**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, 2006





**[_]
      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, 2006, the last business day of the registrant's
      most recently completed second fiscal quarter, was $101,179,698 (based on the
      closing sales price of the registrant's common stock on that date). Shares
      of
      the registrant's common stock held by each officer and director and each person
      who owns more than 5% or more of the outstanding common stock of the registrant
      have been excluded in that such persons may be deemed to be affiliates. This
      determination of affiliate status is not necessarily a conclusive determination
      for other purposes. As of December, 5, 2006 there 178,862,848 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
      December 5, 2006 there were 178,862,848 shares of Common Stock issued and
      outstanding.








**COMPOSITE
      TECHNOLOGY CORPORATION**





TABLE
      OF
      CONTENTS





Part
                IItem
                1
            Business
            1Item
                1A
            Risk
                Factors
            16Item
                1B
            Unresolved
                Staff Comments
            24Item
                2
            Properties
            24Item
                3
            Legal
                Proceedings
            25Item
                4
            Submission
                of Matters to a Vote of Security Holders
            28Part
                IIItem
                5
            Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            29Item
                6
            Selected
                Financial Data
            30Item
                7
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operation
            32Item
                7A
            Quantitative
                and Qualitative Disclosures About Market Risk
            46Item
                8
            Financial
                Statements and Supplementary Data
            47Item
                9
            Changes
                in and Disagreements With Accountants on Accounting and Financial
                Disclosure
            99Item
                9A
            Controls
                and Procedures
            99Item
                9B
            Other
                Information
            102Part
                IIIItem
                10
            Directors
                and Executive Officers of the Registrant
            103Item
                11
            Executive
                Compensation
            106Item
                12
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            110Item
                13
            Certain
                Relationships and Related Transactions, and Director
                Independence
            111Item
                14
            Principal
                Accounting Fees and Services
            112Part
                IVItem
                15
            Index
                to Exhibits, Financial Statement Schedules
            113Signatures
            114Index
                to Exhibits
            115





**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: the consummation of our plan of reorganization, negative perceptions
      from our Title 11 filing, uncertain cash flows, the need to collect accounts
      receivable, our need for additional capital, competition, our need to protect
      and maintain intellectual property, litigation, raw material costs and
      unavailability, changing government regulations, the loss of significant
      customers or suppliers, the limited market for our 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**





**ITEM
      1 - BUSINESS**





**General**


Composite
      Technology Corporation (“CTC” or the “Company”) is a leading innovator in
      renewable and energy efficient electrical energy products. CTC’s products share
      the common goal of providing improved performance in electrical transmission
      systems and wind energy generators to the utility customer. CTC products benefit
      from proprietary and patented technology and processes that result in next
      generation products that we believe have substantial economic benefits over
      similar traditional products. These products include our Aluminum Conductor
      Composite Core or ACCC, conductors and our DeWind 8.2 wind energy
      generators.





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.





**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 2006 Annual Report on Form 10-K may
      also be obtained without charge by contacting Investor Relations, Composite
      Technology Corporation 2026 McGaw Ave Irvine, CA 92614.





**Bankruptcy
      Proceedings and Summary of Reorganization Plan**


On
      May 5,
      2005 we 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. 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 3
      of
      Item 8 in this filing for additional information.





**Operating
      Divisions of the Company**


The
      Company operates through two divisions accounted for as separate segments,
      CTC
      Cable and DeWind. CTC Cable operates under the name CTC Cable Corporation.
      This
      division sells ACCC conductors, an advanced composite core overhead electrical
      transmission conductor, as well as manufactures and sells the composite core
      component of the ACCC conductor and various accessories.





In
      July
      2006, CTC acquired EU Energy Ltd. (“EU” or “EUE”), a manufacturer of world-class
      wind generation turbines under the brand name, “DeWind.” Since the acquisition,
      we have continued to operate EU Energy Ltd. and its subsidiaries, and have
      also
      organized DeWind’s US operations under a new corporation, DeWind Inc. These
      companies form CTC’s wind energy turbine division. To reflect the recent
      diversification as a result of the merger, we intend to propose that CTC’s name
      be changed to CTC Energy, Inc. at the next annual meeting of our shareholders
      expected to be held in March, 2007.





1





**Company
      Growth Strategy**


Our
      strategy is to penetrate the electrical transmission and generation markets,
      dominated by the utilities, 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. Our key
      targets are: electrical conductors for transmission and generation, alternative
      or ‘clean’ energy generation, and towers, poles and supporting structures for
      overhead conductor and cable installation. Our core competency is the
      application of composite technology to address problems facing the energy
      industry ensuring that any product solutions resolve problems economically.
      Our
      approach to new opportunities is to develop products that offer our customers
      solutions that have better value. This strategy allows us to provide customers
      with durable competitive advantages which should translate into sustained profit
      and revenue growth.





