation consisting
      of $200,000 in cash and 650,000 shares of common stock valued at $1.84 per
      share, the closing market price on the trading day prior to the settlement
      date.





3)
      $45,500 recorded for the settlement of the Shields litigation consisting of
      25,000 shares of common stock valued at $1.82 per share, the closing market
      price on the trading day prior to the settlement date.





4)
      $100,000 recorded for the settlement of the J.P. Turner litigation settled
      and
      paid in May, 2005.




39







5)
      $128,292 recorded for the settlement of an employment related claim consisting
      of 87,301 shares of common stock valued at $1.47 per share, the closing market
      price on the trading day prior to the settlement date.





6)
      $65,000 recorded for the estimate of amounts payable on the two remaining
      unresolved claims consisting of one claim related to calendar year 2004 workers
      compensation insurance and one claim related to 2004 marketing consulting
      services.





7)
      $54,625 recorded for the estimate of a settlement of a dispute with a
      professional corporation to be settled upon the approval of the Bankruptcy
      Court, which was obtained in November, 2005, by extending by one year the
      options to purchase 150,000 shares, 50,000 options at $1.75 per share and
      100,000 options at $2.00 per share. The fair value estimate was calculated
      under
      SFAS 123R since the dispute was expected to be settled in fiscal 2006 and is
      described in greater detail in footnote 10.




GAIN
      IN
      UNCONSOLIDATED SUBSIDIARY Activity related to the Gain in unconsolidated
      subsidiary relates to DeWind’s share in the E Services joint venture. This
      venture was entered into at the beginning of 2007.




IMPAIRMENT
        ON ACQUIRED GOODWILL Impairment on acquired goodwill represents a write down
        of
        goodwill allocated to our service organization and service VIE in fiscal
        2007.
        No such impairment occurred for 2006 or 2005.


INCOME
      TAXES We made no provision for income taxes for the years ending September
      30,
      2007, 2006, and 2005 due to net losses incurred. 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, 2007, 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.





**Net
      Loss**


Our
      net
      loss increased to $44.5 million from $28.5 million for the years ended September
      30, 2007 and 2006 respectively. The net loss increase of $16.0 million is due
      to:





o
      A
      decrease in Gross Margin of $1.9 million from 2006 to 2007,





o
      An
      increase in Operating Expenses of $13.8 million from 2006 to 2007





o
      An
      increase in Other Expenses of $0.4 million from 2006 to 2007





Gross
      Margin: The Gross Margin decrease is due to the net effect of the increase
      in
      gross margin from the Cable segment of $3.7 million, the result of increased
      ACCC conductor margins due to higher revenue levels offset by the negative
      gross
      margin of $5.6 million, primarily $1.5 million in negative margin from legacy
      turbine sales, primarily due to inventory write-offs and negative $4.1 million
      from the service subsidiary of the Wind segment relating primarily to increased
      warranty and availability accruals for the European legacy turbine install
      base.





Our
      operating expenses increased by $13.8 million from $17.7 million in fiscal
      2006
      to $31.5 million for fiscal 2007. $12.8 million or 93% of the increase in
      operating expenses from prior fiscal year was primarily due to a full year
      of
      DeWind operations, compared to three months of operations since its acquisition
      in July 2006, the net result of an increase in R&D expenses and S&M
      expenses offset by a decrease in G&A expenses, combined with increased Cable
      and Corporate operating expenses of $757,000 and $176,000, respectively. The
      increase in Cable was due to increased S&M expenses of $885,000, which
      contributed to our increased revenues, offset by expected decreases in G&A
      and R&D expenses of $86,000 and $630,000, respectively. The increase in
      Corporate was due primarily to increased officer compensation of $1.3 million,
      offset by the reorganization expense decrease of $635,000 from the prior year
      resolution of our litigation and bankruptcy action in the first fiscal quarter
      of 2006.





Other
      Expenses: Other expenses increased by $0.4 million from $10.5 million in fiscal
      2006 to $10.9 million in fiscal 2007, due primarily to the net effect of a
      $3.8
      million decrease in non-recurring non-cash charges and an increase of $4.2
      million of interest expenses in 2007 over 2006 related to the $22.8 million
      convertible debt offering including accelerated interest expense due to
      conversions. In 2005, there were $14.4 million recorded for litigation and
      bankruptcy settlements, paid in stock in 2006 and $6.5 million in bankruptcy
      accounting driven adjustments to debt carrying value. In 2006 there was $0.8
      million in litigation and bankruptcy settlements, $2.6 million in bankruptcy
      accounting driven adjustments to debt carrying value, $3.6 million relating
      to
      stock issued to induce and settle convertible debt, and $0.7 million for expense
      related to warrant anti-dilution. In 2007, there was $3.1 million in litigation
      and bankruptcy settlements, $0.4 million for expense related to warrant
      anti-dilution, $0.9 million in goodwill impairment charges, $0.2 million profit
      from unconsolidated subsidiary accounted for under the equity
      method.





Our
      net
      loss decreased to $28.5 million from $40.2 million for the years ended September
      30, 2006 and 2005 respectively. The net loss decrease of $11.7 million is due
      to:





o
      A
      decrease in Gross Margin of $0.6 million from 2005 to 2006,





o
      An
      increase in Operating Expenses of $0.6 million from 2005 to 2006




40




o
      A
      decrease in Other Expenses of $12.9 million from 2005 to 2006





Gross
      Margin: The Gross Margin decrease is due to the net effect of the increase
      in
      gross margin from the Cable segment of $0.5 million, the result of increased
      $0.3 million in ACCC conductor margins and the one time consulting margin of
      $0.2 million offset by the negative gross margin of $1.1 million, primarily
      from
      the service subsidiary of the Wind segment.





Our
      operating expenses increased by $0.6 million from $17.1 million in fiscal 2005
      to $17.7 million for fiscal 2006. The increase was due to an increase of $3.7
      million of the DeWind operating expenses including $0.3 million in amortization
      of acquired intangibles, offset by a decrease in the Cable and corporate
      operating expenses of $3.1 million. The Cable and Corporate decrease was
      primarily due to a reduction of $2.5 million in bad debt expense, $2.0 million
      in combined litigation and bankruptcy related legal expenses, reflecting the
      impact of resolving our litigation and bankruptcy action in the first fiscal
      quarter of 2006 and resulting in much lower legal spending than fiscal 2005,
      offset by an increase in SFAS 123R stock option compensation charges of $1.0
      million, corporate G&A expenditures of $0.6 million, financing fees increase
      of $0.7 million, and an expense decrease caused by the increase in the operating
      expenses allocated to cable inventory and cost of cable sold of $1.1
      million.





Other
      Expenses: Our other expenses decreased by $12.9 million from $23.4 million
      to
      $10.5 million in fiscal 2006, due primarily to the net effect of non-recurring
      non-cash charges. In 2005, there were $14.4 million recorded for litigation
      and
      bankruptcy settlements, paid in stock in 2006 and $6.5 million in bankruptcy
      accounting driven adjustments to debt carrying value. In 2006 there was $0.8
      million in litigation and bankruptcy settlements, $2.6 million in bankruptcy
      accounting driven adjustments to debt carrying value, $3.6 million relating
      to
      stock issued to induce and settle convertible debt, and $0.7 million for expense
      related to warrant anti-dilution.





**CAPITAL
      EXPENDITURES**





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




**EFFECTS
      OF INFLATION**





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
      OF EXCHANGE RATE CHANGES**




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.





**OFF
      BALANCE SHEET ARRANGEMENTS**





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
      OBLIGATIONS AND COMMITMENTS**





The
      following table summarizes our contractual obligations (including interest
      expense) and commitments as of September 30, 2007:





Less
                than
            
            
            
            
            
            More
                thanContractual
                Obligations
            
            Total
            
            1
                Year
            
            1-3
                Years
            
            3-5
                Years
            
            5
                YearsLong-Term
                Debt Obligations
            
            $
            13,876,618
            
            $
            730,348
            
            
            13,146,270
            
            
            --
            
            
            --Capital
                Lease Obligations
            
            $
            113,860
            
            $
            113,860
            
            $
            --
            
            
            --
            
            
            --Operating
                Lease Obligations
            
            $
            4,173,711
            
            $
            1,637,416
            
            $
            2,531,768
            
            $
            4,527
            
            $
            --





41





**NEW
      ACCOUNTING PROUNOUNCEMENTS**




**Statement
      No. 159, “The Fair Value Option for Financial Assets and Financial
      Liabilities” (SFAS 159)** In
      February 2007, the FASB issued Statement No. 159 “The Fair Value
      Option for Financial Assets and Financial Liabilities” (SFAS 159).
      SFAS 159.permits entities to choose to measure certain financial
      instruments and certain other items at fair value for those financial assets
      and
      liabilities not currently required to be measured at fair value. SFAS 159
      is effective for financial statements issued for fiscal years beginning after
      November 15, 2007, and interim periods within those fiscal years. The
      adoption of SFAS No. 159 is not expected to have a material impact on our
      financial position, results of operations or cash flows.




**Statement
      No. 157, “Fair Value Measurements” (SFAS 157)** In
      September 2006, the FASB issued Statement No. 157, “Fair Value
      Measurements” (SFAS 157). SFAS 157 defines fair value, establishes a
      framework and gives guidance regarding the methods used for measuring fair
      value, and expands disclosures about fair value measurements. SFAS 157 is
      effective for financial statements issued for fiscal years beginning after
      November 15, 2007, and interim periods within those fiscal years. The
      adoption of SFAS No. 157 is not expected to have a material impact on our
      financial position, results of operations or cash flows.




**EITF
      Issue No. 06-6** *Debtor’s
      Accounting for a Modification (or Exchange) of Convertible Debt Instruments:*


In
      November, 2006, the Emerging Issues Task Force (EITF) approved EITF Issue No.
      06-6. EITF 06-6 addresses the issue of accounting for modifications made to
      convertible debt instruments, supersedes Issue No. 05-7 “Accounting for
      Modifications to Conversion Options Embedded in Debt Instruments and Related
      Issues,” clarifies the accounting approach required for such modifications and
      modifies guidance provided in EITF 96-19 “Debtor’s Accounting for a Modification
      or Exchange of Debt Instruments.” EITF 06-6 is effective for convertible debt
      instrument modifications made after November 29, 2006. We have used the guidance
      provided in EITF 06-6 and in the revised EITF 96-19 for our fiscal 2007
      modifications and will apply this guidance to any future modifications to our
      Convertible Debt instruments on a prospective basis.





**EITF
      Issue No. 06-7** *Issuer’s
      Accounting for a Previously Bifurcated Conversion Option in a Convertible Debt
      Instrument When the Conversion Option No Longer Meets the Bifurcation Criteria
      in FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging
      Activities”*


In
      November, 2006 the Emerging Issues Task Force (EITF) approved EITF Issue No.
      06-7. EITF 06-7 provides clarification and guidance for bifurcated conversion
      options in convertible debt instruments where the bifurcation criteria of SFAS
      133 are no longer met. EITF 06-7 is effective for changes to such criteria
      after
      November 29, 2006. We will use the guidance provided in EITF 06-7 on a
      prospective basis. The adoption of EITF 06-7 had no impact to our financial
      statements for the year ending September 30, 2007.





**EITF
      Issue No. 07-3** *,* " *Accounting
      for Advance Payments for Goods or Services to Be Used in Future Research and
      Development Activities* ."


In
      June
      2007, the EITF ratified EITF Issue No. 07-3 *,* " *Accounting
      for Advance Payments for Goods or Services to Be Used in Future Research and
      Development Activities* ."
       EITF 07-3 provides that nonrefundable advance payments made for goods or
      services to be used in future research and development activities should be
      deferred and capitalized until such time as the related goods or services are
      delivered or are performed, at which point the amounts would be recognized
      as an
      expense. This issue is effective for fiscal years beginning after December
      15,
      2007.  We are currently evaluating the potential impact these standards may
      have on our financial position and results of operations, but do not believe
      the
      impact will be material.





**FASB
      Interpretation No. 48** , *“Accounting
      for Uncertainty in Income Taxes.”*


In
      June
      2006, the FASB issued FASB Interpretation No. 48  (“FIN 48”), *“Accounting
      for Uncertainty in Income Taxes.”* This interpretation clarifies the accounting for uncertainty in income taxes
      recognized in an enterprise’s financial statements in accordance with SFAS No.
      109, *“Accounting
      for Income Taxes.”* This
      interpretation prescribes a recognition threshold and measurement attribute
      for
      the financial statement recognition and measurement of a tax position taken
      or
      expected to be taken in a tax return. FIN 48 will become effective for the
      Company in fiscal year 2008. Management of the Company does not expect the
      impact of this pronouncement to be material on the Company’s consolidated
      results of operations and financial condition.




**Staff
      Accounting Bulletin No. 108 (SAB 108)**


In
      September 2006, the Securities and Exchange Commission, or SEC, Staff issued
      Staff Accounting Bulletin No. 108 (SAB 108) addressing how the effects of
      prior-year uncorrected financial statement misstatements should be considered
      in
      current-year financial statements. SAB 108 requires registrants to quantify
      misstatements using both balance-sheet and income-statement approaches and
      to
      evaluate whether either approach results in quantifying an error that is
      material in light of relative quantitative and qualitative factors. SAB 108
      does
      not change the SEC staff's previous guidance in Staff Accounting Bulletin No.
      99
      on evaluating the materiality of misstatements.




42




SAB
      108
      addresses the mechanics of correcting misstatements that include the effects
      from prior years. Additionally, SAB 108 requires registrants to apply the new
      guidance for the first time that it identifies material errors in existence
      at
      the beginning of the first fiscal year ending after November 15, 2006 by
      correcting those errors through a one-time cumulative effect adjustment to
      beginning-of-year retained earnings. We do not anticipate the adoption of SAB
      108 to have a material effect on our financial position, results of operations
      or cash flows.





**ITEM
      7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      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, 2007 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, 2007, we had $22.7 million in 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.





43




**ITEM
      8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**




PageINDEPENDENT
                  REGISTERED PUBLIC ACCOUNTING FIRM REPORTS
              
              
              45Composite
                  Technology Corporation and Subsidiaries Consolidated Financial
                  StatementsConsolidated
                  Balance Sheets As of September 30, 2007 and September 30,
                  2006
              
              
              48Consolidated
                  Statements of Operations and Comprehensive Loss For the Years Ended
                  September 30, 2007, 2006, and 2005
              
              
              49Consolidated
                  Statements of Shareholder's Equity for the Years Ended September
                  30, 2007,
                  2006, and 2005
              
              
              51Consolidated
                  Statements of Cash Flows for the Years Ended September 30, 2007,
                  2006, and
                  2005
              
              
              52Supplemental
                  Schedule for Non Cash Financing Activities
              
              
              54Notes
                  to the Consolidated Financial Statements
              
              
              55





44




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




To
        the Board of Directors and Shareholders
 Composite
        Technology Corporation
 Irvine,
        California
 
 We
        have audited the consolidated balance sheets of Composite Technology Corporation
        and subsidiaries (collectively, the “Company”) as of September 30, 2007 and
        2006, 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, 2007. Our audits also included the financial
        statement schedule of the Company listed in Item 15(a). These financial
        statements and the 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, 2007 and 2006, and the results of its operations and its cash
        flows for each of the three years in the period ended September 30, 2007,
        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.
 
 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.
 
 We
        also have 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, 2007, based on criteria established
        in
        Internal Control—Integrated Framework issued by the Committee of Sponsoring
        Organizations of the Treadway Commission (COSO). Our report dated December
        13,
        2007 expressed an opinion that the Company had not maintained effective internal
        control over financial reporting as of September 30, 2007, based on criteria
        established in Internal Control—Integrated Framework issued by the Committee of
        Sponsoring Organizations of the Treadway Commission (COSO).
 
 /s/
        SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
 
 
 Singer
        Lewak Greenbaum and Goldstein LLP
 Irvine,
        California
 December
        13, 2007





45




**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’ (the “Company”)
        internal control over financial reporting as of September 30, 2007, based
        on
        criteria established in Internal Control—Integrated Framework issued by the
        Committee of Sponsoring Organizations of the Treadway Commission (COSO).
        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 (1) pertain
        to
        the maintenance of records that, in reasonable detail, accurately and fairly
        reflect the transactions and dispositions of the assets of the company; (2)
        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 (3) 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:
 
 **Entity
        level Processes and weaknesses**
 As
        of
        September 30, 2007, the following material weaknesses existed related to
        general
        processes and weaknesses for the entity taken as a whole:
 
 ·
            Inadequate
                segregation of duties, levels of staffing, and
                training. 
 ·
            The
                Company had a one member Audit Committee, a one member Compensation
                Committee, and had a designated financial expert on the Board of
                Directors
                since January of 2006. 
 ·
            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 the Company’s
        significant accounts and could result in a material misstatement to the
        Company’s 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. ITCs 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, 2007, a material weakness existed
        relating to the Company’s information technology general controls, including
        ineffective controls relating to:




46
 
 ·
              Access
                  to programs and data including (1) user administration, (2) application
                  and system configurations, and (3) periodic user access
                  validation
 **Inventory
          Process**
 As
          of
          September 30, 2007, the following material weaknesses existed related to
          ineffective controls over the Company’s inventory processes:
 
 ·
              Perpetual
                  Inventory records: Ineffective controls to (a) accurately record
                  turbine
                  parts and conductor raw materials inventory moved out of inventory
                  stores
                  and into service use or manufacturing production and later into
                  finished
                  goods, (b) accurately record manufacturing variances and (c) accurately
                  monitor offsite inventories. 
 **Procure
          to Pay Process**
 During
          the Company’s fiscal 2007 assessment of the Company’s procure to pay (cash
          payments and disbursements) cycle, 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, the following constitute a material
          weakness:
 
 ·
              An
                  effective purchasing function did not exist as of September 30,
                  2007.  ·
              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. 
 ·
              Lack
                  of segregation of duties between the purchasing and payable processing
                  functions. 
 ·
              Inadequate
                  vendor management duties and
                  responsibilities 
 ·
              Lack
                  of sufficient purchasing reports for management
                  review.  **The
          Company’s DeWind Subsidiary’s General Controls**
 
 As
          of
          September 30, 2007, the following material weaknesses existed related to
          the
          Company’s subsidiary, DeWind:
 ·
              The
                  Company did not have a sufficient number of accounting personnel
                  trained
                  in US Generally Accepted Accounting
                  Principles. 
 ·
              Reporting
                  key turbine warranty and turbine service related accounting and
                  operations
                  issues to management and finance staff on a timely basis, in a
                  consistent
                  report format, or properly, was inadequate, and resulted in the
                  over
                  reliance on high level detective controls and which may result
                  in future
                  material misstatements or a delay in timely financial reporting
                  if not
                  remedied. 
 These
          material weaknesses were considered in determining the nature, timing,
          and
          extent of audit tests applied in our audit of the consolidated balance
          sheets of
          the Company as of September 30, 2007, and the related consolidated statements
          of
          operations and comprehensive loss, shareholders’ deficit and cash flows for the
          year in the period ended September 30, 2007, and this report does not affect
          our
          report dated December 13, 2007 on those financial statements.
 
 In
          our opinion, because of the effect of the material weakness 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, 2007, based on criteria established in Internal Control—Integrated Framework
          issued by the Committee of Sponsoring Organizations of the Treadway Commission
          (COSO).
 
 /s/
          SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
 
 Singer
          Lewak Greenbaum and Goldstein LLP
 Irvine,
          California
 
 December
          13, 2007


47





**PART
      1 - FINANCIAL STATEMENTS**


**COMPOSITE
      TECHNOLOGY CORPORATION**


**AND
      SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**





September
                  30, 2007
              
              September
                  30, 2006ASSETSCURRENT
                  ASSETSCash
                  and Cash Equivalents
              
              $
              22,656,834
              
              $
              2,578,347Accounts
                  Receivable, current, net
              
              
              7,808,986
              
              
              9,473,863Inventory,
                  net
              
              
              38,595,362
              
              
              23,891,867Prepaid
                  Expenses and Other Current Assets
              
              
              3,242,234
              
              
              3,433,936Total
                  Current Assets
              
              $
              72,303,416
              
              $
              39,378,013Long
                  Term Trade Receivables
              
              
              2,809,558
              
              
              2,028,927Investment
                  in Unconsolidated Subsidiary
              
              
              2,109,394
              
              
              --Property
                  and Equipment, net
              
              
              7,942,677
              
              
              4,714,084Goodwill
                  and Intangible Assets
              
              
              46,777,139
              
              
              49,616,000Other
                  Assets
              
              
              305,466
              
              
              515,800TOTAL
                  ASSETS
              
              $
              132,247,650
              
              $
              96,252,824LIABILITIES
                  AND SHAREHOLDERS' EQUITYCURRENT
                  LIABILITIESAccounts
                  Payable and Other Accrued Liabilities
              
              $
              20,645,794
              
              $
              12,965,468Deferred
                  Revenues and Customer Advances
              
              
              35,581,067
              
              
              17,808,209Warranty
                  Provision
              
              
              12,522,837
              
              
              11,594,876Lease
                  Obligation - Current
              
              
              109,021
              
              
              286,650Current
                  Portion - Convertible Notes, net
              
              
              --
              
              
              6,023,250Total
                  Current Liabilities
              
              
              68,858,719
              
              
              48,678,453LONG
                  TERM LIABILITIESLong-Term
                  Portion of Deferred Revenues
              
              
              1,136,404
              
              
              2,304,492Long-Term
                  Portion of Warranty Provision
              
              
              3,292,628
              
              
              3,059,328Lease
                  Obligation - Long-Term
              
              
              --
              
              
              111,038Convertible
                  Notes - Long-Term, net
              
              
              9,247,453
              
              
              --Total
                  Long-Term Liabilities
              
              
              13,676,485
              
              
              5,474,858Total
                  Liabilities
              
              $
              82,535,204
              
              $
              54,153,311COMMITMENTS
                  AND CONTINGENCIESSHAREHOLDERS'
                  EQUITYCommon
                  Stock, $.001 par value 300,000,000 shares authorized 221,308,530
                  and
                  178,635,325 issued and outstanding
              
              
              221,308
              
              
              178,635Additional
                  Paid in Capital
              
              
              189,604,754
              
              
              137,461,330Subscription
                  Receivable
              
              
              --
              
              
              (378,000
              )Accumulated
                    Deficit
              
              
              (139,609,437
              )
              
              (95,125,955
              )Accumulated
                  Other Comprehensive Loss
              
              
              (504,179
              )
              
              (36,497
              )Total
                  Shareholders’ Equity
              
              
              49,712,446
              
              
              42,099,513TOTAL
                  LIABILITIES AND SHAREHOLDERS’ EQUITY
              
              $
              132,247,650
              
              $
              96,252,824





The
      accompanying notes are an integral part of these financial
      statements





48




**COMPOSITE
      TECHNOLOGY CORPORATION**


**AND
      SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS**





For
                the Years ended September 30,2007
            
            2006
            
            2005RevenueProduct
                Sales
            
            $
            33,654,393
            
            $
            6,127,718
            
            $
            1,008,970Service
                Revenue
            
            
            7,124,073
            
            
            3,457,596
            
            
            -Consulting
                Revenue
            
            
            -
            
            
            550,000
            
            
            -Total
                Revenue
            
            $
            40,778,466
            
            $
            10,135,314
            
            $
            1,008,970Cost
                of Product Sold
            
            
            30,549,132
            
            
            5,427,510
            
            
            650,563Cost
                of Service Revenue
            
            
            12,371,600
            
            
            4,646,742
            
            
            -Cost
                of Consulting Revenue
            
            
            -
            
            
            304,787
            
            
            -Gross Profit
                (Loss)
            
            $
            (2,142,266
            )
            $
            (243,725
            )
            $
            358,407OPERATING
                EXPENSESOfficer
                Compensation
            
            
            1,864,369
            
            
            566,293
            
            
            246,838General
                and Administrative
            
            
            10,196,154
            
            
            7,746,365
            
            
            8,446,097Research
                and Development
            
            
            7,332,238
            
            
            4,855,175
            
            
            5,413,787Sales
                and Marketing
            
            
            8,963,393
            
            
            2,580,084
            
            
            1,121,789Depreciation
                and Amortization
            
            
            3,143,434
            
            
            1,351,544
            
            
            559,084Reorganization
                Expense - Bankruptcy Legal Fees
            
            
            -
            
            
            635,402
            
            
            1,275,693Total
                Operating Expenses
            
            
            31,499,588
            
            
            17,734,863
            
            
            17,063,288LOSS
                FROM OPERATIONS
            
            $
            (33,641,854
            )
            $
            (17,978,588
            )
            $
            (16,704,881
            )OTHER
                INCOME / EXPENSEInterest
                Expense
            
            
            (7,175,354
            )
            
            (2,931,184
            )
            
            (2,587,272
            )Interest
                Income
            
            
            292,314
            
            
            29,820
            
            
            59,992Other
                Income
            
            
            269,892
            
            
            67,842
            
            
            10,626Expense
                related to Modification of Warrants due to Anti-Dilution
                Events
            
            
            (373,709
            )
            
            (696,350
            )
            
            -Expense
                related to Inducement of Convertible Debt
            
            
            -
            
            
            (3,586,236
            )
            
            -Bankruptcy
                and Claims Settlements
            
            
            (3,148,076
            )
            
            (802,000
            )
            
            (14,464,417
            )Gain
                in Unconsolidated Subsidiary
            
            
            167,856
            
            
            -
            
            
            -Impairment
              of Acquired Goodwill
            
            
            (931,695
            )
            
            --
            
            
            --Reorganization
                Item - adjustment to Carrying value of Convertible
                Debentures
            
            
            -
            
            
            (2,622,240
            )
            
            (6,477,455
            )Total
                Other Income / Expense
            
            $
            (10,898,772
            )
            $
            (10,540,348
            )
            $
            (23,458,526
            )Loss
                before Income Taxes
            
            $
            (44,540,626
            )
            $
            (28,518,936
            )
            $
            (40,163,407
            )Income
                Taxes
            
            
            (46,426
            )
            
            4,256
            
            
            --NET
                LOSS before Minority Interest
            
            $
            (44,494,200
            )
            $
            (28,523,192
            )
            $
            (40,163,407
            )Minority
                Interest in Consolidated Entity
            
            
            10,718
            
            
            --
            
            
            --NET
                LOSS
            
            $
            (44,483,482
            )
            $
            (28,523,192
            )
            $
            (40,163,407
            )OTHER
                COMPREHENSIVE LOSSForeign
                Currency Translation adjustment, net of tax of $0, $0, and
                $0
            
            
            (467,682
            )
            
            (36,497
            )
            
            --COMPREHENSIVE
                LOSS
            
            $
            (44,951,164
            )
            $
            (28,559,689
            )
            $
            (40,163,407
            )





49




**COMPOSITE
      TECHNOLOGY CORPORATION**


**AND
      SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS, CONT’D**




For
                  the years ended September 30,2007
              
              2006
              
              2005BASIC
                  AND DILUTED LOSS PER SHARELoss
                  per share
              
              
              ($0.24
              )
              
              ($0.20
              )
              
              ($0.35
              )TOTAL
                  BASIC AND DILUTED LOSS PER SHARE AVAILABLE TO COMMON
                  SHAREHOLDERS
              
              
              ($0.24
              )
              
              ($0.20
              )
              
              ($0.35
              )WEIGHTED-AVERAGE
                  COMMON SHARES OUTSTANDING
              
              
              189,683,876
              
              
              142,462,240
              
              
              114,384,274




The
      accompanying notes are an integral part of these financial
      statements





50




**COMPOSITE
      TECHNOLOGY CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENT OF SHAREHOLDERS’ EQUITY FOR**


**THE
      YEARS ENDED SEPTEMBER 30, 2007, 2006 and 2005**





**Common
                  Stock****Shares**
              
              **Amount**
              
              **Subscription
                  Receivable**
              
              **Additional
                  paid-in capital**
              
              **Accumulated**
                **Other
                  Comprehensive Loss**
              
              **Accumulated
                  deficit**
              
              **Total**Balance
                  at September 30, 2004
              
              
              110,841,320
              
              $
              110,841
              
              $
              --
              
              $
              31,931,234
              
              $
              --
              
              $
              (26,439,356
              )
              $
              5,602,719Issuance
                  of Common Stock forCash
                  pursuant to warrant exercises
              
              
              3,546,910
              
              $
              3,547
              
              $
              --
              
              $
              1,982,741
              
              $
              --
              
              $
              --
              
              $
              1,986,288Cash
                  pursuant to option exercises
              
              
              1,480,000
              
              
              1,480
              
              
              --
              
              
              293,520
              
              
              --
              
              
              --
              
              
              295,000Cashless
                  warrant exercises
              
              
              257,352
              
              
              257
              
              
              --
              
              
              (257
              )
              
              --
              
              
              --
              
              
              --Conversion
                  of Convertible Debentures
              
              
              2,478,777
              
              
              2,479
              
              
              --
              
              
              4,137,079
              
              
              --
              
              
              --
              
              
              4,139,558Fair
                  value of Services
              
              
              150,000
              
              
              150
              
              
              --
              
              
              325,619
              
              
              --
              
              
              --
              
              
              325,769Recognition
                  of deferred compensation expense
              
              
              --
              
              
              --
              
              
              --
              
              
              248,675
              
              
              --
              
              
              --
              
              
              248,675Committed
                  Stock adjustment
              
              
              (10,000
              )
              
              (10
              )
              
              --
              
              
              10
              
              
              --
              
              
              --
              
              
              --Modification
                  of option award
              
              
              --
              
              
              --
              
              
              --
              
              
              54,625
              
              
              --
              
              
              --
              
              
              54,625Issuance
                  of warrants for services
              
              
              --
              
              
              --
              
              
              --
              
              
              12,857
              
              
              --
              
              
              --
              
              
              12,857Issuance
                  of warrants for debenture modification
              
              
              --
              
              
              --
              
              
              --
              
              
              1,993,809
              
              
              --
              
              
              --
              
              
              1,993,809Net
                  Loss
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              (40,163,407
              )
              
              (40,163,407
              )Balance
                  at September 30, 2005
              
              
              118,744,359
              
              $
              118,744
              
              $
              --
              
              $
              40,979,912
              
              $
              --
              
              $
              (66,602,763
              )
              $
              (25,504,107
              )Issuance
                  of Common Stock forCash
                  pursuant to warrant exercise
              
              
              913,596
              
              
              914
              
              
              (378,000
              )
              
              1,075,661
              
              
              --
              
              
              --
              
              
              698,575Conversion
                  of Convertible Debt
              
              
              7,815,048
              
              
              7,815
              
              
              --
              
              
              12,154,377
              
              
              --
              
              
              --
              
              
              12,162,192Inducement
                  to convert Convertible Debt
              
              
              2,568,737
              
              
              2,569
              
              
              --
              
              
              3,583,667
              
              
              --
              
              
              --
              
              
              3,586,236Settlement
                  of Bankruptcy claims and litigation
              
              
              7,971,425
              
              
              7,971
              
              
              --
              
              
              15,201,551
              
              
              --
              
              
              --
              
              
              15,209,522Fair
                  value of Services provided
              
              
              1,175,014
              
              
              1,175
              
              
              --
              
              
              1,830,975
              
              
              --
              
              
              --
              
              
              1,832,150Interest
                  paid in common stock
              
              
              277,476
              
              
              277
              
              
              --
              
              
              450,482
              
              
              --
              
              
              --
              
              
              450,759EU
                  Energy Acquisition
              
              
              39,169,670
              
              
              39,170
              
              
              --
              
              
              55,190,065
              
              
              --
              
              
              --
              
              
              55,229,235Issuance
                  of Warrants forServices
              
              
              --
              
              
              --
              
              
              --
              
              
              742,286
              
              
              --
              
              
              --
              
              
              742,286Antidilutive
                  effect of stock issuance
              
              
              --
              
              
              --
              
              
              --
              
              
              131,748
              
              
              --
              
              
              --
              
              
              131,748$6.0
                  million Debtor in Possession financing
              
              
              --
              
              
              --
              
              
              --
              
              
              1,834,092
              
              
              --
              
              
              --
              
              
              1,834,092$3.5
                  million Bridge Financing
              
              
              --
              
              
              --
              
              
              --
              
              
              1,956,526
              
              
              --
              
              
              --
              
              
              1,956,526
  Warrant
                  modifications due to antidilutive events
              
              
              --
              
              
              --
              
              
              --
              
              
              564,331
              
              
              --
              
              
              --
              
              
              564,331Additional
                  conversion feature - antidilutive event
              
              
              --
              
              
              --
              
              
              --
              
              
              788,148
              
              
              --
              
              
              --
              
              
              788,148Vesting
                  of options issued to non-employees
              
              
              --
              
              
              --
              
              
              --
              
              
              239,405
              
              
              --
              
              
              --
              
              
              239,405Vesting
                  of options issued to employees
              
              
              --
              
              
              --
              
              
              --
              
              
              738,104
              
              
              --
              
              
              --
              
              
              738,104Other
                  Comprehensive Loss
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              (36,497
              )
              
              --
              
              
              (36,497
              )Net
                  Loss
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              (28,523,192
              )
              
              (28,523,192
              )Balance
                  at September 30, 2006
              
              
              178,635,325
              
              $
              178,635
              
              $
              (378,000
              )
              $
              137,461,330
              
              $
              (36,497
              )
              $
              (95,125,955
              )
              $
              42,099,513Issuance
                  of Common Stock forCash
                  pursuant to PIPE placement
              
              
              25,201,954
              
              
              25,202
              
              
              
              
              
              24,927,718
              
              
              --
              
              
              --
              
              
              24,952,920Cash
                  pursuant to warrant exercises
              
              
              2,314,135
              
              
              2,314
              
              
              378,000
              
              
              2,444,917
              
              
              --
              
              
              --
              
              
              2,825,231Cash
                  pursuant to option exercises
              
              
              1,133,066
              
              
              1,133
              
              
              --
              
              
              365,085
              
              
              --
              
              
              --
              
              
              366,218Conversion
                  of Convertible Debt
              
              
              14,612,136
              
              
              14,612
              
              
              --
              
              
              16,661,165
              
              
              --
              
              
              --
              
              
              16,675,777Fair
                  value of Services provided
              
              
              227,523
              
              
              228
              
              
              --
              
              
              248,272
              
              
              --
              
              
              --
              
              
              248,500Recovery
                  of common stock -EU Energy Acquisition claim
              
              
              (815,789
              )
              
              (816
              )
              
              --
              
              
              (1,149,446
              )
              
              --
              
              
              --
              
              
              (1,150,262
              )Offering
                  Costs paid in Cash
              
              
              
              
              
              
              
              
              
              
              
              (1,497,175
              )
              
              
              
              
              
              
              
              (1,497,175
              )Offering
                  Costs paid in Warrants
              
              
              
              
              
              
              
              
              
              
              
              (974,524
              )
              
              
              
              
              
              
              
              (974,524
              )Issuance
                  of Warrants forServices
              
              
              --
              
              
              --
              
              
              --
              
              
              754,418
              
              
              --
              
              
              --
              
              
              754,418Offering
                  Costs
              
              
              --
              
              
              --
              
              
              --
              
              
              974,524
              
              
              --
              
              
              --
              
              
              974,524$22.8
                  million Convertible Debt Offering
              
              
              --
              
              
              --
              
              
              --
              
              
              4,681,714
              
              
              --
              
              
              --
              
              
              4,681,714Settlement
                  of legal claims
              
              
              --
              
              
              --
              
              
              --
              
              
              165,720
              
              
              --
              
              
              --
              
              
              165,720Interest
              
              
              --
              
              
              --
              
              
              --
              
              
              1,008,047
              
              
              --
              
              
              --
              
              
              1,008,047Warrant
                  modifications due to antidilutive events
              
              
              --
              
              
              --
              
              
              --
              
              
              553,446
              
              
              --
              
              
              --
              
              
              553,446Additional
                  conversion feature - antidilutive event
              
              
              --
              
              
              --
              
              
              --
              
              
              625,625
              
              
              --
              
              
              --
              
              
              625,625Vesting
                  of options issued to non-employees
              
              
              --
              
              
              --
              
              
              --
              
              
              830,752
              
              
              --
              
              
              --
              
              
              830,752Vesting
                  of options issued to employees
              
              
              --
              
              
              --
              
              
              --
              
              
              1,523,166
              
              
              --
              
              
              --
              
              
              1,523,166Other
                  Comprehensive Loss
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              (467,682
              )
              
              --
              
              
              (467,682
              )Net
                  Loss
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              (44,483,482
              )
              
              (44,483,482
              )Balance
                  at September 30, 2007
              
              
              221,308,350
              
              $
              221,308
              
              $
              --
              
              $
              189,604,754
              
              $
              (504,179
              )
              $
              (139,609,437
              )
              $
              49,712,446




The
      accompanying notes are an integral part of these financial
      statements





51




**COMPOSITE
      TECHNOLOGY CORPORATION**


**AND
      SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS FOR**


**THE
      YEARS ENDED SEPTEMBER 30, 2007, 2006, and 2005**


Year
                  Ending September 30,2007
              
              2006
              
              2005CASH
                    FLOWS FROM OPERATING ACTIVITIESNET
                  LOSS
              
              $
              (44,483,482
              )
              $
              (28,523,192
              )
              $
              (40,163,407
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Interest
                  related to detachable warrants and fixed conversion
                  features
              
              
              5,431,585
              
              
              1,956,526
              
              
              1,266,924Depreciation
                  and Amortization
              
              
              3,143,434
              
              
              1,351,544
              
              
              559,084Expense
                  related to fair value of vested options
              
              
              2,353,913
              
              
              977,509
              
              
              248,675Reorganization
                  item - adjustment to carrying value of convertible debt
              
              
              --
              
              
              2,622,240
              
              
              --Amortization
                  of prepaid expenses paid in stock
              
              
              422,146
              
              
              398,107
              
              
              --Issuance
                  of warrants for services
              
              
              164,208
              
              
              410,386
              
              
              2,006,666Issuance
                  of common stock for settlement
              
              
              165,720
              
              
              3,586,236
              
              
              --Issuance
                  of common stock for services
              
              
              248,500
              
              
              1,002,423
              
              
              325,769Issuance
                  of common stock for interest
              
              
              --
              
              
              17,325
              
              
              --Bad
                  debt expense
              
              
              --
              
              
              -
              
              
              2,500,000Modification
                  of warrants due to antidilution provision
              
              
              373,709
              
              
              696,079
              
              
              --Litigation
                  and bankruptcy settlements
              
              
              --
              
              
              702,000
              
              
              14,455,792Inventory
                  reserve expense
              
              
              --
              
              
              --
              
              
              239,367Carrying
                  value adjustment for liabilities
              
              
              --
              
              
              --
              
              
              4,831,970Impairment
                of acquired goodwill
              
              
              931,695
              
              
              --
              
              
              --Compensation
                  expense for modification of options
              
              
              --
              
              
              --
              
              
              54,626(Gain)
                  in unconsolidated subsidiary
              
              
              (167,856
              )
              
              --
              
              
              --Other
              
              
              
              
              
              (11,732
              )
              
              147,649CHANGES
                  IN ASSETS / LIABILITIESInventory
              
              
              (17,931,674
              )
              
              (209,143
              )
              
              (672,028
              )Accounts
                  receivable
              
              
              (1,545,537
              )
              
              493,006
              
              
              (55,004
              )Prepaids
                  and other current assets
              
              
              (187,680
              )
              
              1,051,860
              
              
              (18,926
              )Other
                  assets
              
              
              850,735
              
              
              (4,219
              )
              
              (304,855
              )Accounts
                  payable and other accruals
              
              
              11,397,415
              
              
              675,597
              
              
              2,071,489Deferred
                  revenue
              
              
              15,894,070
              
              
              7,662,903
              
              
              56,998Accrued
                  warranty liability
              
              
              1,099,549
              
              
              (1,119,158
              )
              
              --Net
                  cash used
                  in operating activities
              
              $
              (21,839,550
              )
              $
              (6,263,703
              )
              $
              (12,449,211
              )CASH
                    FLOWS FROM INVESTING ACTIVITIESCash
                  received from EU acquisition
              
              
              --
              
              
              1,163,712
              
              
              ---Cash
                  paid for EU acquisition
              
              
              --
              
              
              (237,487
              )
              
              ---Restricted
                  cash
              
              
              --
              
              
              --
              
              
              10,010,060Proceeds
                  from sale of assets
              
              
              --
              
              
              --
              
              
              210,570Purchase
                  of property, plant and equipment
              
              
              (5,432,071
              )
              
              (527,366
              )
              
              (1,833,052
              )Cash
                  investment in unconsolidated subsidiary
              
              
              (401,921
              )
              
              --
              
              
              --Net
                    cash provided by (used in) investing activities
              
              $
              (5,833,992
              )
              $
              398,859
              
              $
              8,387,578




52




**COMPOSITE
      TECHNOLOGY CORPORATION**


**AND
      SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS FOR**


**THE
      YEARS ENDED SEPTEMBER 30, 2007, 2006, and 2005, Continued**




CASH
                    FLOW FROM FINANCING ACTIVITIESProceeds
                  from issuance of convertible debentures
              
              
              21,455,500
              
              
              9,500,000
              
              
              --Proceeds
                  from issuance of common stock
              
              
              23,833,745
              
              
              --
              
              
              --Convertible
                  debt repayment - $3.5M bridge
              
              
              --
              
              
              (2,175,000
              )
              
              --Payments
                  on capital leased assets
              
              
              (288,667
              )
              
              (450,199
              )
              
              (342,455
              )Proceeds
                  from exercise of warrants
              
              
              2,447,232
              
              
              698,575
              
              
              1,986,288Proceeds
                  from exercise of options
              
              
              366,219
              
              
              --
              
              
              295,000Proceeds
                  from Notes Payable and Factoring Arrangements
              
              
              2,300,000
              
              
              --
              
              
              --Repayments
                  of Notes Payable and Factoring Arrangements
              
              
              (2,300,000
              )
              
              --
              
              
              --Cash
                  advances (to)/from officers
              
              
              (62,000
              )
              
              62,000
              
              
              -Net
                  cash provided
                  by financing activities
              
              $
              47,752,029
              
              $
              7,635,376
              
              $
              1,938,833Net
                    increase/(decrease) in cash and cash
                    equivalents
              
              $
              20,078,487
              
              $
              1,770,532
              
              $
              (2,122,800
              )Cash
                    and cash equivalents, Beginning of Year
              
              $
              2,578,347
              
              $
              807,815
              
              $
              2,930,615Cash
                    and cash equivalents,End
                    of Year
              
              $
              22,656,834
              
              $
              2,578,347
              
              $
              807,815SUPPLEMENTAL
                  DISCLOSURE OF CASH FLOW
                INFORMATION:INTEREST
                  PAID
              
              $
              1,088,759
              
              $
              831,807
              
              $
              527,556TAXES
                  PAID
              
              $
              4,147
              
              $
              4,256
              
              $
              --CASH
                  PAID FOR REORGANIZATION ITEMS
              
              $
              316,592
              
              $
              949,871
              
              $
              240,876
 
 **Supplemental
                  Disclosure of Non-cash Activities:**On
                  July 3, 2006, we acquired EU Energy. (Note 4)Accounts
                  receivable
              
              $
              --
              
              $
              11,939,000
              
              $
              --Inventories
              
              
              --
              
              
              22,450,000
              
              
              --Property,
                  plant and equipment
              
              
              --
              
              
              2,447,000
              
              
              --Other
                  assets
              
              
              --
              
              
              5,621,000
              
              
              --Intangible
                  assets and goodwill
              
              
              --
              
              
              49,942,000
              
              
              --Accounts
                  payable and accrued expenses
              
              
              --
              
              
              (9,412,000
              )
              
              --Warranty
                  reserves
              
              
              --
              
              
              (15,774,000
              )
              
              --Deferred
                  revenues and customer advances
              
              
              --
              
              
              (11,828,000
              )
              
              --Acquisition
                  costs net of cash acquired
              
              
              --
              
              
              (156,000
              )
              
              --Stock
                  issued for purchase of EU Energy
              
              
              --
              
              
              (55,229,000
              )
              
              --$
              --
              
              $
              --
              
              $
              --




The
      accompanying notes are an integral part of these financial
      statements





53





**Supplemental
      Schedule for Non Cash Financing Activities**


During
      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 $193,500;


220,000
      warrants valued at the fair value at the issuance date as described in note
      8 of
      $164,208 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 $5,169,656 at the issuance date as
      described in Note 13 were issued as part of the February, 2007 Senior
      Convertible Note transaction. We incorporated the fair value of these warrants
      into our beneficial conversion calculation for the debt discount described
      in
      Note 4.