Our
      current customers fall into three categories:





·
            Wind
                farm developers and operators who purchase wind powered electrical
                generators. These are customers who are concerned about the overall
                cost
                to own a wind powered turbine including the initial capital cost,
                service
                cost, availability of the turbine, and efficiency of
                operation.





·
            Electric
                utilities that own or operate electrical transmission lines. These
                are
                customers who need to increase transmission capacity on a grid systems
                and
                are concerned with the feasibility and cost of upgrading existing
                transmission lines or the cost and feasibility of installing a new
                power
                line corridor to either bring new capacity or increase capacity to
                an
                area.





·
            Conductor
                manufacturers that produce bare overhead conductors. These are customers
                that strand bare overhead aluminum conductors and are concerned with
                the
                introduction of the new energy efficient ACCC
                conductors.




Three
      key
      fundamentals support our growth strategy:





·
            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. Our recent
                EU
                Energy/DeWind acquisition is an example of our belief that wind energy
                represents a large market opportunity for a next generation wind
                powered
                turbine that has performance
                advantages.





·
            We
                use operational discipline and process excellence 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.





·
            We
                seek partnerships with strategic 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.





See
      products and services below for more information on how our products align
      with
      our customer needs and our growth strategy.





**Products
      and Services:**


CTC
      offers products and services in two business segments: bare overhead conductors
      and wind energy generation. Our products and services are sold mainly in the
      United States, Europe, and China and are described below. CTC’s products and
      services are designed to utilize proprietary and protected materials and
      engineering technology and to market these products as more efficient, better
      suited innovations and solutions to problems facing the electrical utility
      industry. Our initial product was the ACCC conductor, which utilizes our
      patented composite core as a strength member to support a greater quantity
      of
      aluminum conductor. Our second product is the range of DeWind wind energy
      turbines acquired through our July, 2006 acquisition. We anticipate that in
      the
      future we may apply some of our composite technology expertise into improving
      the DeWind products.





International
      total net revenue was approximately 86% of consolidated net revenue for fiscal
      2006 and less than 5% for fiscal 2005 and 2004. For a discussion of financial
      information about these segments, see “Management’s Discussion and Analysis of
      Financial Condition and Results of Operations in Item 7 and Note 20 to the
      financial statements in Item 8. Classes of similar products or services that
      accounted for 10% or more of total net revenue in fiscal 2006, 2005, and 2004
      were as follows:





Fiscal
                2006
            
            Fiscal
                2005
            
            Fiscal
                2004DeWind
                turbines and related services
            
            
            65
            %
            
            0
            %
            
            0
            %ACCC
                conductor products and related services
            
            
            35
            %
            
            100
            %
            
            100
            %




The
      Company has long lived assets located in Germany and the United States. As
      of
      September 30, 2006 the Company has $2.4 million or 52% of its long lived assets,
      consisting of property and equipment, located in the United States and $2.3
      million, or 48% of its long lived assets located in Germany.




2


**CTC
      Cable Division:**


Our
      CTC
      Cable division operates under the name CTC Cable Corporation. CTC Cable
      produces, sells, and markets next-generation electrical transmission conductor
      called Aluminum Conductor Composite Core, or ACCC conductor or sometimes ACCC
      cable. ACCC conductor consists of a lightweight carbon/glass/resin composite
      core (ACCC core) produced by CTC that acts as the strength member of the
      conductor and is stranded with a trapezoidal shaped cross-section aluminum
      wire
      (“trap wire”) by an aluminum wire stranding partner to produce a finished ACCC
      conductor. During fiscal 2006, we had one conductor wrapping partner in
      commercial operations in Canada. In November, 2006, we certified an additional
      wrapping partner in Belgium that will manufacture and deliver an initial order
      of 100 kilometers of ACCC by the end of December, 2006. A third manufacturer
      in
      Bahrain has already submitted sample ACCC conductor for the qualification
      approval testing and is expected to be qualified in early 2007. The finished
      ACCC conductor product is purchased by electrical utilities for electrical
      transmission applications. We sell ACCC conductor and core internationally
      and
      ACCC conductor in the US and Canada as well as through a distribution
      relationship. We also sell ACCC conductor hardware and engineering design
      services. We have had ACCC conductor available for commercial sale since June,
      2005.