1,316,827
      warrants valued at the fair value of $610,613 at the issuance date as described
      in Note 13 were issued as fees related to the February, 2007 Senior Convertible
      Note transaction.


1,800,000
      warrants valued at the fair value of $843,840 at the issuance date as described
      in Note 13 were issued in conjunction with the factored receivable arrangement.


629,128
      warrants valued at the fair value of $194,573 at,, the issuance date as
      described in Note 13 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 $61,868 at the issuance date as described
      in Note 13 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 $165,720 were issued in settlement of
      a
      legal dispute. The expense was recorded to other expense during the three and
      nine months ended June 30, 2007.


6,247,676
      warrants valued at the fair value of $4,028,502 at the issuance date as
      described in Note 13 were issued in conjunction with the two PIPE equity
      placements.


1,564,901
      warrants valued at the fair value of $1,009,046 at the issuance date as
      described in Note 13 were issued for services related to the two PIPE equity
      placements.


87,374
      warrants valued at the fair value of $76,243 at the issuance date as described
      in Note 13 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.


During
      the year ending September 30, 2007, the Company issued 4,272,855 shares of
      common stock for the conversion of $6,023,250 of the August, 2004 Convertible
      Debentures as follows:


-
            $1,010,050
                of principal was converted at $1.46 per share into 691,816 shares
                of
                common stock-
            $5,013,200
                of principal was converted at $1.40 per share into 3,580,857 shares
                of
                common stock.





During
      the year ending September 30, 2007, the Company issued 10,383,150 shares of
      common stock for the conversion of $10,697,527 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-
            $10,352,527
                of principal was converted at $1.03 per share into 10,050,997 shares
                of
                common stock.





The
      Company had the following balances consolidated with the September 30, 2006
      balance sheet figures that related to the assets and liabilities of the Service
      business that was subsequently contributed into the Variable Interest Entity
      as
      discussed in Note 9. The cash balance at September 30, 2006 is included in
      the
      statement of cash flows as a cash investment in unconsolidated subsidiary for
      the year ending September 30, 2007:


BalanceCash
            $
            103,217Accounts
                Receivable
            
            1,468,416Inventory
            
            3,027,839Property
                & Equipment
            
            856,748Total
                Assets
            $
            5,456,220Accounts
                Payable and Accrued Expenses
            $
            (3,889,567)Net
                Assets
            $
            $1,566,653




The
      Company recorded the following adjustments to Goodwill for the year ended
      September 30, 2007:


Goodwill
                  reduction due to returned shares
              
              $
              (1,150,000
              )Increase
                  in Goodwill due to acquisition inventory write downs
              
              
              831,234Impairment
                  of goodwill allocated to Service organization
              
              
              (931,695
              )Total
              
              
              (1,250,461
              )




54




**COMPOSITE
      TECHNOLOGY CORPORATION**


**AND
      SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED SEPTEMBER 30, 2007, 2006, AND 2005**





**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 energy efficiency
      patented composite core conductors known as ("ACCC") 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 Jiangsu Far East; and directly through
      CTC Cable.





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





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.





**BASIS
      OF FINANCIAL STATEMENTS**





The
      accompanying Consolidated Financial Statements have been prepared on a going
      concern basis. The consolidated financial statements include the accounts of
      CTC
      and its wholly owned subsidiaries (collectively, the "Company"). 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, 2007.





As
      discussed later in this Note 1, we adopted Statement of Financial Accounting
      Standards (SFAS) No. 123(R), *“Share-Based
      Payment,”* on
      October 1, 2005 using the modified prospective transition method.
      Accordingly, our operating income from continuing operations for the twelve
      months ended September 30, 2007 and 2006 includes approximately $2.4 million
      and
      $1.0 million in share-based compensation expense respectively for stock
      options and our Employee Stock Purchase Plan that we recorded as a result of
      adopting SFAS 123(R). Because we elected to use the modified prospective
      transition method, results for prior periods have not been
      restated.





**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, wrapped composite core, core and wrapped core hardware,
      and other electric utility related products.


b)
      the
      sale of electrical generation turbines and related turbine parts





(2)
      Service revenue which includes revenue from the service and maintenance of
      turbine generators under service contract.




55




(3)
      License revenue which includes revenue from the license of technology and
      production processes for DeWind turbines.





(4)
      Consulting revenue, which includes engineering, product design, and service
      fees
      that we receive under customer agreements related to the installation and design
      of our product sale solutions.





In
      addition to the above general revenue recognition principles prescribed by
      SAB
      104, our specific revenue recognition policies for each revenue source are
      more
      fully described below.





PRODUCT
      SALES Product revenues are generally 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 our
      distributor, ii) composite core sold to a cable stranding entity not subject
      to
      a distributor agreement and where title passes to the partner, or iii) turbines
      or turbine parts sold to wind farm operators, utilities, and technology
      licensees. For most cable related product sales, we expect that the terms of
      sales generally will not contain provisions that will obligate us to provide
      additional products or services after installation to end users. We recognize
      conductor related revenue: (i) upon shipment when cable products are shipped
      FOB
      shipping point to end users or (ii) upon delivery at the end-user customer's
      location when cable products are shipped FOB destination. Currently, we do
      not
      anticipate recognizing revenues on products provided to distributors unless
      the
      title to the product has been transferred and no right of return
      exists.





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. 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. We recognize as revenue the contracted
      turbine value reduced by the value of the warranty portion when title has passed
      for turbine sales, occasionally when shipped but frequently when the turbine
      has
      been erected or “commissioned” if so stated in a turbine purchase contract.
      Progress payments and customer deposits are recorded as deferred revenues until
      title has passed. Costs incurred and turbine materials purchased during the
      production of turbines in advance of delivery or title transfer 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.





SERVICE
      REVENUE 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.





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.





**DERIVATIVE
      FINANCIAL INSTRUMENTS**





The
      Company issues financial instruments in the form of stock options, stock
      warrants, and debt conversion features 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.




56




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, 2006 to value options and warrants granted or issued
      are as follows:


**Year
                  ended**
                **September
                  30,****2007**
              
              **2006**
              
              **2005**Risk
                  Free Rate of Return
              
              
              4.01%-4.97
              %
              
              3.97%-4.95
              %
              
              3.66%-4.14
              %Volatility
              
              
              88%-98
              %
              
              95%-107
              %
              
              73%-106
              %Dividend
                  yield
              
              
              0
              %
              
              0
              %
              
              0
              %





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





**Stock-Based
      Compensation**





Prior
      to
      September 30, 2005, we accounted for employee stock option plans based on the
      intrinsic value method in accordance with Accounting Principles Board (APB)
      Opinion No. 25, “ *Accounting
      for Stock Issued to Employees,”* and
      related Interpretations and had adopted the disclosure requirements of SFAS
      No.
      123, “ *Accounting
      for Stock-Based Compensation”* (SFAS
      No.123), as amended by SFAS No. 148, “ *Accounting
      for Stock-Based Compensation-Transition and Disclosure* ”
(SFAS
      No. 148). Accordingly, compensation cost for stock options was measured as
      the
      excess, if any, of the quoted market price of the Company’s stock at the grant
      date over the amount an employee must pay to acquire the stock. The Company
      granted stock options with exercise prices equal to the market price of the
      underlying stock on the date of grant; therefore, the Company did not record
      stock-based compensation expense under APB Opinion No. 25.





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 were 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
      15.





**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.




57




Under
      Bankruptcy accounting guidance, namely AICPA SOP 90-7, the Company was required
      to record its liabilities at the expected settlement amount. Therefore, debt
      discount that existed prior to the Chapter 11 bankruptcy was charged to expense
      as of May 5, 2005 and debt discount incurred during the bankruptcy in October,
      2006 was charged to expense as a debt carrying value adjustment on the date
      the
      discount was recorded.





**USE
      OF ESTIMATES**


Our
      consolidated financial statements are prepared in accordance with U.S. generally
      accepted accounting principles (GAAP). These accounting principles require
      us to
      make certain estimates, judgments and assumptions. We believe that the
      estimates, judgments and assumption upon which we rely are reasonable 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 not 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
                collectibility-
            the
                estimates pertaining to the valuation of our
                inventories,-
            the
                assumptions used to calculate fair value of our stocked 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-
            the
                warranty, retrofit and availability provisions for our wind
                turbines.-
            goodwill
                and intangible valuation.





**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.





**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 $100,000. 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 19% and one customer representing 12%
      of
      the total net receivables balance.


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 one customer from our Cable segment of the Company represented 86% of
      the
      Company's revenues for the fiscal year ended September 30, 2005. 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.




**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. We did
      not
      recognize any property impairment charges in fiscal 2007, 2006, or 2005.
      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.




58




**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.





**WARRANTY
      RESERVES**


Through
      its ownership of 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.




Warranty
      obligations reflect expected minor repairs during the period of warranty of
      the
      turbine, between 2 and 5 years following installation, and more major repairs
      which may affect particular types of units. 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. Retrofit
      provisions reflect expected future proactive repairs of turbine components
      where
      we have seen an operational history of failure for other similar turbine units.
      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. Warranty work
      expected to be performed more than one year from the balance sheet date and
      availability provisions estimated to be incurred more than one year from the
      balance sheet date are classified as a non-current liability.





**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 and   British Pounds. 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.





**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 DeWind 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. Included in turbine raw materials inventories are payments made to
      third party vendors in advance of parts deliveries made to DeWind in order
      to
      secure delivery of future parts deliveries. 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.




59




As
      of
      September 30, 2007, 2006, and 2005, 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 338, 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, 2007, 2006, and 2005 since
      their effect would have been anti-dilutive:


September
                30,2007
            2006
            2005Options
                for common stock
            15,019,870
            15,965,336
            6,167,936Warrants
                for common stock
            32,449,107
            11,488,393
            8,796,393Convertible
                Debentures, if converted
            11,817,935
            3,885,968
            6,503,25859,286,912
            31,339,697
            21,467,587





**NEW
      ACCOUNTING PROUNOUNCEMENTS**




**Statement
      No. 159, “The Fair Value Option for Financial Assets and Financial
      Liabilities” (SFAS 159)** In
      February 2007, the FASB issued Statement No. 159 “The Fair Value
      Option for Financial Assets and Financial Liabilities” (SFAS 159).
      SFAS 159.permits entities to choose to measure certain financial
      instruments and certain other items at fair value for those financial assets
      and
      liabilities not currently required to be measured at fair value. SFAS 159
      is effective for financial statements issued for fiscal years beginning after
      November 15, 2007, and interim periods within those fiscal years. The
      adoption of SFAS No. 159 is not expected to have a material impact on our
      financial position, results of operations or cash flows.




**Statement
      No. 157, “Fair Value Measurements” (SFAS 157)** In
      September 2006, the FASB issued Statement No. 157, “Fair Value
      Measurements” (SFAS 157). SFAS 157 defines fair value, establishes a
      framework and gives guidance regarding the methods used for measuring fair
      value, and expands disclosures about fair value measurements. SFAS 157 is
      effective for financial statements issued for fiscal years beginning after
      November 15, 2007, and interim periods within those fiscal years. The
      adoption of SFAS No. 157 is not expected to have a material impact on our
      financial position, results of operations or cash flows.




**EITF
      Issue No. 06-6 Debtor’s** *Accounting for a Modification (or Exchange) of Convertible Debt Instruments:*


In
      November, 2006, the Emerging Issues Task Force (EITF) approved EITF Issue No.
      06-6. EITF 06-6 addresses the issue of accounting for modifications made to
      convertible debt instruments, supersedes Issue No. 05-7 “Accounting for
      Modifications to Conversion Options Embedded in Debt Instruments and Related
      Issues,” clarifies the accounting approach required for such modifications and
      modifies guidance provided in EITF 96-19 “Debtor’s Accounting for a Modification
      or Exchange of Debt Instruments.” EITF 06-6 is effective for convertible debt
      instrument modifications made after November 29, 2006. We have used the guidance
      provided in EITF 06-6 and in the revised EITF 96-19 for our fiscal 2007
      modifications and will apply this guidance to any future modifications to our
      Convertible Debt instruments on a prospective basis.





**EITF
      Issue No. 06-7** *Issuer’s
      Accounting for a Previously Bifurcated Conversion Option in a Convertible Debt
      Instrument When the Conversion Option No Longer Meets the Bifurcation Criteria
      in FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging
      Activities”*


In
      November, 2006 the Emerging Issues Task Force (EITF) approved EITF Issue No.
      06-7. EITF 06-7 provides clarification and guidance for bifurcated conversion
      options in convertible debt instruments where the bifurcation criteria of SFAS
      133 are no longer met. EITF 06-7 is effective for changes to such criteria
      after
      November 29, 2006. We will use the guidance provided in EITF 06-7 on a
      prospective basis. EITF 06-7 had no impact to our financial statements for
      the
      year ending September 30, 2007.





**EITF
      Issue No. 07-3** *,* " *Accounting
      for Advance Payments for Goods or Services to Be Used in Future Research and
      Development Activities* ."


In
      June
      2007, the EITF ratified EITF Issue No. 07-3 *,* " *Accounting
      for Advance Payments for Goods or Services to Be Used in Future Research and
      Development Activities* ."
       EITF 07-3 provides that nonrefundable advance payments made for goods or
      services to be used in future research and development activities should be
      deferred and capitalized until such time as the related goods or services are
      delivered or are performed, at which point the amounts would be recognized
      as an
      expense. This issue is effective for fiscal years beginning after December
      15,
      2007. We do not expect EITF 07-3 to have a material impact.




60




**FASB
      Interpretation No. 48** , *“Accounting
      for Uncertainty in Income Taxes.”*


In
      June
      2006, the FASB issued FASB Interpretation No. 48  (“FIN 48”), *“Accounting
      for Uncertainty in Income Taxes.”* This interpretation clarifies the accounting for uncertainty in income taxes
      recognized in an enterprise’s financial statements in accordance with SFAS No.
      109, *“Accounting
      for Income Taxes.”* This
      interpretation prescribes a recognition threshold and measurement attribute
      for
      the financial statement recognition and measurement of a tax position taken
      or
      expected to be taken in a tax return. FIN 48 will become effective for the
      Company in fiscal year 2008. Management of the Company does not expect the
      impact of this pronouncement to be material on the Company’s consolidated
      results of operations and financial condition.




**Staff
      Accounting Bulletin No. 108 (SAB 108)**


In
      September 2006, the Securities and Exchange Commission, or SEC, Staff issued
      Staff Accounting Bulletin No. 108 (SAB 108) addressing how the effects of
      prior-year uncorrected financial statement misstatements should be considered
      in
      current-year financial statements. SAB 108 requires registrants to quantify
      misstatements using both balance-sheet and income-statement approaches and
      to
      evaluate whether either approach results in quantifying an error that is
      material in light of relative quantitative and qualitative factors. SAB 108
      does
      not change the SEC staff's previous guidance in Staff Accounting Bulletin No.
      99
      on evaluating the materiality of misstatements.




SAB
      108
      addresses the mechanics of correcting misstatements that include the effects
      from prior years. Additionally, SAB 108 requires registrants to apply the new
      guidance for the first time that it identifies material errors in existence
      at
      the beginning of the first fiscal year ended after November 15, 2006 by
      correcting those errors through a one-time cumulative effect adjustment to
      beginning-of-year retained earnings. The adoption of SAB 108 had
      no material effect on our financial position, results of operations or cash
      flows.




**NOTE
      2 BANKRUPTCY AND BANKRUPTCY RECLASSIFICATIONS**





As
      discussed in Note 1, for financial reporting purposes, the consolidated
      financial statements have been prepared on a going concern basis. For the
      financial statements for the fiscal year ended September 30, 2005 the Company
      had applied the provisions of the AICPA SOP 90-7, Accounting for Bankruptcies.
      We reviewed the guidelines and determined that the following applied to our
      situation as at September 30, 2005:





-Assets
      were recorded at net realizable value. As of September 30, 2005, our assets
      consisted primarily of cash, receivables, inventory, and equipment which are
      all
      reviewed for impairment on a quarterly basis. Based on a review of our asset
      base, we determined that our carrying value as of September 30, 2005 was equal
      to the net realizable value of our assets. We therefore determined that there
      were no requirements to adjust our assets since their book value approximates
      their net realizable value.





-All
      pre-petition liabilities subject to compromise were segregated in the Balance
      Sheet and classified as Liabilities Subject to Compromise, at the estimated
      amount of allowable claims. Under the provisions of our Plan of Reorganization,
      subsequent to September 30, 2005 we paid all non-disputed pre-petition
      liabilities at 100% plus 3% interest.





-Post-petition
      liabilities are recorded at the amounts expected to be allowed.





-Liabilities
      not subject to settlement were classified as current or non-current, as
      appropriate.





-We
      adjusted our convertible debt discount that existed as of the petition date
      of
      May 5, 2005. During the year ending September 30, 2005, coinciding with the
      filing of our plan of reorganization, we determined that the allowed amount
      of
      liability relating to our $15M Debenture offering of August, 2004 was
      $15,000,000. Prior to the filing of the plan, the carrying value of the
      Debentures was determined to be $10,168,030, representing a debt discount due
      to
      conversion features of the Convertible Debentures. Prior to the filing of the
      plan, we had been amortizing this discount to interest expense at approximately
      $176,780 per month As a result; we recorded an additional $4,831,970 in other
      expense in the quarter ending June 30, 2005, to adjust the carrying value of
      the
      Debentures to $15,000,000.





-Since
      we
      intend to pay our creditors at 100% and modifications to existing contracts
      and
      liability are primarily non-financial in nature, we recorded gains related
      to
      the bankruptcy.





-Our
      bankruptcy related expenses consisted primarily of professional fees. During
      the
      years ending September 30, 2005 and 2006, we incurred $1,275,693 and $635,402
      respectively in bankruptcy related legal and professional fees. We have
      segregated these fees in our Statement of Operations.




61




-Interest
      expense recorded related to the bankruptcy filing consists of 3% annual interest
      on our pre-petition liabilities and totaled $15,720 for fiscal 2005 and $3,100
      for fiscal 2006.





-We
      have
      disclosed the cash payments for reorganization costs as a supplemental
      disclosure to our Statement of Cash Flows.





-We
      issued common stock in payment of liabilities upon emergence from bankruptcy.
      We
      have disclosed the impact of our potential share issuances below.





-We
      did
      not qualify for Fresh-Start reporting upon emergence from
      bankruptcy.





During
      fiscal 2006, we emerged from Chapter 11 bankruptcy on November 18, 2006. We
      received a formal decree that we were no longer subject to Bankruptcy Court
      supervision on August 2, 2006. Since we did not qualify for fresh start
      accounting, we have reclassified our September 30, 2005 balance sheet to conform
      to fiscal 2006 and 2007 presentation.





We
      issued
      8,231,215 shares of common stock during fiscal 2006 in settlement of certain
      bankruptcy claims and litigation settlements as Section 1145 stock as
      follows:


Shares
                  issuable at September 30, 2005
              
              Additional
                  shares issuable during fiscal 2006
              
              Total
                  Shares issued in fiscal 2006Litigation
                  settlements
              
              
              7,175,000
              
              
              --
              
              
              7,175,000Bankruptcy
                  claim settlements
              
              
              287,301
              
              
              450,000
              
              
              737,301Debenture
                  interest payable
              
              
              259,790
              
              
              --
              
              
              259,790Pre-petition
                  liabilities
              
              
              59,124
              
              
              --
              
              
              59,124Total
              
              
              7,781,215
              
              
              450,000
              
              
              8,231,215





The
      shares issuable as of September 30, 2005 were issued in November, 2005. The
      450,000 shares issuable that were not accrued for in the September 30, 2005
      balances were issued in June, 2006 in settlement of the liquidated damages
      claim
      for the August, 2004 Debenture holders. The total shares issued under the
      bankruptcy represented 6.9% and 4.6% of the total shares issued and outstanding
      as of September 30, 2005 and 2006 respectively. If these shares had been issued
      on September 30, 2005, there would be no change to the loss per share for the
      fiscal year ending September 30, 2005.




The
      value
      of the shares issued was the fair market value on the date prior to
      issuance.





**NOTE
      3 - GOING CONCERN**





The
      Company has received a report from its independent auditors for the year ended
      September 30, 2007 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, 2007, the Company incurred a net loss of
      $44,483,482 and negative cash flows from operations of $21,839,550. In addition,
      the Company had an accumulated deficit of $139,609,437 at September 30, 2007.
      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.




62







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.





Commercial
      orders: To date, since inception for our Cable products and since the
      acquisition of DeWind, we have received orders for approximately $36 million
      in
      ACCC conductor products and $81 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 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 become a
      going
      concern.





We
      believe our cash position as of September 30, 2007 of $22.7 million and expected
      cash flows from revenue orders may not be sufficient to fund operations for
      the
      next four calendar quarters. We anticipate that additional cash is needed to
      fund operations beyond March, 2008 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 adjust the purchase price paid for the EU Energy
      Acquisition. 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, 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:




Goodwill
            
            
            
            
            $
            24,319,000Identifiable
                intangibles (see note 8)
            
            
            
            
            
            24,473,000Assets
                Acquired:Cash
            
            
            1,164,000Trade
                Receivables, net
            
            
            11,939,000Inventories
            
            
            22,450,000Fixed
                Assets
            
            
            2,447,000Other
                assets
            
            
            5,621,000Total
                Fair value of tangible assets acquired
            
            
            
            
            
            43,621,000Liabilities
                AssumedAccounts
                Payable and Accrued Liabilities
            
            
            (9,412,000
            )Warranty
                Reserves
            
            
            (15,774,000
            )Deferred
                revenues and customer advances
            
            
            (11,828,000
            )Total
                Liabilities assumed
            
            
            
            
            
            (37,014,000
            )Allocated
                Purchase Price
            
            
            
            
            $
            55,399,000Fair
                Value of Stock Issued, less Stock recovered through claim of
                $1,150,000
            
            
            
            
            $
            54,079,000Transaction
                Costs
            
            
            
            
            
            1,320,000Total
                Consideration
            
            
            
            
            $
            55,399,000




63




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; in particularly in light
      of
      recent media attention to alternative and “clean” or non-petroleum based
      renewable energy generation. See also Item 1 above.




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
                  ended**
              
              **Year
                  ended****September
                  30,**
              
              **September
                  30,****2006**
              
              **2005**Revenues
              
              $
              35,691,458
              
              $
              12,928,763Loss
                  from Operations
              
              
              (39,729,103
              )
              
              (44,583,464
              )Loss
                  from Operations per weighted average share
              
              $
              (0.23
              )
              $
              (0.29
              )





Other
      than the event described below, 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**





Current
      accounts receivable, net consists of the following:


September
                  30, 2007
              
              September
                  30, 2006Turbine
                  products and services receivables
              
              $
              10,015,481
              
              $
              11,320,185Cable
                  products receivables
              
              
              1,199,043
              
              
              2,682,605Gross
                  receivables
              
              $
              11,214,524
              
              $
              14,002,790Reserves
              
              
              (595,980
              )
              
              (2,500,000
              )Net
                  receivables
              
              $
              10,618,544
              
              $
              11,502,790Portion
                  relating to greater than one year, net of reserves of $0 and
                  $0
              
              
              2,809,558
              
              
              2,028,927Net
                  current accounts receivable
              
              $
              7,808,986
              
              $
              9,473,863




Included
      in accounts receivable at September 30, 2007 and 2006 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, 2007 or 2006.





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, 2007 there were $4,604,081 of
      retention payments receivable of which $3,427,972 is expected to be collected
      within one year and $1,176,109 is expected to be collected after September
      30,
      2008. Substantially all of the long term retention receivables are expected
      to
      be collected in the fiscal year ending September 30, 2009.




**NOTE
      6 - INVENTORY**





Inventories
      consist of the following:


September
                  30, 2007
              
              September
                  30, 2006Raw
                  Materials and Turbine Parts
              
              $
              25,484,315
              
              $
              15,614,107Work
                  in Progress
              
              $
              10,621,287
              
              
              6,714,281Finished
                  Goods
              
              $
              3,984,804
              
              
              1,821,857Gross
                  Inventory
              
              $
              40,090,406
              
              $
              24,150,245Reserves
              
              
              (1,495,044
              )
              
              (258,378
              )Net
                  Inventory
              
              $
              38,595,362
              
              $
              23,891,867




64




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, 2007
      and 2006.




The
      following table is offered to provide additional information regarding the
      composition of inventory as at September 30, 2007:




Cable
                  Segment
              
              Wind
                  Segment
              
              TotalRaw
                  Materials and Turbine Parts
              
              $
              2,493,813
              
              $
              22,990,502
              
              $
              25,484,315WIP
              
              
              59,247
              
              
              10,562,040
              
              
              10,621,287ACCC
                  Finished Core, Cable, & Related Hardware
              
              
              3,984,804
              
              
              --
              
              
              3,984,804Gross
                  Inventory
              
              $
              6,537,864
              
              $
              33,552,542
              
              $
              40,090,406Reserves
              
              
              (375,728
              )
              
              (1,119,316
              )
              
              (1,495,044
              )Net
                  Inventory
              
              $
              6,162,136
              
              $
              32,433,226
              
              $
              38,595,362





**NOTE
      7- PROPERTY AND EQUIPMENT**





Property
      and equipment consisted of the following:


September
                  30,Estimated
                  Useful Lives
              
              2007
              
              2006Office
                  furniture and equipment
              
              
              3-10
                  yrs
              
              $
              1,240,703
              
              $
              782,622Production
                  Equipment
              
              
              3-10
                  yrs
              
              
              9,243,772
              
              
              4,600,560Automobiles
              
              
              3-5
                  yrs
              
              
              26,301
              
              
              360,056Leasehold
                  improvements
              
              
              7
                  yrs
              
              
              424,184
              
              
              408,095Total
                  Property
              
              
              
              
              $
              10,934,960
              
              $
              6,151,333Accumulated
                  Depreciation
              
              
              
              
              
              (2,992,283
              )
              
              (1,437,249
              )Property,
                  net
              
              
              
              
              $
              7,942,677
              
              $
              4,714,084





Property
      and equipment from EU Energy consisted of primarily production equipment, office
      equipment, and automobiles and totaled $5,659,647 in the aggregate. All property
      was evaluated under the guidance of SFAS 141, and properly valued
      accordingly.





Depreciation
      expense was $1,555,034, $1,025,544, and $ 559,084, for the years ended September
      30, 2007, 2006, and 2005, 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 remaining goodwill of $24,218,539 at
        September 30, 2007 is related to the acquisition of EU Energy on July 3,
        2006.
        In accordance with SFAS 142, the Company evaluates goodwill impairment at
        least
        annually, normally at year-end. We determined that as of September 30, 2007
        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.
  Balance
                  as of September 30, 2006
              
              $
              25,469,000Goodwill
                  reduction due to returned shares - see note 4
              
              
              (1,150,000
              )Increase
                  in Goodwill due to acquisition inventory write downs
              
              
              831,234Impairment
                  of goodwill allocated to Service organization
              
              
              (931,695
              )Balance
                  as of September 30, 2007
              
              $
              24,218,539
 
 The
        goodwill reduction due to returned shares represented the return of shares
        issued during the acquisition as settlement for claims made by the Company
        pursuant to the purchase agreement of EU Energy. In the purchase agreement,
        if
        the acquired assets were lower or acquired liabilities were higher than were
        represented at the acquisition date, the Company had the right to make a
        claim
        against the shares issued to the majority shareholders. On June 30, 2007
        the
        Company determined that the liabilities represented at the July 3, 2006
        acquisition date were substantially higher than represented during the due
        diligence period prior to the acquisition and filed a claim. The claim was
        disputed by the majority shareholders and settled for 815,789 shares in August,
        2007. The Company has recorded the return of these shares as a reduction
        in the
        purchase price of the EU Energy acquisition and a reduction in
        goodwill.
 
 The
        increase in goodwill due to acquisition inventory write downs reflect a true
        up
        in the acquired turbine inventory balances. Under the guidelines of SFAS
        141,
        acquired inventory is required to be valued at the estimated liquidation
        value.
        As of September 30, 2006 we valued the acquired inventory at what was expected
        to be recovered from sales of those assets less the expected costs to sell
        those
        assets. During fiscal 2007, we reduced our estimate of the recoverable value
        of
        this inventory by $831,234 reflecting lower than expected sales values and
        higher than expected costs to sell those assets.
 
 During
        the year, as described in Note 20, we sold 75.1% of our services organization
        and created a Variable Interest Entity (VIE). We allocated $931,695 of our
        acquired goodwill to this organization upon its creation based on a relative
        value analysis. At September 30, 2007 we reviewed our goodwill and determined
        that the likelihood of recovery of the service related goodwill was remote
        and
        that the entire balance allocated should be impaired. We expensed the goodwill
        impairment to other expenses on the statement of operations for fiscal
        2007.


65





As
      of
      September 30, 2007, 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, 2007****Gross**
              
              
              
              **Net****Carrying**
              
              **Accumulated**
              
              **Intangible****Amount**
              
              **Amortization**
              
              **Assets**Supply
                  Agreements
              
              $
              12,347,000
              
              $
              --
              
              $
              12,347,000Technology
                  Transfer Agreements
              
              
              3,131,000
              
              
              --
              
              
              3,131,000Trade
                  name
              
              
              7,553,000
              
              
              (472,400
              )
              
              7,080,600Service
                  Contracts
              
              
              1,442,000
              
              
              (1,442,000
              )
              
              --Total
              
              $
              24,473,000
              
              $
              (1,914,400
              )
              $
              22,558,600




**September
                  30, 2006****Gross**
              
              
              
              **Net****Carrying**
              
              **Accumulated**
              
              **Intangible****Amount**
              
              **Amortization**
              
              **Assets**Supply
                  Agreements
              
              $
              12,347,000
              
              $
              --
              
              $
              12,347,000Technology
                  Transfer Agreements
              
              
              3,131,000
              
              
              --
              
              
              3,131,000Trade
                  name
              
              
              7,553,000
              
              
              (94,400
              )
              
              7,458,600Service
                  Contracts
              
              
              1,442,000
              
              
              (231,600
              )
              
              1,210,400Total
              
              
              24,473,000
              
              
              (326,000
              )
              $
              24,147,000




Aggregate
      amortization expense of the intangible assets with determinable lives was
      $1,588,400, $326,000, and $0 for the years ended September 30, 2007, 2006,
      and
      2005 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 expected
      in
      early 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:


**For
                  the Year Ending**
              
              **Estimated
                  Amortization****September
                  30,**
              
              **Expense**2008
              
              $
              1,644,0002009
              
              
              3,455,0002010
              
              
              4,266,0002011
              
              
              4,517,0002012
              
              
              3,485,000Thereafter
              
              
              5,191,600$
              22,558,600





**NOTE
      9 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES**





Accounts
      payable and Accrued Liabilities consisted of the following:


September
                  30,2007
              
              2006Trade
                  Payables
              
              $
              15,161,739
              
              $
              8,895,196Legal
                  Provision
              
              
              2,072,434
              
              
              1,479,218Accrued
                  Acquisition Costs
              
              
              318,502
              
              
              1,167,069Accrued
                  Payroll
              
              
              1,014,702
              
              
              1,081,132Due
                  to Affiliates
              
              
              1,848,521
              
              
              120,320Deferred
                  Rents
              
              
              227,059
              
              
              217,598Other
                  accruals
              
              
              2,837
              
              
              4,935Total
                  Accounts Payable and Accrued Liabilities
              
              $
              20,645,794
              
              $
              12,965,468





Included
      in the legal provision are primarily the accruals related to the Brush Electric
      and DeWind v. FKI legal accruals as described in note 17 below. Accrued
      acquisition costs represent primarily legal and statutory payments required
      as a
      result of the EU acquisition.




66




**NOTE
      10 - TURBINE 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. Our product guarantee for our cable is underwritten by an insurance
      policy and results in no similar liability.





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, 2007
              
              September
                  30, 2006Warranty
                  reserves
              
              $
              4,230,393
              
              $
              5,568,973Reserve
                  for turbine retrofitting
              
              
              5,111,576
              
              
              4,739,594Reserve
                  for turbine availability
              
              
              6,473,496
              
              
              4,345,637Total
                  Warranty and Product Guarantee reserves
              
              $
              15,815,465
              
              $
              14,654,204Less
                  Amount classified as current liabilities
              
              
              12,522,837
              
              
              11,594,876Long
                  term warranty liability
              
              $
              3,292,628
              
              $
              3,059,328




The
      following table sets forth an analysis of warranty reserve activity


September
                  30, 2007
              
              September
                  30, 2006Beginning
                  balance
              
              $
              14,654,204
              
              $
              --Reserves
                  acquired
              
              
              --
              
              
              15,773,362Additional
                  reserves recorded to expense
              
              
              8,648,542
              
              
              440,226Reserves
                  utilized
              
              
              (9,220,625
              )
              
              (1,559,384
              )Impact
                  of foreign currency translation
              
              
              1,733,344
              
              
              --Ending
                  balance
              
              $
              15,815,465
              
              $
              14,654,204





**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 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, 2007
              
              September
                  30, 2006Customer
                  advances on turbine and turbine parts sales
              
              $
              30,352,975
              
              
              15,253,249Deferred
                  revenues - Other Turbine related
              
              
              4,030,602
              
              
              4,524,026Deferred
                  revenues - Cable sales
              
              
              2,333,894
              
              
              335,426Total,
                  Deferred revenues and customer advances
              
              $
              36,717,471
              
              $
              20,112,701Balance
                  included in current liabilities
              
              
              35,581,067
              
              $
              17,808,209Long
                  term Deferred Revenues
              
              $
              1,136,404
              
              
              2,304,492





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




67




**NOTE
      12 - DEBT AND NOTES PAYABLE**





The
      following table summarizes the company’s debt structure as of September
      30, 2007, 2006, and 2005 :




September
                30, 2007
            September
                30, 2006
            September
                30, 2005Convertible
                Debentures due August, 2007 net of discount of $0, $0, and
                $0
            $
                --
            $
                6,023,250
            $
                10,860,442Senior
                Convertible 8% Notes due January, 2010 net discount of $2,925,020,
                $0, and
                $0
            9,247,453
            --
            --Capital
                Leases
            109,021
            397,688
            847,887Total
                Debt
            9,356,474
            6,420,938
            11,708,329Balance
                included in current liabilities
            (109,021)
            (6,309,900)
            (403,191)Long
                Term Debt
            $
                9,247,453
            $
                111,038
            $
                11,305,138





Debt
      outstanding or issued during the year ended September 30, 2007 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 convertible into common stock of the Company at
      a
      price of $1.04 per share which was greater than the market price of $0.87 on
      the
      day of the close of the transaction. 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.




As
      part
      of the February, 2007 Senior Convertible Note transaction, holders of the Notes
      were given a total of 10,973,585 detachable warrants. The warrants have a life
      of three years and entitle the holder to purchase shares of the Company’s common
      stock at a price of $1.13 per share. We calculated the fair value of these
      warrants using the Black-Scholes option pricing model at $0.4711 per warrant
      or
      $5,169,656 using a market price of $0.87, a dividend yield of 0%, a risk free
      rate of 4.85% and a volatility of 90%. We determined that an additional discount
      of $4,681,714 should be recorded for the value of the beneficial conversion
      feature which was calculated based on the relative fair values of the conversion
      features and the warrants.




As
      part
      of the financing fee related to the February, 2007 Senior Convertible Notes,
      we
      issued 1,316,827 warrants with a three year life and which entitle the holder
      to
      purchase a share of the Company’s common stock at a price of $1.04 per share. We
      calculated the fair value of these warrants using the Black-Scholes option
      pricing model at $0.4637 per warrant or $610,613 using a market price of $0.84,
      a dividend yield of 0%, a risk free rate of 4.85% and a volatility of
      90%.




Subsequent
      to the issuance, the June, 2007 Private Placement described in Note 13 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 $296,522 consisting of $243,922 intrinsic value of the
      additional shares issuable at $1.03 and $52,600 for the difference in fair
      value
      of the warrants as described in Note 13.




The
      following table summarizes the recording of the debt discount for the February,
      2007 Notes:




Cash
                financing fee of 6% of face value of Senior Convertible
                Notes
            
            $
            1,369,500Warrants
                issued for financing fees
            
            
            610,613Cash
                legal fees relating to financing
            
            
            46,574Detachable
                warrants and beneficial conversion features of Senior
                Notes
            
            
            4,681,714Total
                discount recorded at issuance
            
            $
            6,708,401Additional
                discount - anti-dilution impacts
            
            
            296,522Discount
                amortized to interest expense
            
            
            (1,281,408
            )Discount
                amortization accelerated due to conversion
            
            
            (2,798,495
            )Discount
                balance, September 30, 2007
            
            $
            2,925,020




68




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.





During
      the year ending September 30, 2007, the Company issued 10,339,459 shares of
      common stock for the conversion of $10,652,527 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-
            $10,352,527
                of principal was converted at $1.03 per share into 10,050,997 shares
                of
                common stock.


If
      converted, the remaining $12,172,473 of principal would be convertible into
      11,817,935 shares of common stock at the current conversion price of $1.03
      per
      share.





B.
            August,
                2004 Convertible Debentures:





On
      August
      17, 2004, THE COMPANY closed a financing transaction in which it sold 6%
      convertible debentures (the "August, 2004 Debentures") to select institutional
      accredited investors, in order to raise a total of $15,000,000. All of the
      convertible debt was converted into common stock prior to maturity. The
      following table summarizes the conversion of this debt into 9,840,868 common
      shares:


Shares
                  issued
              
              PrincipalBalance,
                  September 30, 2004
              
              
              --
              
              $
              15,000,000Converted
                  at $1.67 per share
              
              
              2,478,777
              
              
              (4,139,558
              )Outstanding,
                  September 30, 2005
              
              
              
              
              
              10,860,442Converted
                  at $1.67 per share
              
              
              407,300
              
              
              (680,191
              )Converted
                  at $1.55 per share
              
              
              2,681,936
              
              
              (4,157,001
              )Outstanding,
                  September 30, 2006
              
              
              
              
              
              6,023,250Converted
                  at $1.46 per share
              
              
              691,816
              
              
              (1,010,050
              )Converted
                  at $1.40 per share
              
              
              3,580,857
              
              
              (5,013,200
              )Principal
                  paid at maturity, August, 2007
              
              
              
              
              $
              --




As
      a
      result of the dilutive impacts of the February, 2007 Notes and the June, 2007
      private placement issuances, the Company recorded an additional $459,251 of
      debt
      discount relating to the August, 2004 Debentures. The balance consists of
      $381,704 for the intrinsic value of the additional shares issuable resulting
      from the reduction of the conversion price from $1.55 to $1.40 and $77,547
      relating to the accumulated differences in fair value for the detachable
      warrants as described in Note 13. The entire balance of this additional discount
      was amortized to interest expense during the year ended September 30, 2007.




C.
      Other
      Notes and Factored Receivables:




In
      November, 2006 we converted a $500,000 cash advance received on a cable order
      to
      a short term note payable due December 31, 2006. The note had no cash interest
      component. We issued 220,000 warrants in lieu of interest and recorded the
      fair
      value of the warrants to interest expense as described in Note 13. The note
      was
      repaid during the quarter ended March 31, 2007.




In
      November, 2006 we entered into a receivable and cable order factoring
      relationship where we sold the rights to certain future payments on qualified
      cable related accounts receivable and orders sold under letters of credit (the
      “Factored Receivables Note”). We received $1,800,000 under this relationship
      during the quarter ending December 31, 2006. We repaid the balance during the
      quarter ending March 31, 2007. The agreement called for the issuance of
      1,800,000 warrants if it was not repaid by February 1, 2007. In
      March,
      2007 we issued 1,800,000 warrants at $1.06 per warrant effective to February
      1,
      2007. We calculated the fair value of these warrants at $0.4688 per warrant
      or
      $843,840 using the Black Scholes option pricing model with a market price of
      $0.97, a dividend yield of 0%, a risk free rate of 4.7% and a volatility of
      91.4%. We recorded this value as debt discount which was fully amortized to
      interest expense during the six months ended March 31, 2007.




See
      also
      footnote 13 warrants section regarding the impact of the issuance of this stock
      on the anti-dilution provisions of warrants outstanding.




69







**NOTE
      13 - SHAREHOLDERS' EQUITY**





**PREFERRED
      STOCK**





We
      have
      5,000,000 shares of preferred stock authorized. For the years ending September
      30, 2007 there was no preferred stock outstanding.




**COMMON
      STOCK**





**SERVICES
      RENDERED**




For
        the
        fiscal year ended September 30, 2005, the Company issued 150,000 shares of
        common stock, registered under an S-8 registration statement to one individual
        for intellectual property and business advisory services valued at $325,769,
        the
        market value of the services.
 
 For
        the
        fiscal year ended September 30, 2006 the Company issued in aggregate 1,175,014
        shares of common stock for services rendered or in settlement of accounts
        payable valued at the market value of the services provided as
        follows:
 
 In
        November, 2005 the Company issued 73,961 shares of stock registered for resale
        pursuant to Bankruptcy code section 1145 (“Section 1145” stock) for business
        advisory and consulting services incurred between May, 2005 and September,
        2005
        and valued at $131,577.
 
 In
        November, 2005 the Company issued 232,258 shares of stock registered for
        resale
        pursuant to Bankruptcy code section 1145 for financial services performed
        in
        conjunction with the $6,000,000 Debtor in Possession notes. The services
        were
        valued at $360,000.
 
 In
        January, 2006 the Company issued 78,489 shares of unregistered common stock
        valued at $1.72 per share, the market price on the date prior to issuance,
        in
        payment of services related to the negotiation of the conversion of the October,
        2005 Debtor in Possession financing.
 
 In
        May,
        2006, the Company issued 526,840 shares of unregistered common stock as
        prepayment for public and media relations consulting services from January,
        2006
        through March, 2008 valued at $832,407. The shares were valued at $1.58 per
        share, the closing market price on the date prior to issuance. The expense
        will
        be amortized over the life of the consulting contract. We have amortized
        $277,470 of this balance through September 30, 2006 and we will amortize
        $92,490
        per quarter until the contract expiration in March, 2008.
 
 In
        May,
        2006, the Company issued 191,466 shares of common stock registered under
        Form
        S-8 to an individual in payment of past due accounts payable related to legal
        services and valued at $296,773, both the market value of the shares on the
        date
        prior to issuance and the value of the legal services.
 
 In
        September, 2006, the Company issued 72,000 shares of unregistered common
        stock
        valued at $1.06 per share, the market price on the date prior to issuance,
        in
        payment of services related to the negotiation of the partial $3,500,000
        March
        Bridge Notes conversion.


For
      the
      fiscal year ended September 30, 2007 the Company issued a total of 227,523
      shares for payment of accounts payable of $248,500 consisting of $55,000 of
      marketing related services valued at the fair value of the services provided
      and
      $193,500 of product development services valued at the fair value of the
      services provided.




**CONVERSION
      OF CONVERTIBLE NOTES AND DEBENTURES**




For
        the
        fiscal year ending September 30, 2005, the Company issued 2,478,777 shares
        of
        common stock upon the conversion of $4,139,558 of principal at a conversion
        price of $1.67 per share of the $15 million debentures issued in August,
        2004.
 
 For
        the
        fiscal year ending September 30, 2006 we issued 7,815,048 shares for the
        conversion of $12,162,191 in convertible notes and debentures. We also issued
        2,568,737 shares of stock as inducements to convert $7,325,000 of converted
        debt
        and to waive certain rights under the debt and related debt documents. The
        value
        of the inducement shares at market prices was determined to be
        $3,568,235.


For
      the
      fiscal year ending September 30, 2007 we issued 14,612,132 shares for the
      conversion of $16,675,777 in convertible notes and debentures. During fiscal
      2007, we had two series of debt subject to conversions:





**A.
      August, 2004 $15 million Debentures**





During
      the year ending September 30, 2007, the Company issued 4,272,673 shares of
      common stock for the conversion of $6,023,250 of the August, 2004 Convertible
      Debentures as follows:


-
            $1,010,050
                of principal was converted at $1.46 per share into 691,816 shares
                of
                common stock-
            $5,013,200
                of principal was converted at $1.40 per share into 3,580,857 shares
                of
                common stock.





**B.
      February, 2007 $22.8 million Convertible Notes**





During
      the year ending September 30, 2007, in February, 2007 the Company issued
      $22,825,000 of convertible notes due January, 2010.


During
      the year ending September 30, 2007, the Company issued 10,339,459 shares of
      common stock for the conversion of $10,652,527 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-
            $10,352,527
                of principal was converted at $1.03 per share into 10,050,997 shares
                of
                common stock.





See
      also
      Note 12 for additional information.





**CASH**





During
      the year ended September 30, 2007 the Company received $2,447,231 in cash from
      the exercise of 2,314,135 warrants and received $378,000 from the repayment
      of a
      subscription receivable related to 300,000 stock warrants exercised in July,
      2006.





During
      the year ended September 30, 2007 the Company received $366,218 from the
      exercise of 1,133,066 employee and consultant stock options.





June,
      2007 Private Equity Placements





In
      June,
      2007 the Company closed two private equity placements where we issued 25,201,954
      units raising a total of $24,952,920 before cash fees of $1,497,175. Both of
      these placements constituted a dilutive issuance as defined in certain of the
      Company’s past financing agreements. The issuances resulted in exercise price
      adjustments to certain of our previously issued warrant series as well as the
      conversion price of our convertible debt.





On
      June
      9, 2007, a total of 20,151,446 Units were sold to 17 institutional investors
      at
      a price of $0.99 per Unit for gross proceeds of $19,952,920. Each Unit consisted
      of one share of common stock and 1⁄4 of a warrant to purchase a share of common
      stock at an exercise price of $1.40 per warrant. A total of 20,151,446 shares
      of
      Common Stock and 5,038,590 warrants valued at the fair value of $0.6448 per
      warrant or $3,248,424 were issued. Capstone Investments acted as the primary
      investment advisor for this transaction and received cash fees of $1,197,175
      in
      cash and 1,209,086 warrants at an exercise price of $1.40 per warrant valued
      at
      $0.6448 per warrant or $779,619. The cash and warrants issued to Capstone were
      recorded as offering costs.





On
      June
      19, 2007, a total of 5,050,505 Units were sold to 1 institutional investor
      at a
      price of $0.99 per Unit for gross proceeds of $5,000,000. Each Unit consisted
      of
      one share of common stock and 1⁄4 of a warrant to purchase a share of common stock
      at an exercise price of $1.40 per warrant. A total of 5,050,505 shares of Common
      Stock and 1,262,626 warrants valued at the fair value of $0.6448 per warrant
      or
      $814,141 were issued. Capstone Investments acted as the primary investment
      advisor for this transaction and received cash fees of $300,000 in cash and
      302,272 warrants at an exercise price of $1.40 per warrant or $194,905. The
      cash
      and warrants issued to Capstone were recorded as offering costs.




70




**LEGAL
        AND BANKRUPTCY SETTLEMENTS**
 
 There
        were no issuances of stock for fiscal 2005 or 2007 for Bankruptcy and Claims
        Settlements.
 
 During
        fiscal 2006, the Company issued 7,971,425 shares of common stock for settlement
        of bankruptcy claims and litigation settlements valued at $15,209,522 All
        shares
        issued for bankruptcy claims and litigation settlements were Section 1145
        stock
        and the price per share was set by the Bankruptcy court as the market price
        on
        the date immediately prior to the settlement date.
 
 **PAYMENT
        OF ACCRUED INTEREST**
 
 During
        fiscal 2006, the Company issued 277,476 shares of common stock in lieu of
        interest totaling $450,760.
 
 In
        November, 2005 interest accrued on the August, 2004 Debentures of $433,435
        was
        paid by the issuance of 261,132 shares of Section 1145 stock valued under
        the
        Bankruptcy court at $1.66 per share.
 
 In
        September, 2006 16,344 shares of unregistered stock valued at the market
        price
        on the date prior to issuance of $1.06 or $17,325 were issued to the two
        holders
        of the $3,500,000 Bridge Notes.


**RECOVERY
      OF ACQUISITION SHARES**





Under
      the
      terms of the Share Purchase Agreement to acquire 100% of the shares of EU Energy
      was a clause that allowed for recovery of shares from the two principal
      shareholders in the event of misrepresentation of asset and liability balances
      at a rate of one share for each $1.55 of misrepresentation. In June, 2007 the
      Company filed a claim under this clause claiming understatement of liabilities
      existing at the acquisition date. In September, 2007 the principal shareholders
      returned 815,789 shares to the Company valued at $1,150,000.





**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.





The
      following table summarizes all warrant activity from September 30, 2004 through
      September 30, 2007:


Number
                of
                  Shares
              
              Weighted-Average
                  Exercise PriceOutstanding,
                  September 30, 2004
              
              
              13,201,681
              
              $
              1.08Granted
              
              
              1,166,009
              
              $
              3.13Exercised
              
              
              (3,830,242
              )
              $
              0.55Cancelled
              
              
              (1,741,055
              )
              $
              0.56Outstanding,
                  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
              
              $
              1.30EXERCISABLE,
                  September 30, 2007
              
              
              32,449,107
              
              $
              1.30





Cash
      exercises:





The
      following table summarizes the warrant exercises for cash for the year ended
      September 30, 2007. 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
              
              Exercise
                  Price per shareSeries
                  S
              
              
              6
              
              
              1,110,000
              
              $
              1,110,000
              
              $
              1.00Debenture
                  $1.75 series
              
              
              1
              
              
              2,212
              
              $
              3,097
              
              $
              1.40February,
                  2007 Convertible Notes
              
              
              1
              
              
              1,201,923
              
              $
              1,334,135
              
              $
              1.11Total
              
              
              8
              
              
              2,314,135
              
              $
              2,447,232
              
              $
              1.06




71




Exercise
      for subscription note receivable:





On
      July
      11, 2006 the holder of 300,000 “Red Guard” warrants to purchase a like number of
      shares for $1.26 per share submitted their warrants for exercise without cash
      payment. The holder of the warrants had made a legal claim prior to the exercise
      that the shares underlying the warrants were supposed to have been registered
      for resale as part of the terms of their issuance in September, 2001. In April,
      2007 the registration statement covering these shares was declared effective.
      In
      September, 2007 the holder paid the Company $378,000 in cash and the Company
      released the shares. The shares had been included in the Company’s issued and
      outstanding figure for the year ending September 30, 2006.





During
      the year ended September 30, 2007 we issued the following warrants exercisable
      to purchase an equal number of shares of common stock of the
      Company:





In
      November, 2006 we issued 220,000 warrants in lieu of interest on a $500,000
      non
      interest bearing note due December 31, 2006. The warrants were valued at
      $164,208 and were recorded to interest expense during the quarter ending
      December 31, 2006. We valued the warrants using the Black Scholes option pricing
      model with a volatility of 98.4%, a risk free rate of 4.7%, a life of 3 years,
      a
      0% dividend rate and a market price of $1.16 at $0.7464 per warrant.





In
      February, 2007, in conjunction with the issuance of our $22,825,000 convertible
      debt offering, we issued 10,973,585 warrants to purchase an equal number of
      shares of common stock at an exercise price of $1.13 per warrant. The fair
      value
      of the warrants of $0.4711 per warrant or $5,169,656 was incorporated into
      the
      beneficial conversion feature as debt discount against the convertible
      debentures as described in Note 4. We also issued 1,316,827 warrants with an
      exercise price of $1.04 per warrant to Capstone Investments as part of their
      placement fee which was valued at $0.4637 per warrant for $610,613. The fair
      value of both sets of warrants was incorporated into the debt discount to our
      convertible debentures as described in Note 4 and which will be amortized to
      interest expense over the life of the convertible debt. We valued the warrants
      using the Black Scholes option pricing model with a volatility of 90.5%, a
      risk
      free rate of 4.85%, a life of 3 years, a 0% dividend rate and a market price
      of
      $0.87 per share.





In
      June,
      2007 in conjunction with the issuance of $24,952,920 for our private equity
      units, we issued a total of 6,247,676 warrants on June 9, 2007 and 1,564,898
      on
      June 19, 2007. We valued the warrants using the Black Scholes option pricing
      model with a volatility of 90%, a risk free rate of 4.97%, a life of 3 years,
      a
      0% dividend rate and a market price of $1.16 at $0.6448 per warrant.





In
      conjunction with the issuance of our February, 2007 convertible debt and the
      June, 2007 private equity placements, we triggered anti-dilution provisions
      in
      certain of our existing warrant series. For additional warrants issued we
      calculated the fair value of the issuances using the Black-Scholes option
      pricing model. For warrants with price re-sets, we calculated the difference
      in
      their fair value immediately prior to reset and immediately after the price
      reset using the Black Scholes option pricing model. Our Black-Scholes
      calculations used the following assumptions for the February, 2007 anti-dilution
      re-pricings:





Volatility
      82.9% - 91.4%


Risk
      free
      rate 4.6%-4.85%


Life
      -
      remaining life of warrant series ranging between 1.2 and 2.8 years


Dividend
      rate of 0%


Market
      price of the previous trading day close prior to the change event





The
      following table describes the total $335,179 fair value impact of the February,
      2007 dilutive issuances on warrants subject to anti-dilution
      provisions:





Warrants,
                after dilution
            
            Additional
                warrants issued
            
            Exercise
                price prior to dilution
            
            Exercise
                price after dilution
            
            Fair
                value of dilution impact
            
            NotesAugust,
                2004 Debenture & Debenture Amend warrants
            
            
            4,307,275
            
            
            --
            
            $
            1.55
            
            $
            1.47
            
            $
            49,591
            
            
            (1
            )October,
                2005 DIP Series 1
            
            
            988,365
            
            
            310,946
            
            $
            1.22
            
            $
            1.22
            
            $
            99,092
            
            
            (2
            )October,
                2005 DIP Series 2
            
            
            995,601
            
            
            318,182
            
            $
            1.33
            
            $
            1.32
            
            $
            96,677
            
            
            (2
            )2006
                Series A2
            
            
            1,117,793
            
            
            152,341
            
            $
            1.55/$1.06
            
            $
            1.04
            
            $
            89,819
            
            
            (3
            )Subtotal,
                other expense impact at fair value
            
            
            
            
            
            
            $
            285,588Total
                impact at fair value
            
            
            
            
            
            
            $
            335,179





(1)
      The
      $49,591 recorded related to these warrants was recorded as additional debt
      discount to the August, 2004 Debentures and will be amortized ratably to
      interest expense through August, 2007, the due date of the convertible
      debentures.




72




(2)
      The
      combined $195,769 was recorded to other expense as a warrant modification during
      the quarter ended March 31, 2007 and the nine months ended June 30, 2007.





(3)
      We
      issued additional 2006 Series A2 warrants and reset the price of previously
      existing Series A2 warrants. We recorded $89,819 to other expense as a warrant
      modification during the quarter ended March 31, 2007 and the nine months ended
      June 30, 2007.





In
      March,
      2007 we issued 1,800,000 warrants at $1.06 per warrant pursuant to a receivable
      factoring arrangement. We calculated the fair value of these warrants at $0.4688
      per warrant or $843,840 using the Black Scholes option pricing model with a
      market price of $0.97, a dividend yield of 0%, a risk free rate of 4.7% and
      a
      volatility of 91.4%. We recorded this value as debt discount which was fully
      amortized to interest expense during the three months ended March 31, 2007
      and
      the nine months ended June 30, 2007 since the debt was repaid in March, 2007.





In
      March,
      2007, we agreed to modify the 600,000 warrants issued in May, 2006 to Media
      Relations Services. In exchange for extending their services contract by one
      year to June 30, 2009 we extended the life of all 600,000 warrants issued by
      one
      year to December 31, 2009 and we reduced the exercise prices of the 200,000
      $2.00 warrants to $1.25 per warrant; the 200,000 $2.50 warrants to $1.50 per
      warrant, and the 200,000 $3.00 warrants to $1.75 per warrant. We calculated
      a
      fair value difference of $0.2317, $0.2420, and $0.2453 for the $1.25, $1.50,
      and
      $1.75 warrants respectively. The difference in fair value for the 600,000
      warrants in total was $143,805 and was recorded as additional prepaid expense
      which will be combined with the remaining unamortized and previously recorded
      prepaid warrant and stock expense balance and the revised total will be
      amortized ratably over the remaining revised contract life through December
      31,
      2009. The fair values were calculated using the Black Scholes option pricing
      model with a market price of $0.97 per share, a volatility of 90%, a risk free
      rate of 4.85%, and a dividend yield of 0%.





In
      May,
      2007 we settled a dispute with one holder of our Series A2 warrants. We issued
      300,000 additional Series A2 warrants at an exercise price of $1.04 per warrant
      and an expiration of March 1, 2009. We recorded an expense of $165,720, the
      fair
      value of the warrants on the issuance date. We valued the warrants using the
      Black-Scholes option pricing model with a volatility of 91%, a market price
      of
      $1.12 per share, a risk free rate of 4.85% and a 1.75 year life at $0.5524
      per
      warrant.





In
      June,
      2007 we had two private equity issuances that resulted in the issuance of
      warrants, as described above, and which resulted in the triggering of certain
      anti-dilution protection provisions of past warrant series.’ Our Black-Scholes
      calculations used the following assumptions for the June, 2007 anti-dilution
      re-pricings and fair value calculations:





Volatility
      82.9% - 98%


Risk
      free
      rate 4.6%-4.97%


Life
      -
      remaining life of warrant series ranging between 1.2 and 3.0 years


Dividend
      rate of 0%


Market
      price of the previous trading day close prior to the change event





The
      following table describes the $221,351 fair value impact resulting from our
      warrant anti-dilution provisions triggered by the two combined June, 2007
      dilutive issuances:





Warrants,
                after dilution
            
            Additional
                warrants issued
            
            Exercise
                price prior to dilutive event
            
            Exercise
                price after dilutive event
            
            Fair
                value of dilution impact
            
            NotesAugust,
                2004 Debenture & Debenture Amend warrants
            4,307,275
            
            --
            
            $1.47
            
            $1.40
            
            $77,547
            
            (4)February,
                2007 Convertible Debt warrants
            10,973,585
            
            --
            
            $1.13
            
            $1.11
            
            $52,600
            
            (5)February,
                2007 services warrants
            1,316,833
            
            --
            
            $1.04
            
            $1.03
            
            $3,083
            
            (6)Subtotal,
                Additional Debt Discount
            
            
            
            
            
            $133,230October,
                2005 DIP Series 1
            996,534
            
            8,168
            
            $1.22
            
            $1.21
            
            $6,397
            
            (7)October,
                2005 DIP Series 2
            1,003,201
            
            7,600
            
            $1.32
            
            $1.31
            
            $5,656
            
            (7)2006
                Series A2
            1,489,399
            
            71,606
            
            $1.04
            
            $0.99
            
            $64,280
            
            (8)June,
                2007 PIPE warrants series 1
            6,246,964
            
            --
            
            $1.40
            
            $1.39
            
            $11,789
            
            (9)Subtotal,
                Other expense
            
            
            
            
            
            $88,121Total
                dilutive impact at fair value
            
            
            
            
            
            $221,351




73




(4)
      The
      August 2004 Debenture warrants and the Debenture Amendment had their price
      reset
      to $1.40 per warrant. The difference in fair value as a result of the exercise
      price change of $77,547 was recorded as additional debt discount and will be
      amortized to interest expense through August, 2007, the due date of the
      convertible debentures.





(5)
      The
      February, 2007 Debenture warrants had their price reset to $1.12 for the first
      PIPE and to $1.11 per warrant for the second. The combined difference in fair
      value was $0.00457 per warrant as a result of the exercise price changes and
      $52,600 was recorded as additional debt discount and will be amortized to
      interest expense through January, 2010, the due date of the convertible
      debentures.





(6)
      The
      February, 2007 Services warrants had their price reset to $1.03 per warrant.
      The
      difference in fair value of $0.0023 per warrant as a result of the exercise
      price change or $3,083 was recorded to additional debt discount.





(7)
      We
      reset the prices of our October, 2005 DIP warrants resulting in the issuance
      of
      8,168 Series 1 and 7,600 of Series 2 warrants at $1.21 and $1.31 exercise prices
      respectively and repriced 988,366 and 995,601 warrants to $1.21 and $1.31
      respectively. The fair value of the warrants issued was $0.3957 and $0.3651
      per
      warrant for the $1.21 and $1.31 warrants respectively and the fair value
      difference for the repriced warrants was approximately $0.003 per warrant.
      The
      fair value of the dilution impact, consisting of was recorded to other expense
      during the quarter and nine months ended June 30, 2007.





(8)
      We
      issued additional 2006 Series A2 warrants and reset the price of previously
      existing Series A2 warrants. We recorded $64,280 to other expense during the
      quarter and nine months ended June 30, 2007 representing the fair value of
      the
      following: 1,417,793 warrants had their exercise price reset from $1.04 per
      warrant to $0.99 per warrant at a fair value difference of $0.0166 per warrant
      and 71,606 additional warrants were issued at $0.99 per warrant at a fair value
      of $0.5690 per warrant.





(9)
      The
      June, 2007 PIPE Series 1 warrants had their price reset to $1.39 per warrant.
      The difference in fair value of $0.0018 per warrant as a result of the exercise
      price change or $11,789 was recorded to other expense as a warrant
      modification.





The
      following table summarizes the warrants issued, outstanding, and exercisable
      as
      of September 30, 2007:





Warrant
                Series
            Grant
                Date
            Strike
                Price
            
            Expiration
                Date
            Warrants
                remaining
            Proceeds
                if Exercised
            Call
                feature“December
                2003”
            Dec.,
                2003
            $2.04
            
            December,
                2008
            120,000
            $
                244,800
            (F)August,
                2004 Debenture warrants
            Aug,
                2004
            $1.40
            (A)
            August,
                2008
            3,221,471
            4,510,059
            NoneDebenture
                Amend
            Nov,
                2004
            $1.40
            (A)
            November,
                2008
            1,083,592
            1,517,029
            NoneSeries
                T
            Sept,
                2004
            $1.00
            
            July,
                2008
            160,000
            160,000
            NoneSeries
                U
            Sept,
                2004
            $1.83
            
            August,
                2008
            512,362
            937,622
            (H)October,
                2005 DIP Series 1
            Oct,
                2005
            $1.21
            (B)
            October,
                2008
            996,538
            1,205,811
            NoneOctober,
                2005 DIP Series 2
            Oct,
                2005
            $1.31
            (C)
            October,
                2008
            1,003,207
            1,314,201
            None2006
                Series A1
            Mar,
                2006
            $1.55
            
            March,
                2009
            150,000
            232,500
            None2006
                Series A2
            Mar,
                2006
            $0.99
            (D)
            March,
                2009
            1,489,399
            1,474,505
            None2006
                Series B
            Various
                2006
            $2.00
            
            May,
                2009
            2,191,466
            4,382,932
            (I)2006
                Series C
            May,
                2006
            $1.25
            
            December,
                2009
            200,000
            250,000
            None2006
                Series D
            May,
                2006
            $1.50
            
            December,
                2009
            200,000
            300,000
            None2006
                Series E
            May,
                2006
            $1.75
            
            December,
                2009
            200,000
            350,000
            None2007
                Series F
            Nov,
                2006
            $1.10
            
            November,
                2009
            220,000
            242,000
            None2007
                Convertible Debt
            Feb,
                2007
            $1.11
            (E)
            February,
                2010
            9,771,662
            10,846,545
            None2007
                Convertible Debt Fees
            Mar,
                2007
            $1.03
            (E)
            February,
                2010
            1,316,833
            1,356,338
            None2007
                Factoring
            Mar,
                2007
            $1.06
            
            February,
                2009
            1,800,000
            1,908,000
            NoneJune
                PIPE Series 1
            Jun,
                2007
            $1.39
            (E)
            June,
                2010
            6,247,676
            8,684,270
            NoneJune
                PIPE Series 2
            Jun,
                2007
            $1.40
            (E)
            June,
                2010
            1,564,901
            2,190,862
            NoneTotal
            
            
            
            
            32,449,107
            $42,107,474





74





(A)
      Subject to anti-dilution provisions. Price reset under a 100% of “new issue
      price” price reset in October, 2005 that converted to a weighted average formula
      in August, 2006. Certain future equity or equity equivalent issuances below
      $1.40 per share may result in additional price resets.





(B)
      Subject to anti-dilution provisions. Price reset under a weighted average 115%
      of “new issue price” reset in June, 2007. Certain future warrant issuances with
      exercise prices below $1.05 per warrant may result in weighted average price
      re-set and additional issuances of warrants.





(C)
      Subject to anti-dilution provisions. Price reset under a weighted average 125%
      of “new issue price” reset in February, 2007. Certain future warrant issuances
      with exercise prices below $1.05 per warrant may result in weighted average
      price re-set and additional issuances of warrants.





(D)
      Subject anti-dilution provisions. Certain future equity or equity equivalent
      issuances below $0.99 per share may result in a price reset of 100% of the
      new
      issue price and additional issuances of warrants.





(E)
      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.





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





(G)
      Callable if closing market price is 300% of strike price for 5 consecutive
      trading days





(H)
      Callable if closing market price is 200% of strike price for one trading day





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





**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 "Stock Plan"). The number of shares reserved initially
      under the 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
      exercise price of the underlying shares will be determined 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. The Plan
      automatically terminates on May 15, 2021 and no options under the Plan may
      be
      granted after May 15, 2011.




The
      following table summarizes the Stock Plan stock option activity from the
      conversion of the Plan from September 30, 2004 through September 30,
      2007.


Number
                of
                  Shares
              
              Average
                Exercise
                PriceOutstanding,
                  September 30, 2004
              
              
              7,195,336
              
              $
              0.37Granted
              
              
              775,000
              
              $
              1.71Exercised
              
              
              (1,480,000
              )
              $
              0.22Cancelled
              
              
              (322,400
              )
              $
              2.15Outstanding,
                  September 30, 2005
              
              
              6,167,936
              
              $
              0.57Granted
              
              
              10,177,000
              
              $
              1.01Exercised
              
              
              --
              
              $
              --Cancelled
              
              
              (379,600
              )
              $
              1.29Outstanding,
                  September 30, 2006
              
              
              15,965,336
              
              $
              0.83Granted
              
              
              3,972,000
              
              $
              1.11Exercised
              
              
              1,133,066
              
              $
              0.32Cancelled
              
              
              3,784,400
              
              $
              1.04Outstanding,
                  September 30, 2007
              
              
              15,019,870
              
              $
              0.91EXERCISABLE,
                  September 30, 2007
              
              
              7,293,366
              
              $
              0.74




75




The
      weighted-average remaining contractual life of the options outstanding at
      September 30, 2007 was 4.3 years. The exercise prices of the options outstanding
      at September 30, 2007 ranged from $0.25 to $1.89, 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
            
            
            1,613,216
            
            
            1,563,216
            
            
            4.3
            
            $
            0.29
            
            $
            0.29$0.50-$0.99
            
            
            2,775,000
            
            
            2,513,333
            
            
            4.3
            
            $
            0.59
            
            $
            0.58$1.00-$1.49
            
            
            10,431,654
            
            
            3,016,817
            
            
            4.2
            
            $
            1.08
            
            $
            1.02$1.50-$1.99
            
            
            200,000
            
            
            200,000
            
            
            4.3
            
            $
            1.89
            
            $
            1.89Total
            
            
            15,019,870
            
            
            7,293,366





76





**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 Stock1Based 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,
      2007, 2006, and 2005 are as follows:


Fiscal
                  year ending September 30
              
              Risk
                  Free Rate
              
              Volatility2005
              
              
              3.66-4.13
              %
              
              73-106
              %2006
              
              
              4.36-4.95
              %
              
              98-107
              %2007
              
              
              4.01-4.97
              %
              
              88-98
              %




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, 2007, 2006, and 2005 is as follows:


**Year
                  ended**
              
              **Year
                  ended**
              
              **Year
                  ended****September
                  30,**
              
              **September
                  30,**
              
              **September
                  30,****2007**
              
              **2006**
              
              **2005**Cost
                  of Products Sold
              
              $
              77,057
              
              $
              --
              
              $
              --Officer
                  Compensation
              
              
              873,351
              
              
              189,245
              
              
              --Selling
                  and marketing
              
              
              532,957
              
              
              21,259
              
              
              --Research
                  and development
              
              
              569,089
              
              
              206,763
              
              
              248,675General
                  and administrative
              
              
              301,464
              
              
              560,242
              
              
              --Totals
              
              $
              2,353,918
              
              $
              977,509
              
              $
              248,675





As
      of
      September 30, 2007, there was $5.7 million of total unrecognized compensation
      cost related to non-vested share-based compensation arrangements related to
      stock options consisting of $4.7 million related to employee grants and $1.0
      million related to consultant and director grants. The costs are expected to
      be
      recognized over a weighted-average period of 2.8 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 2007 and 2006
      grants using 3 year volatility and 2005 grants using 2 year volatility. Options
      granted from fiscal 2005 through fiscal 2007 used the following range of
      assumptions:





Expected
                term
            
            
            2-5
                yearsExpected
                and weighted average volatility
            
            
            99.43
            %Risk-free
                rate
            
            
            3.66-4.97
            %




77




*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, 2006.




*Fair
      Value Disclosures - Prior to SFAS No. 123R Adoption*





Before
      the adoption of SFAS No. 123R, the Company applied APB Opinion No. 25 to account
      for its stock-based awards. Under APB Opinion No. 25, the Company was not
      required to recognize compensation expense for the cost of employee stock
      options. Had the Company adopted SFAS No. 123 for fiscal 2005, the impact would
      have been as follows:


2005Net
                  loss, as reported
              
              $
              (40,163,407
              )Deduct
                  total stock based employee compensation expense determined under
                  fair
                  value method for all awards
              
              
              (1,500,568
              )Net
                  loss, pro forma
              
              $
              (41,663,975
              )Earnings
                  per common shareBasic,
                  as reported
              
              $
              (0.35
              )Basic,
                  pro forma
              
              $
              (0.36
              )Diluted,
                  as reported
              
              $
              (0.35
              )Diluted,
                  pro forma
              
              $
              (0.36
              )




**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:


Year
                  Ended September 30,2007
              
              2006
              
              2005Statutory
                  regular federal tax rate
              
              $
              (14,390,000
              )
              
              34.0%
              
              $
              (9,741,000
              )
              
              34.0%
              
              $
              (13,656,000
              )
              
              34.0%Change
                  in valuation allowance
              
              
              16,067,000
              
              
              (38.0%
              )
              
              9,694,000
              
              
              (33.8%
              )
              
              16,585,000
              
              
              (41.3%
              )State
                  tax, net of federal benefit
              
              
              (1,390,000
              )
              
              3.3%
              
              
              (1,690,000
              )
              
              5.9%
              
              
              (2,347,000
              )
              
              5.8%Convertible
                  note exchanges
              
              
              --
              
              
              0.0%
              
              
              1,219,000
              
              
              (4.3%
              )
              
              --
              
              
              0.0%Other
              
              
              (289,642
              )
              
              0.7%
              
              
              518,000
              
              
              (1.8%
              )
              
              (582,000
              )
              
              1.5%Total
              
              $
              2,642
              
              
              0%
              
              $
              --
              
              
              0%
              
              $
              --
              
              
              0%





Net
      deferred tax assets comprised the following at September 30, 2007, 2006 and
      2005:





2007
              
              2006
              
              2005Deferred
                  tax assetsNet
                  operating loss carry forwards and tax credits
              
              $
              46,200,000
              
              $
              31,608,000
              
              $
              16,565,000Accrued
                  legal settlements
              
              
              --
              
              
              20,000
              
              
              6,188,000Warrants
                  issued for services
              
              
              (1,078,000
              )
              
              6,312,000
              
              
              4,071,000SFAS
                  123R stock-based compensation
              
              
              1,192,000
              
              
              --
              
              
              --Asset
                  reserves and provisions
              
              
              6,030,000
              
              
              5,134,000
              
              
              1,174,000Fixed
                  assets
              
              
              503,000
              
              
              (376,000
              )
              
              --Capitalized
                  intangible assets
              
              
              (6,853,000
              )
              
              (7,342,000
              )
              
              --Other
              
              
              --
              
              
              631,000
              
              
              467,000Less:
                  Valuation allowance
              
              $
              (45,994,000
              )
              $
              (35,987,000
              )
              $
              (28,463,000
              )Net
                  deferred tax assets
              
              $
              --
              
              $
              --
              
              $
              --




78


The
        valuation allowance increased by $10.0 million and $7.5 million during 2007
        and
        2006, 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, 2007, the Company had provided a full valuation allowance to
      reduce net deferred tax assets.





As
      of
      September 30, 2007, the Company had net operating loss carry forwards for
      federal, state and foreign income tax purposes of approximately $86,660,000,
      $62,918,000, and $34,194,000 respectively. The net operating loss carry forwards
      begin expiring in 2020 and 2010, for the Federal and State NOLs.




**NOTE
      16 - COMMITMENTS AND CONTINGENCIES**





**LEASES**





The
      company leases the following office and production space:


Monthly
                  rent
              
              ExpiresIrvine,
                  CA, headquarters
              
              $
              83,044
              
              
              December,
                  2010Office
                  - Bartonville, TX
              
              $
              3,000
              
              
              November,
                  2007Office
                  and production - Lubeck, Germany
              
              $
              15,231
              
              
              June,
                  2008Service
                  and storage - Lubeck, Germany
              
              $
              33,586
              
              
              September,
                  2008





Monthly
      rents are listed in US Dollars at the September 30, 2007 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 $3,035 per month.
      The vehicles leases expire through July, 2010.





Rent
      expense was $1,398,177, $972,010, and $1,082,945 for the years ended September
      30, 2007, 2006, and 2005, respectively.





Future
      minimum operating lease payments at September 30, 2006 were as
      follows:


Year
                ending September 30,
            
            Operating
                Leases2008
            
            $
            1,637,4162009
            
            
            1,114,7052010
            
            
            1,124,6862011
            
            
            292,3782012
            
            
            4,527Thereafter
            
            $
            --




In
      May
      2004, the Company entered into a $500,000 sale leaseback of certain of its
      capital assets. Under the terms of the Master Lease Agreement the Company
      received $450,000 which was net of a 10% security deposit, and is to make
      payments of $16,441 per month for 36 months. At the end of the lease period,
      which ended during the current fiscal year on May 2007, the Company had the
      right to renew the lease for an additional 12 months, terminate and return
      the
      equipment or purchase the equipment at the greater of fair market value subject
      to a minimum of 10% and a maximum of 20% of the capitalized cost. The company
      recognized a gain in the amount of $59,045 from this transaction, deferred
      the
      gain and amortized the deferred gain to income over the period of the initial
      lease term. At the end of the lease term, the Company purchased the equipment
      for $217,425, capitalized the cost in June 2007, and is depreciating the asset
      over 12 months as allowed under generally accepted accounting principles.




79




In
      June
      2004, the Company entered into a $300,000 equipment lease with the same company
      financing the sale leaseback, above. The Company received $131,421 which was
      net
      of a 10% security deposit ($30,000) and direct payment to one vendor ($126,750)
      and less advance payments. The Company is to make payments of $9,864 per month
      for 36 months. The terms, at the end of the lease, are the same as above sale
      leaseback.





During
      2005, the Company purchased $455,960 in equipment through a sale-leaseback
      and
      direct vendor payment financing with the same company used to finance equipment
      in 2004. The Company received $208,570 in cash through the sale-leaseback and
      had $247,390 paid directly to third part vendors and recorded a $13,862 loss
      on
      the sale-leaseback transaction. The Company paid a 10% security deposit for
      the
      equipment leased and is to make payments of $13,177 per month for 42 months.
      At
      the end of the lease period, the Company has the right to renew the lease for
      an
      additional 12 months, terminate and return the equipment or purchase the
      equipment at the greater of fair market value subject to a minimum of 10% and
      a
      maximum of 25% of the capitalized cost.





Future
      minimum capital lease payments under the new leases at September 30, 2007 were
      as follows:


2008
              
              $
              113,860Total
                  Payments
              
              
              113,860Less:
                  Amounts representing interest
              
              
              (4,839
              )Fair
                  Value of Capital Leases
              
              
              109,021Less
                  Current Portion
              
              
              (109,021
              )Non
                  Current Portion
              
              $
              --





Property
      and equipment under capital leases consisted of the following at September
      30,
      2007:


Machinery
                  and Equipment
              
              $
              563,977Accumulated
                  Depreciation
              
              
              (373,817
              )Net
                  Property and Equipment
              
              $
              190,160





Depreciation
      expense recorded for assets recorded under capital leases was $369,274, $399,579
      and $374,659 for the fiscal years 2007, 2006 and 2005, respectively.




**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.





On
      January 2, 2006, the Company entered into a Public and Media Relations Strategy
      and Services Consulting Agreement with Media Relations Strategy, Inc., Boca
      Raton, FL ("MRS") to provide public and media relations strategy and marketing
      counsel in the financial markets for a term of 27 months and will terminate
      on
      March 28, 2008. The Agreement provides that MRS shall (1) act as a liaison
      between the Company and its shareholders, (2) act as an advisor to the Company
      with respect to existing and potential markets and investors, and (3) act as
      an
      advisor to the Company with respect to communications and information
      dissemination. The Company shall pay MRS a non-refundable retainer fee of
      $36,500 per month in advance as follows: (i) $197,100 on execution of the
      present Agreement; (ii) $197,100 on April 21, 2006; (iii) $197,100 on August
      25,
      2006; (iv) $197,100 on December 22, 2006 and (v) $197,100 on March 23, 2007.
      MRS
      shall be responsible for all the costs and expenses related to the provision
      of
      the Services.




80




The
      Company settled the entire remuneration due under the Agreement by electing
      to
      pay the full amount of the contract in 526,840 shares of stock valued at
      $832,407 in May, 2006 and thereby taking advantage of a 15% discount clause
      of
      the contract agreement.




As
      a
      further incentive to the MRS, the Company in May, 2006 the Company issued to
      MRS
      the following warrants to acquire the Company's unregistered, restricted shares
      of common stock: (i) 200,000 warrants at an exercise price of $2.00 per warrant;
      and (ii) 200,000 warrants at an exercise price of $2.50 per warrant; and (iii)
      200,000 warrants at an exercise price of $3.00 per warrant ("the Warrants").
      The
      Warrants expire on Wednesday, December 31, 2008.




The
      Agreement may be terminated by any party upon failure of the other party to
      cure
      a default or breach of this Agreement within (30) days; (ii) upon the bankruptcy
      or liquidation of the other party; (iii) upon the other party filing to benefit
      from any insolvency law; and/or (iv) upon the other party having or applying
      to
      have a receiver appointed to have jurisdiction over all or a substantial part
      of
      such party's assets or business. The Agreement may also be terminated by the
      Company in the event of a material and serious breach of MRS' duties or a
      repeated violation of its duties; or (ii) in the event of the loss by MRS of
      the
      services of a Key Person which is defined as any person or manager working
      with
      MRS whose presence the parties agree is materially important to the fulfillment
      of the services to be provided by MRS.




In
        Fiscal
        2007 the Company entered into a Patent License Agreement with GE Infrastructure
        Technology LLC and GE Infrastructure International Inc. (collectively “GE”) in
        which GE licensed certain patents related to wind turbines to DeWind. GE
        granted
        DeWind a non-exclusive license to make, use, sell, and service the D6 and
        D8
        wind turbines and components in certain areas worldwide. Under the term of
        the
        agreement, DeWind is required to pay up front license fees for the use of
        the
        licensed patents. To date, DeWind has not paid for any up front fees and
        has not
        accrued a liability for any GE license fees.


**NOTE
      17 LITIGATION**




The
      Company may be subject to litigation and legal claims activity in the
      normal course of business. Claims are assessed on a case by case basis
      under the guidelines of SFAS 5 as to the likelihood of loss and whether the
      claims are reasonably estimable. Claims that are determined to be probable
      and
      reasonably estimable are accrued for in the period in which the claims are
      determined to be probable and reasonably estimable.


**Enable
        vs. Composite Technology Corporation**
 
 The
        Company has not recorded a loss claim for the Enable vs. Composite Technology
        Corporate case as described below since the claimed loss is neither probable
        nor
        reasonably estimable at this time. The claim is described
        below.




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.
      The Company represents that the market value on the date of the issuance of
      $1.06 was equal to the fair value of the consideration. Enable alleges that
      the
      fair value of the consideration was approximately $0.02 per share and thereby
      triggers additional anti-dilution protection for the warrants still held by
      the
      former convertible debt holders. If the Claim figure were to be upheld, a
      consideration of $0.02 per share would result in the required issuance of
      approximately 40,000,000 additional common shares and common share equivalents,
      representing approximately 20% of the current issued and outstanding share
      amount and further trigger additional anti-dilution for subsequent financing
      rounds resulting in further warrant price reductions and reductions of existing
      conversion prices for existing convertible debt. The Company believes the Claim
      has no merit and has not recorded a liability. The Company promptly filed a
      claim under its E&O insurance policy to cover potential damages and legal
      costs, retained legal counsel and intends to vigorously defend its position.
      On
      July 11, 2007 the Company filed a motion to dismiss the claim. On July 31,
      2007
      Enable filed an opposition to the motion to dismiss. On July 31, 2007 the
      Company received confirmation that the matter is covered under our primary
      E&O policy of $5,000,000. Coverage is subject to$200,000 retention for legal
      fees. Amounts in excess of this up to our policy limits are covered. On August
      28, 2007 we requested a stay of discovery until oral arguments were hear on
      the
      motion to dismiss and this stay was granted on September 20, 2007. On November
      7, 2007 oral arguments were heard on the motion to dismiss and the presiding
      judge reserved decision on the motion, extended our stay of discovery, and
      did
      not provide guidance on the timing of his decision regarding the motion to
      dismiss. No additional hearings are scheduled in this matter at this
      time.




**FKI
        vs. DeWind; Brush vs. DeWind; DeWind vs. FKI**
 
 The
        Company has recorded a loss provision of 2.0 million Euros ($2.9 million
        at
        December 12, 2007 exchange rates) as of September 30, 2007 and expensed to
        bankruptcy and claims settlements in fiscal 2007 to reflect the summary judgment
        hearing results of December 7, 2007 for the combined FKI vs. DeWind and Brush
        vs. DeWind cases described below since these balances are . The Company has
        not
        recorded a gain contingency on the DeWind vs. FKI capital accounts litigation
        described below since the resolution of this matter is not probable nor
        reasonably estimable at this time.
  On
          December, 7, 2007 a hearing was conducted to hear arguments on FKIs motion
          for
          summary judgment of their claims for the FKI bond calls described below
          in A.1
          and the Brush claim described in B below. FKI received approval of a summary
          judgment on their positions consisting of a net judgment of 1,415,000 Euros
          on
          the FKI bond call claim and 650,000 Euros for the Brush claim plus net
          interest
          and costs of approximately 181,000 Euros for a total judgment of approximately
          2,246,000 Euros ($3,290,000 at December 7, 2007 exchange rates). DeWind
          may
          either appeal the summary judgments within 28 days or is obligated to pay
          50% of
          the balances due within 14 days of the date of the summary judgment. Subsequent
          to the hearing, FKI and DeWind agreed to meet in January, 2008 to resolve
          all
          differences related to the FKI bond claim, the Brush Claim, and the Capital
          Accounts claim. During the quarter ended September 30, 2007 DeWind accrued
          an
          additional 514,000 Euros in addition to the 1,500,000 Euros already accrued
          to
          reflect an additional estimate of the amounts payable under the FKI and
          Brush
          claims and recorded 232,000 Euros into the December, 2007 period expense.
          No
          amount was recorded related to the Capital Accounts counter-claim since
          it is
          not reasonably estimable at this time. DeWind is obligated to pay 50% of
          the
          summary judgment within 14 days of the summary judgment date or to file
          for an
          appeal within 28 days of the summary judgment date in which case a payment
          stay
          is in effect. We are also seeking a payment stay with FKI pending the January,
          2008 settlement discussions with FKI relating to the German Capital account
          claim described in A.2 below.
  On
        May 3,
        2007,  the Company and certain of its wind segment subsidiaries (here
        referred to as “DeWind”) entered into a settlement agreement with FKI
        Engineering Ltd., FKI plc, and Brush Electrical Machines Ltd (collectively
        “FKI”) Under the terms of the agreement, the DeWind and FKI agreed to take all
        necessary steps to effect a stay of all of the disputes listed below in A
        and B.
        effective until September 15, 2007 or other such date as the parties agree
        to in
        writing in order to allow sufficient time to effect the settlement
        agreement.  As part of the settlement agreement, the parties have agreed to
        use their best efforts to cause or procure the auditors of a German subsidiary
        of the Company to complete their audit of such German subsidiary’s statutory
        accounts for the fiscal years ending March 31, 2003, 2004, and 2005. It is
        expected that as part of the process of the completion of such audits, the
        auditors will identify any issues relating to the capital reserve accounts
        of
        the German subsidiary that are the subject of the disputes listed in A.2
        below
        and the counterclaim listed in A.1.b&c below.  The De Wind and FKI
        parties have further agreed as part of the settlement agreement that if further
        assurance is required on possible legal issues regarding the German subsidiary’s
        capital structure and / or in relation to payments made into and / or out
        of the
        capital reserve account, then, the legal counsel of DeWind and FKI shall
        meet
        with a view to preparing a mutually acceptable statement regarding the capital
        account or hire an independent reputable and suitably experienced German
        law
        firm to prepare the statement that sets out the capital reserve accounts
        issues.




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.   Assuming De Wind’s satisfaction with the statement referred
        to above, in May, 2007, DeWind agreed to make payments totaling 1,500,000
        Euros
        ($2,128,000 at September 30, 2007 exchange rates) in two equal installments,
        one
        within seven days after the agreed upon capital account statements have been
        issued and one 90 days after the first installment.   These payments
        shall serve to settle all remaining claims currently existing between FKI
        and
        DeWind.  In the event that the auditors cannot complete their audit due to
        issues relating to the capital account of the German subsidiary or in the
        event
        that no statement as referred to above, and if required, is forthcoming,
        then
        the payments referred to above will not be made and the German subsidiary
        will
        have to pursue litigation to correct discrepancies in its capital reserve
        accounts. During the quarter ended March 31, 2007, since the balance due
        was
        probable and reasonably estimable, the Company recorded a litigation settlement
        accrual under the guidance of SFAS 5 and expensed the accrual to other expense
        in the statement of operations of 1,452,000 Euros ($1,936,000 at March 31,
        2007
        exchange rates) to properly accrue for the settlement balance of 1,500,000
        Euros. Between May, 2007 and November, 2007 work was performed on the statutory
        audits which have not been completed pending resolution of the capital accounts
        issue.


81




**A.**  **FKI
      Engineering Ltd. and FKI plc. (the FKI Companies”) v. DeWind Holdings Ltd and
      DeWind GmbH; and DeWind GmbH v. FKI Engineering Ltd.**





There
      are
      two related legal actions against subsidiaries of the Company: the first action
      is by FKI Engineering and FKI plc commenced in England against DeWind Holdings
      Ltd and DeWind GmbH (“first action”) and the second action is by DeWind GmbH
      against FKI Engineering Ltd commenced in Germany (“second action”).





1.
      FKI
      Engineering Ltd. and FKI plc. v. DeWind Holdings Ltd and DeWind
      GmbH





On
      July
      6, 2006 FKI Engineering Ltd. and FKI plc. (the “FKI Companies”) filed a suit
      with the High Court of Justice, Queen’s Bench Division, Commercial Court, Royal
      Court of Justice   in England against both DeWind Holdings Ltd. and DeWind
      GmbH claiming as follows:


a.
      FKI
      Engineering Ltd. claims against DeWind Holdings Ltd.: (1) $2,113,555, further
      or
      alternatively damages for breach of contract; and (2) Interest in the amount
      of
      $112,355;


b.
      FKI
      Engineering Ltd. and FKI plc claim against DeWind GmbH: (1) a declaration that
      neither FKI Engineering Ltd. nor FKI plc is liable to DeWind GmbH as set out
      in
      the Draft Proceedings or at all; (2) damages; (3) a declaration that FKI Ltd.
      and/or FKI plc would be entitled to repayment upon demand from DeWind GmbH
      of
      any amount which they may be ordered to pay to DeWind GmbH by reason of the
      matters set out in the second action commenced by DeWind GmbH in Germany as
      described below) or otherwise; and finally,


c.
      FKI
      Engineering Ltd. further claims against DeWind Holdings Ltd.: (1) damages,
      alternatively payment of $72,095,285; and (2) interest to be
      assessed.


d.
      On
      September 22, 2006 DeWind Holdings Ltd. filed a counterclaim claiming against
      FKI Engineering Ltd. as follows: (1) payment of $430,000; alternatively damages
      for breach of contract; (2) contractual interest; alternatively statutory
      interest to be assessed.





In
      formulating the claims mentioned under letter “b.” above, the FKI Companies are
      seeking a negative declaratory judgment against DeWind GmbH in connection with
      the claims delivered by DeWind GmbH against FKI Engineering Ltd, that are now
      the subject of the second action filed by DeWind GmbH against FKI Engineering
      Ltd in Lübeck Germany. This action is further described below. The FKI Companies
      are seeking declaration that DeWind GmbH has no claims against them out of
      capital reserve agreements or unlawful repayments. Furthermore, the FKI
      Companies seek declaration that any payment obligations towards DeWind GmbH
      would result in a claim of repayment of the FKI Companies against DeWind GmbH
      in
      the same amount. In this connection, the Company has contested the
      jurisdictional competency of the English court since it is not apparent that
      it
      does have jurisdiction according to Art. 2 et seqq. and Art. 6 Nr. 1 of the
      European Council Regulation (EC) No. 44/2001.





The
      claims mentioned under letter “c.” above are contingent on the finding that the
      claims that are now the subject of the above mentioned second action filed
      by
      DeWind GmbH against FKI Engineering Ltd in Lübeck, Germany for payment of $95.8
      million, as further described below, are valid.





The
      counterclaim mentioned under letter “d.” above is based on the argument that FKI
      Engineering Ltd. has failed to pay DeWind Holdings Ltd. the sum of $430,000
      although it was obliged to do so under the SSA, by reason whereof DeWind
      Holdings Ltd. has suffered loss and damage in such sum.





In
      respect of all claims mentioned, DeWind GmbH and DeWind Holdings Ltd. have
      filed
      their defense. The FKI Companies, in turn, have filed and served a Reply to
      Defense and a Defense to the counterclaim. From December 11, 2006 until December
      13, 2006, an oral hearing was held in front of the English High Court regarding
      the competency of the English court to hear the cases. On January 25, 2007
      the
      High Court rendered a judgment holding that it had competence to hear also
      the
      claim against DeWind GmbH. DeWind GmbH sought leave to appeal this decision
      and
      put its submissions in writing by February 8, 2007. The High Court furthermore
      held that DeWind GmbH had to pay a maximum of 90 % of FKI's costs of the
      application contesting jurisdiction. On December 7, 2007, a summary judgment
      was
      issued as described above.




82







2.
      DeWind GmbH v. FKI Engineering Ltd.





On
      July
      20, 2006 DeWind GmbH filed a claim against FKI Engineering Ltd. (with FKI plc
      being a “third party noticed”) at the District Court of Lübeck, Germany seeking
      that: a. FKI Engineering Ltd. shall be ordered to pay to DeWind GmbH the sum
      of
      $72,525,350; b. FKI Engineering Ltd. shall be ordered to pay to DeWind GmbH
      interest on the above mentioned sum of a value of 5 per cent point above the
      respective base lending rate since the pending of the action; and c. it shall
      be
      declared that FKI Engineering Ltd. has the obligation to refund possible taxes
      to DeWind GmbH, which may be evaluated against DeWind GmbH, if the tax
      authorities deem the aforementioned claim for payment as extraordinary gains
      liable to tax, which cannot be settled with DeWind’s accumulated
      deficit.





The
      claim
      was filed based on a review of DeWind GmbH’s March 31, 2006 year end audit which
      indicated that FKI Engineering Ltd. as a former shareholder of DeWind GmbH
      had
      not duly paid capital reserves in the amount of the claim. The Company asserts
      that FKI either did not pay the capital reserves as in accordance with the
      Capital Reserve Agreement signed pursuant to the acquisition of DeWind by EU
      Energy in July, 2005 or had, after receipt of money by DeWind GmbH, immediately
      claimed the funds back on the grounds of undefined loans. Such practices are
      illegal under German law. The Company further asserts that loan contracts of
      this magnitude were never concluded between DeWind GmbH and FKI Engineering
      Ltd.
      On September 12, 2006 FKI Engineering Ltd. filed its acknowledgement of defense
      and filed its detailed statement of defense during the quarter ended March
      31,
      2007. Settlement discussions were held in November, 2007 and are scheduled
      to
      continue in January, 2008. A hearing is scheduled for February, 2008.





**B.**  **Brush
      Electrical Machines Ltd. v. DeWind GmbH**





On
      October 6, 2006, Brush Electrical Machines Ltd., an FKI Engineering Ltd.
      affiliate, served a notice of an action with the High Court of Justice, Queen’s
      Bench Division, Commercial Court, Royal Court of Justice   in England on
      DeWind GmbH. According to this notice of action, Brush is claiming payment
      of an
      amount of GBP 692,438 (approximately $1.36 million at December 31, 2006 exchange
      rates) from DeWind GmbH. The claim is based on an alleged breach of contract
      with regard to an agreement between the parties dated 30 June 2005 concerning
      the asset transfer to DeWind GmbH resulting from the sale of DeWind UK by
      agreement dated July 4, 2005 and/or a further agreement concluded on 13 July
      2005. The Company received the particulars of this claim on November 24, 2006.
      On January 11, 2007 DeWind GmbH filed its defense and a contingent counterclaim
      for damages. In the defense, DeWind GmbH admitted to owe an amount of at least
€
143,000 ($184,755) to Brush and paid this sum in January, 2007. On December
      7,
      2007, a summary judgment was issued as described above.




**C.**  **Zephyr
      GmbH & Co. KG v. DeWind GmbH**





On
      January 06, 2006 Zephyr filed a suit against DeWind GmbH with the District
      Court
      of Düsseldorf, Germany for payment of an amount of $1,300,533 plus interest
      based on the argument that DeWind GmbH had allegedly failed to comply with
      a
      guarantee of availability under a turbine sales contract. Furthermore, Zephyr
      sought a declarative judgment that DeWind GmbH had to come up for a potential
      purchase tax obligation in an amount of $208,085. On August 08, 2006, the
      District Court rendered a judgment by default against Zephyr dismissing the
      case. Zephyr filed an objection against this judgment on August 29, 2006. DeWind
      GmbH responded by filing a written pleading on October 04, 2006. The Company
      is
      expecting to hear an update from the Court in May, 2007. The Company has fully
      reserved net receivables of $914,690 in respect of this dispute and has assumed
      that the $720,590 cash paid to Zephyr as a result of their calling of
      performance bonds will not be recovered.




**DeWind
        Availability penalty litigation and claims:**
 
 In
        the
        ordinary course of business, the DeWind turbines installed in Europe are
        subject
        to availability claims made by customers. These claims are evaluated as to
        their
        validity, frequently disputed as to their validity by DeWind, and eventually
        resolved either through negotiation, arbitration, or legal activity. The
        claims
        are assessed during the course of our accrual for our availability penalties
        and
        our estimate of the eventual availability payments are accrued for within
        the
        warranty accrual balances on our consolidated balance sheets. Expenses related
        to such penalties are expensed to cost of sales – service.
 
 As
        of
        September 30, 2007 one customer has made disputed claims totaling 1.6 million
        Euros ($2.4 million at December 12, 2007 exchange rates) and is expected
        to make
        additional disputed claims of up to 1.0 million Euros ($1.5 million) for
        a total
        of 2.6 million Euros ($3.9 million). We have recorded accrued availability
        claims of 1.8 million Euros ($2.7 million) which represents our estimate
        of the
        amount expected to be resolved.




**NOTE
      18 - RELATED PARTY TRANSACTIONS**





In
      May,
      2005, the Company received $100,000 in cash from one of its Directors as an
      advance payment for sublease rents on approximately 2,100 square feet of the
      Company's headquarters facility. The sublease agreement is for three years
      and
      terminates in 2008. The balance is shown as "due to affiliate" on the balance
      sheet. The Company reduced operating expenses by $38,880 during fiscal 2007
      as a
      result of this transaction. As of September 30, 2007, $19,440 remained as a
      due
      to affiliate on the balance sheet, included in accounts payable.





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 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. The contracts expire on February 29,
      2008.




83




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.


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, 2007 we recorded fees of $250,000 and patent
      filing fees of $106,107 for TMG, and fees of $250,000 and incidental expenses
      of
      $69,500 for TMA. All of these expenses were recorded to Research and Development
      expense.





In
      November, 2005 we issued 73,961 shares of the Company’s common stock to Michael
      McIntosh, registered under Section 1145 of the Bankruptcy Code for payment
      of
      $131,577 outstanding to TMA and TMG and applied this balance for work performed
      through September 30, 2005.





As
      of
      September 30, 2007 the Company had outstanding balances due to TMA and TMG
      of
      $27,748 and $34,404 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. Corporate balances represent corporate expenses and corporate cash
      reserves. See also the analysis in Item 7 Management Discussion and
      Analysis.




**CTC
      Cable Segment**


Located
      in Irvine, California with sales operations in Dallas, Lubeck, Germany, and
      Shanghai, China, 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 three cable manufacturers in Canada, Belgium, 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 Jiangsu
      Far East, 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 all corporate costs to the
      CTC
      Cable Segment. For consistency of presentation, corporate costs are reflected
      in
      the CTC Cable Segment for fiscal years 2007 and 2006.




Segment
      information for the years ended September 30, 2007, 2006, and 2005 is as
      follows:




**Corporate**
              
              **Cable**
              
              **Turbine**
              
              **Total**2007:Revenues
              
              $
              —
              
              $
              16,008,198
              
              $
              24,770,268
              
              $
              40,778,466Operating
                  loss
              
              
              (6,291,640
              )
              
              (4,071,205
              )
              
              (23,279,009
              )
              
              (33,641,854
              )Total
                  assets
              
              
              16,606,372
              
              
              24,718,461
              
              
              90,922,817
              
              
              132,247,650Goodwill
              
              
              —
              
              
              —
              
              
              24,218,539
              
              
              24,218,539Capital
                  expenditures
              
              
              —
              
              
              (504,989
              )
              
              (4,927,082
              )
              
              (5,
                  432,071
              )Depreciation
                  & amortization
              
              
              —
              
              
              798,821
              
              
              2,344,613
              
              
              3,143,4342006:Revenues
              
              $
              —
              
              $
              3,554,436
              
              $
              6,580,878
              
              $
              10,135,314Operating
                  loss
              
              
              (5,534,962
              )
              
              (7,582,249
              )
              
              (4,861,377
              )
              
              (17,978,588
              )Total
                  assets
              
              
              186,616
              
              
              6,557,537
              
              
              89,508,671
              
              
              96,252,824Goodwill
              
              
              —
              
              
              —
              
              
              25,469,000
              
              
              25,469,000Capital
                  expenditures
              
              
              —
              
              
              (467,049
              )
              
              (60,317
              )
              
              (527,366
              )Depreciation
                  & amortization
              
              
              —
              
              
              793,219
              
              
              558,325
              
              
              1,351,5442005:Revenues
              
              
              —
              
              
              1,008,970
              
              
              —
              
              
              1,008,970Operating
                  loss
              
              
              —
              
              
              (16,704,881
              )
              
              —
              
              
              (16,704,881
              )Total
                  assets
              
              
              —
              
              
              5,711,315
              
              
              —
              
              
              5,711,315Goodwill
              
              
              —
              
              
              —
              
              
              —
              
              
              —Capital
                  expenditures
              
              
              —
              
              
              (1,833,052
              )
              
              —
              
              
              (1,833,052
              )Depreciation
                  & amortization
              
              
              —
              
              
              559,084
              
              
              —
              
              
              559,084


Prior
          to
          fiscal 2006, Corporate and Cable assets and losses were not tracked separately.
          All fiscal 2005 assets and losses are included in the Cable
          segment.


84


The
      following Unaudited Pro-forma Segment information for the years ended September
      30, 2006 and 2005 is provided to show the effect if the operating results of
      DeWind had been included from the beginning of fiscal 2005:


**Cable****&
                  Corporate**
              
              **Turbine**
              
              **Total**2006:Revenues
              
              $
              3,554,436
              
              $
              32,137,022
              
              $
              35,691,458Operating
                  loss
              
              
              (13,117,212
              )
              
              (16,198,838
              )
              
              (29,316,050
              )Total
                  assets
              
              
              6,744,153
              
              
              89,508,671
              
              
              96,252,824Goodwill
              
              
              --
              
              
              25,469,000
              
              
              25,469,000Capital
                  expenditures
              
              
              467,049
              
              
              600,217
              
              
              1,067,266Depreciation
                  & amortization
              
              
              793,219
              
              
              1,092,769
              
              
              1,885,9882005:Product
                  Revenues
              
              
              1,008,970
              
              
              6,678,653
              
              
              7,687,623Operating
                  loss
              
              
              (16,704,881
              )
              
              (4,420,057
              )
              
              (21,124,938
              )Total
                  assets
              
              
              5,711,315
              
              
              97,070,277
              
              
              102,781,592Goodwill
              
              
              —
              
              
              25,469,000
              
              
              25,469,000Capital
                  expenditures
              
              
              1,833,052
              
              
              483,521
              
              
              2,316,573Depreciation
                  & amortization
              
              
              559,084
              
              
              385,322
              
              
              944,406




**NOTE
        20- VARIABLE INTEREST ENTITY (VIE)**
 
 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 will function to
        service and maintain the combined installed turbines of DeWind in Europe
        and the
        turbine farms operated by Enertrag in Europe, primarily in Germany and Austria.
        The resulting combined operation increased the number of turbines serviced
        by
        EUES prior to the agreement to over 900 turbines and was undertaken to increase
        the profitability of the turbine servicing of EUES and reduce the turbine
        service costs of Enertrag. The new entity was operated under joint control
        of
        both Enertrag and DeWind executives during the quarter ended December 31,
        2006.
        Since the Company was considered to be the primary beneficiary of the VIE,
        during the quarter ended December 31, 2006, we had consolidated the assets
        and
        liabilities in our December 31, 2006 balance sheet and included the revenues
        and
        expenses in our statement of operations from October 1, 2006 through January
        19,
        2007. We allocated $931,695 of our acquired goodwill to the service
        organization.
 
 On
        January 19, 2007, an amendment was ratified on the original agreement dated
        October 1, 2006. The January 19, 2007 amendment called for an immediate need
        to
        invest additional cash into E Service of 4,950,000 Euros ($6,600,000 at June
        30,
        2007 exchange rates). During this recapitalization, the share capital of
        the
        Company’s investment in E Service decreased from 50% to 24.9% and under the
        January, 2007 amendment we were required to invest 1,232,550 Euros ($1,595,782
        at January 19, 2007 exchange rates). Subsequent to January 25, 2007 we amended
        the recapitalization agreement to require only the investment of 224,000
        Euros
        ($290,013 at January 19, 2007 exchange rates). The Company has concluded
        that
        accounting for E Service as a VIE is no longer required since the Company
        is no
        longer the primary beneficiary. As a result, for the period beginning January
        19, 2007 and ending September 30, 2007 we have not included the revenues
        and
        expenses in our statement of operations and we have not included the assets
        and
        liabilities in our balance sheet. The Company has accounted for our investment
        in E Service for the year ended September 30, 2007 under the equity method
        of
        accounting, which requires us to recognize to adjust our investment each
        quarter
        to reflect our ownership share of the operating income or loss of the
        investment. We have eliminated all inter company profits related to our
        investment in this entity for the quarter ended September 30, 2007 and we
        have
        shown the carrying value of our investment of $2,109,394 as an asset on our
        balance sheet as of September 30, 2007.
 
 As
        of
        September 30, 2007, the Company’s maximum exposure to loss is limited to the
        investment balance of $2,109,394. We have amounts payable to the entity of
        approximately $1,829,081 and which are included in Accounts Payable in the
        September 30, 2007 balance sheet. Excluding the September, 2007 balance due
        to
        the entity, no creditors or beneficial interest holders have any recourse
        to the
        general credit of the Company as a result of this variable interest
        entity.




**NOTE
      21 - SUBSEQUENT EVENTS**




On
      October 8, 2007 the Company issued 1,677,185 shares of common stock for the
      conversion of $1,727,500 of convertible debt at a conversion price of $1.03
      per
      share.




On
        December 4, 2007 the Company conducted a special shareholders meeting. At
        this
        meeting, the shareholders approved a proposed amendment to the Company’s
        Articles of Incorporation to increase the authorized shares from 300,000,000
        to
        600,000,000 shares. On December 12, 2007 the Company filed the amendment
        to the
        Company’s Articles of Incorporation to increase the authorized shares with the
        State of Nevada.
 
 On
        December 7, 2007 a summary judgment was handed down on the FKI litigation
        as
        discussed in Note 17.
 
 On
        December 12, 2007 the Company issued 3,161,423 shares of the Company’s common
        stock for the cash exercise of a like number of common stock warrants at
        exercise prices of $1.11 and $1.39 per warrant. We received cash totaling
        $3,721,301 for the combination of these two exercises.
 
 Between
        October 1, 2007 and December 12, 2007 the Company saw the continued depreciation
        of our reporting currency, the US Dollar, against the functional currency
        of our
        European operations, the Euro. The exchange rate of the USD to the Euro
        increased from $1.4186 to $1.4706 or 3.67%. If the December 12, 2007 rate
        were
        applied to our Euro denominated balances as of September 30, 2007 this would
        result in an increase of the recorded value of our year end assets of $2.8
        million, and increase the recorded value of our liabilities by $3.5 million
        for
        a net foreign exchange loss of $0.7 million.
 
 Between
        October 1, 2007 and December 12, 2007, the company granted a total of 3,745,000
        options to purchase common stock to one director and 74 employees at exercise
        prices ranging between $1.74 and $2.09. The options vest over a period of
        three
        to five years based on service with initial vesting occurring after 6 months
        for
        five year vesting options and one year for three year vesting options. No
        executive officers were granted options during this time
        frame.





**NOTE
      22 - SUPPLEMENTAL FINANCIAL INFORMATION**





**Supplemental
      Quarterly Financial Information (unaudited)**





Fiscal
                year ended September 30, 2006
            
            December
                31
            
            March
                31
            
            June
                30
            
            September
                30Revenue
            
            $
            572,892
            
            $
            1,030,528
            
            $
            1,785,420
            
            $
            6,746,474Gross
                profit (Loss)
            
            
            251,426
            
            
            53,416
            
            
            533,217
            
            
            (1,081,784
            )Loss
                before income taxes
            
            
            (7,233,302
            )
            
            (6,517,597
            )
            
            (4,205,944
            )
            
            (10,562,093
            )Net
                loss
            
            
            (7,234,902
            )
            
            (6,518,653
            )
            
            (4,205,944
            )
            
            (10,563,693
            )Basic
                and diluted net loss per share
            
            $
            (0.06
            )
            $
            (0.05
            )
            $
            (0.03
            )
            $
            (0.06
            )




Fiscal
                    year ended September 30, 2007
                
                December
                    31
                
                March
                    31
                
                June
                    30
                
                September
                    30Revenue
                
                $
                13,032,728
                
                $
                8,408,433
                
                $
                12,902,201
                
                $
                6,435,104Gross
                    profit (Loss)
                
                
                1,253,738
                
                
                (213,735
                )
                
                544,910
                
                
                (3,727,179
                )Loss
                    before income taxes
                
                
                (6,909,210
                )
                
                (11,071,603
                )
                
                (8,215,280
                )
                
                (18,344,533
                )Net
                    loss
                
                
                (6,949,324
                )
                
                (11,073,203
                )
                
                (8,123,599
                )
                
                (18,337,356
                )Basic
                    and diluted net loss per share
                
                $
                (0.04
                )
                $
                (0.06
                )
                $
                (0.04
                )
                $
                (0.09
                )


85




**SCHEDULE
      II - VALUATION AND QUALIFYING ACCOUNTS**


Description
              
              Balance
                  at beginning of year
              
              Reserves
                  Acquired
              
              Additions
                  charged to costs and expenses
              
              Payment
                  or utilization,
              
              Balance
                  at end of year**FY2007**Allowance
                  for doubtful accounts (current)
              
              $
              2,500,000
              
              
              
              
              $
              $595,980
              
              $
              (2,500,000
              )
              $
              595,980Inventory
                  reserve
              
              
              258,378
              
              
              
              
              
              1,236,666
              
              
              -
              
              
              1,495,044Warranty
                  reserve
              
              
              14,654,204
              
              
              
              
              
              8,648,542
              
              
              (7,487,281
              )
              
              15,815,465**FY2006**Allowance
                  for doubtful accounts (current)
              
              $
              2,500,000
              
              $
              
              
              $
              -
              
              $
              -
              
              $
              2,500,000Inventory
                  reserve
              
              
              234,673
              
              
              
              
              
              23,705
              
              
              -
              
              
              258,378Warranty
                  reserve
              
              
              -
              
              
              14,654,204
              
              
              -
              
              
              -
              
              
              14,654,204**FY2005**Allowance
                  for doubtful accounts (current)
              
              $
              -
              
              $
              -
              
              $
              2,500,000
              
              $
              -
              
              $
              2,500,000Inventory
                  reserve
              
              
              -
              
              
              -
              
              
              234,673
              
              
              -
              
              
              234,673Warranty
                  reserve
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -





**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 there
      being more than a 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.





**Fiscal
      2007 Assessment.**





During
      management's review of our internal control structure under Sarbanes-Oxley
      section 404, for the fiscal year ending September 30, 2007, we determined the
      following to be material weaknesses:




86




Entity
      level Processes and weaknesses. As of September 30, 2007, 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 had one member Audit Committee, a one member Compensation Committee,
      and
      had a designated financial expert on the Board of Directors since January of
      2006.





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) 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, 2007, 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
      Process. As of September 30, 2007, the following material weaknesses existed
      related to ineffective controls over our inventory process:




o
      Perpetual Inventory records: Ineffective controls to (a) accurately record
      turbine parts and conductor raw materials inventory moved out of inventory
      stores and into service use or manufacturing production and later into finished
      goods, (b) accurately record manufacturing variances and (c) accurately monitor
      offsite inventories.




o
      During
      our 2007 assessment, we noted that there were insufficient cycle counts of
      Turbine related parts for our Interim Reporting Periods.





Procure
      to Pay process. During our fiscal 2007 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)
              An
                  effective purchasing function did not exist during the entire fiscal
                  year.ii)
              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.iii)
              There
                  was a lack of segregation of duties between the purchasing and
                  payable
                  processing functions.iv)
              There
                  were inadequate vendor management duties and responsibilities during
                  the
                  yearv)
              There
                  was a lack of sufficient purchasing reports for management
                  review.


Weaknesses
        specific to our DeWind subsidiary:
 
 During
        our 2007 assessment, we determined that we did not have a sufficient number
        of
        accounting personnel trained in US Generally Accepted Accounting Principles
        working in our DeWind subsidiary.
 
 We
        also
        determined that there were several instances during fiscal 2007 where
        information relating to key turbine warranty and turbine service related
        accounting information and operations issues were not communicated to management
        and finance staff on a timely basis, in a consistent report format, or
        incorrectly that resulted in the over reliance on high level detective controls
        and which may result in future material misstatements or a delay in timely
        financial reporting if not remedied. The issues primarily related to the
        turbine
        service and related operations personnel and the service personnel employed
        by
        the E Services entity.




87




**Changes
      in Internal Control over Financial Reporting**





Throughout
      fiscal 2007, in addition to addressing the control weaknesses identified in
      the
      US operations in 2006, we completed the evaluation of the DeWind controls in
      fiscal 2007 and we identified additional control weaknesses related to the
      DeWind processes. The nature of the control 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
      the year, we engaged the services of an ex-Big 4 accounting specialist with
      US
      GAAP and accounting process experience to review the processes related to
      DeWind’s revenue recognition, inventory, accounts receivables, and product
      warranty liability balances. In addition, this consultant assisted with the
      required disclosure requirements related to operational activity subsequent
      to
      the acquisition and related to this 10-K document. We relied on this specialist
      to supplement our European personnel’s accounting skills. We also engaged the
      services of additional personnel with Sarbanes-Oxley experience to assist us
      in
      our assessment of the DeWind internal control structure.





During
      fiscal 2007, two events transpired that will impact our internal control
      structure for future periods.





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. As such, we have excluded the service entity
      from the scope of our internal control assessment.





In
      the
      fourth fiscal quarter of 2007, we began to transition the supply chain of our
      turbine assembly and parts procurement to our TECO partner. TECO has a much
      more
      robust and mature supply chain with extensive and systematic controls and
      processes that are superior to our internal controls in place with our German
      supply chain. We expect that this transition will be completed in fiscal 2008
      and will substantially reduce the material weaknesses in the turbine inventory,
      turbine parts procurement, and related informational technology
      systems.





During
      the year, we also continued to improve the US internal controls. We hired
      additional experienced accounting and finance staff including a Chief Financial
      Officer and a new Corporate Controller as well as additional supporting
      accounting staff. We implemented additional review procedures of complex
      transactions and established and enforced additional policies and procedures.
      In
      September, 2007 we began phase one of a three phase informational technology
      upgrade designed to improve the systematic controls surrounding our ACCC cable
      production, materials sourcing, and inventory tracking. We expect the IT
      enhancements to continue through the third quarter of fiscal 2008. Finally,
      in
      October, 2007, subsequent to year end, we appointed an additional independent
      director who will also serve 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 2007 described above, as follows:





(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;




88




(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; and





(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 2008.





(7)
      Continue the work in progress on the Information Technology initiatives begun
      in
      the last fiscal quarter of 2007 including the enhancements of the ACCC Cable
      inventory systems and the transition of the DeWind turbine inventory systems
      to
      our TECO partner





(8)
      Continue the enhancement of the DeWind accounting and financial
      systems.




(9)
      Conduct cycle counts of turbine related inventories.





The
      Company began to execute the remediation plans identified above in the first
      fiscal quarter of 2008.





Except
        for the inclusion of our DeWind operations and except for the sale of 75.1%
        of
        our service entity, there was no change in our internal control over financial
        reporting during the year ended September 30, 2007 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.




Singer
        Lewak Greenbaum and Goldstein LLP, the Company’s independent registered public
        accounting firm, has issued an opinion on the Company’s internal control over
        financial reporting. This opinion appears in the Report of Independent
        Registered Public Accounting Firm on page 46 of this annual report on Form
        10-K.




**Evaluation
      of Effectiveness 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 and 2007 because of the material weaknesses
      identified above.




**ITEM
      9B - OTHER INFORMATION**





None.








PART
      III





**ITEM
      10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**





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 4, 2008 Annual Meeting of
      Shareholders.





**ITEM
      11. EXECUTIVE COMPENSATION**





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 4, 2008 Annual
      Meeting of Shareholders.




89




**ITEM
      12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS**





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 4, 2008 Annual Meeting of Shareholders.





**ITEM
      13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE**





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 4, 2008 Annual Meeting of Shareholders.





**ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND 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 4, 2008 Annual Meeting of Shareholders.




**PART
      IV**





**ITEM
      15- EXHIBITS, FINANCIAL STATEMENT SCHEDULES**





The
      following documents are filed as part of this report:




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





(2)
      Exhibits - See Index to Exhibits following the signatures to this
      report.




**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.





**COMPOSITE
      TECHNOLOGY CORPORATION**





*By:
                /s/ Benton H Wilcoxon*
              
              *Benton
                H Wilcoxon*
              *Chief
                Executive Officer*
              
              *Dated:
                December 14, 2007*
              
              *By:
                /s/ Domonic J. Carney*
              
              *Domonic
                J. Carney*
              *Chief
                Financial Officer*
              
              *Dated:
                December 14, 2007*





90





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 Wilcoxon*
              
              *Benton
                H Wilcoxon*
              *Chief
                Executive Officer and*
              *Chairman*
              *(Principle
                Executive Officer)*
              
              *Dated:
                December 14, 2007*
              
              */s/
                Domonic J.
                Carney*
              *Domonic
                J. Carney*
              *Chief
                Financial Officer*
              *(Principle
                Financial and*
              *Accounting
                Officer)*
              
              */s/
                D. Dean McCormick III*
              
              *D.
                Dean McCormick III*
              *Director*
              
              *Dated:
                December 14, 2007*
              
              */s/
                Michael D. McIntosh*
              
              *Michael
                D. McIntosh*
              *Director*
              
              *Dated:
                December 14, 2007*





91





**EXHIBIT
      INDEX**




Number
            Description2.1(1)
            Articles
                of Merger of ElDorado Financial Group, Inc., a Florida corporation,
                into
                ElDorado Financial Group, Inc., a Nevada corporation.2.2(2)
            Agreement
                and Plan of Reorganization By and Among Transmission Technology
                Corporation, Certain of its Stockholders, and ElDorado Financial
                Group,
                Inc. dated November 3, 2001.2.3(3)
            Third
                Amended Chapter 11 Plan of Reorganization with non-material modifications
                of Composite Technology Corporation.2.4(3)
            Order
                confirming Debtor's Third Amended Chapter 11 Plan of Reorganization
                with
                Non-material Modifications.3.1(1)
            Articles
                of Incorporation of the Company, as amended.3.2(4)
            Bylaws
                of Composite Technology Corporation, as modified January 6,
                200610.1(5)
            Agreement
                by and among Enertrag AG and EU Energy Ltd. dated as of September
                27,
                2006.10.2(6)
            Agreement
                by and among EU Energy Inc., GE Infrastructure Technology, LLC and
                GE
                Infrastructure Technology International Inc. dated as of October
                6,
                2006.10.3(7)
            Strategic
                Alliance Agreement by and between the Registrant and TECO-Westinghouse
                Motor Company dated as of November 27, 2006.10.4(10)
            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(11)
            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(12)
            Securities
              Purchase Agreement dated as of February 12, 2007 by and among
              the Registrant and the investors set forth therein10.7(12)
            Form
              of Senior Convertible Debenture10.8(12)
            Form
              of Warrant10.9(12)
            Registration
              Rights Agreement dated as of February 12, 2007 by and among the Registrant
              and the investors set forth therein10.10(16)
            Consulting
                Agreement
                dated as of April 1, 2007 between the Registrant and Michael
                Porter. Appointment of Officers.10.11(17)
            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(18)
            Securities
                Purchase Agreement dated as of June 11, 2007 by and among the Registrant
                and the investors set forth therein10.13(18)
            Form
                of Warrant10.14(18)
            Registration
                Rights Agreement dated as of June 11, 2007 by and among the Registrant
                and
                the investors set forth therein10.15(19)
            Securities
              Purchase Agreement dated as of June 18, 2007 by and among the Registrant
              and the other parties listed therein10.16(19)
            Form
              of Warrant10.17(19)
            Registration
              Rights Agreement dated as of June 18, 2007 by and among the Registrant
              and
              the other parties listed therein10.18(19)
            Wind
              Turbine Agreement, dated as of June 15, 2007, by and between DeWind,
              Inc.
              and Enerserve Limited.10.19(20)
            Letter
              Agreement dated as of October 31, 2007 between the Registrant and John
              P
              Mitola10.20(20)
            Option
              Agreement dated as of October 31, 2007 between the Registrant and John
              P
              Mitola10.21(21)
            Factoring
                agreement by and between the Registrant and Bradley Rotter dated as
                of December 31, 2006




92




14(8)
            Code
                of Ethics.21(12)
            Subsidiaries
                of the Registrant.23.1(13)
            Consent
                of Independent Registered Public Accounting Firm.31.1(13)
            Rule
                13a-14(a) / 15d-14(a)(4) Certification of Chief Executive
                Officer31.2(13)
            Rule
                13a-14(a) / 15d-14(a)(4) Certification of Chief Financial
                Officer32.1(13)
            Section
                1350 Certification of Chief Executive Officer32.2(13)
            Section
                1350 Certification of Chief Financial Officer





93





(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 November 20, 2001.





(3)
      Incorporated herein by reference to the Form 8-K filed with the U. S. Securities
      and Exchange Commission on November 25, 2005.





(4)
      Incorporated herein by reference to Form 8-K filed with the U.S. Securities
      and
      Exchange Commission on January 12, 2006.





(5)
      Incorporated herein by reference to Form 8-K filed with the U.S. Securities
      and
      Exchange Commission on September 27, 2006.





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





(7)
      Incorporated herein by reference to Form 8-K filed with the U.S. Securities
      and
      Exchange Commission on November 30, 2006.





(8)
      Incorporated herein by reference to Form 10-K filed with the U.S. Securities
      and
      Exchange Commission on December 13, 2005.





(9)
      Incorporated herein by reference to Form 8-K filed with the U.S. Securities
      and
      Exchange Commission on January 12, 2007.





(10)
      Incorporated herein by reference to Form 8-K filed with the U.S. Securities
      and
      Exchange Commission on January 25, 2007.





(11)
      Incorporated herein by reference to Form 8-K filed with the U.S. Securities
      and
      Exchange Commission on February 2, 2007.





(12)
      Incorporated herein by reference to Form 8-K filed with the U.S. Securities
      and
      Exchange Commission on February 13, 2007.





(13)
      Filed herewith.





(14)
      Incorporated herein by reference to Form 8-K filed with the U.S. Securities
      and
      Exchange Commission on February 27, 2007.





(15)
      Incorporated herein by reference to Form 8-K filed with the U.S. Securities
      and
      Exchange Commission on April 3, 2007.





(16)
      Incorporated herein by reference to Form 8-K filed with the U.S. Securities
      and
      Exchange Commission on April 10, 2007.





(17)
      Incorporated herein by reference to Form 8-K filed with the U.S. Securities
      and
      Exchange Commission on May 9, 2007.





(18)
      Incorporated herein by reference to Form 8-K filed with the U.S. Securities
      and
      Exchange Commission on June 14, 2007.





(19)
      Incorporated herein by reference to Form 8-K filed with the U.S. Securities
      and
      Exchange Commission on June 21, 2007.





(20)
      Incorporated herein by reference to Form 8-K filed with the U.S. Securities
      and
      Exchange Commission on November 6, 2007.





(21)
      Incorporated herein by reference to Form 10-Q filed with the U.S. Securities
      and
      Exchange Commission on February 14, 2007.





94