**DeWind
      Wind Turbine Division** **:**


The
      DeWind division sells wind powered electrical generators or wind “turbines” and
      operates under the trade name DeWind. The DeWind division represents the
      operations of the EU Energy Ltd., acquisition completed in July, 2006.
      Substantially all of EU Energy’s business was represented by their DeWind brand.
      DeWind GmbH was founded in August 1995 in Lübeck, Germany. The focus from the
      outset was to offer wind generation products with state of the art technology.
      The first product, the D4 turbine, was produced in 1996 as a 500 kilowatt
      product and then upgraded to 600 kilowatt. Two and a half years later, the
      1.0
      megawatt D6 was in production and was then enhanced in the year 2000 to the
      1.25
      megawatt version of the D6. Following an eighteen month development program,
      the
      flagship product, the D8 2.0 megawatt turbine was introduced in March 2002,
      and
      involved the world’s first series production carbon fiber blade. In 2002, FKI
      plc purchased 100% of the share capital of DeWind. FKI then spent considerable
      resources on further improvements to the turbines. In November 2004 the
      multi-business FKI took the strategic decision to withdraw from the wind energy
      business and in July 2005, EU Energy acquired DeWind from FKI. In July, 2006,
      Composite Technology Corporation acquired EU Energy Ltd and thus acquired the
      DeWind business. This division is now operating under the name DeWind Inc.,
      and
      DeWind Ltd.





**The
      ACCC Conductor Product**


Our
      ACCC
      conductor or Aluminum Conductor Composite Core product was developed as a high
      performance transmission conductor that can increase electrical capacity not
      only by operating at higher temperatures with significantly reduced thermal
      sag
      when compared with the standard conductor used around the world today, Aluminum
      Conductor Steel Reinforced or “ACSR” conductor, but also because it contains
      much more aluminum conductor than a similar ACSR. The innovation arises from
      the
      use of a stronger, light weight, and sag resistant carbon and glass fiber
      composite “core” designed to replace the traditional steel core in ACSR. The new
      core, being lighter and stronger, has a smaller diameter that the steel
      equivalent and therefore allows a greater amount of aluminum to be stranded
      on
      the conductor. The aluminum is stranded with a trapezoidal shape so that the
      diameter of the conductor is not increased significantly and the conductor
      is
      less susceptible to noise and causing interference. Fundamental to the ACCC
      conductor innovation is its ability to increase the quantity of conductive
      aluminum on the conductor without increasing its weight. This is vital because
      powerline towers and poles are designed to support a certain weight of conductor
      at a specific tension. The ACCC conductor of the same weight and diameter that
      is capable of transmitting more power with less line losses can therefore
      replace existing conductors on their towers and poles without the capital
      expense associated with strengthening the towers to carry the extra weight.
      In
      addition, the ability of ACCC conductors to operate continuously at 180 degrees
      Centigrade (356 degrees Fahrenheit), approximately 80 degrees Centigrade higher
      than the industry standard ACSR, gives them a much greater current carrying
      capacity. This is also possible because the composite core stranded with
      annealed aluminum does not sag appreciably as the temperature increases. ACCC
      conductors are truly high temperature low sag (HTLS) conductors. The use of
      new
      composite materials in the design of the ACCC conductors, giving them a
      combination of an increased volume of conductor per foot of length, better
      conductivity from the purer annealed aluminum and HTLS properties, makes the
      ACCC conductor the most energy efficient overhead conductor available
      today.





Overhead
      conductor sag is one of the biggest operational issues facing transmission
      line
      operators. It effectively limits the operating temperature of traditional
      conductor, thus limiting their current carrying capacity. When the line
      temperature is raised as a result of electrical resistance caused by an
      increased electrical current transmission, the metals that make up the
      conductors expand. This causes the conductor to sag. Conductor sag presents
      problems, primarily because as they sag lower they become dangerous and prone
      to
      short circuit when they come close to objects. The practical problem of line
      sag
      was brought to everybody’s attention at the time of the 2003 blackouts. These
      occurred throughout the world, including in the Northeastern United States
      when
      an overheating line sagging too close to a tree caused an electrical short
      that
      stopped the electricity transmission. A chain reaction resulted in the collapse
      of a major portion of the northeast electrical grid that resulted in an extended
      blackout for the city of New York and other places within several states.





3


The
      lack
      of redundancy is another serious operational issue facing transmission line
      operators. Unlike most essential services, our electrical grids operate at
      close
      to capacity. There is little or no emergency backup transmission capacity.
      The
      ability to operate a conductor at higher temperatures, however, can provide
      an
      emergency reserve. The ability of an HTLS ACCC conductor to double its current
      carrying capacity over a normal operation range is a significant advantage
      which
      CTC believes will revolutionize the way in which transmission and distribution
      operators plan and manage their operations. Traditional conductors carry
      electricity efficiently and safely only between certain temperature ranges;
      and
      because new tower systems are so expensive, lines are usually built with
      relatively exact electricity carrying limits in mind, and which increasingly
      only match current demand. Growth must be provided for by additional new lines
      and 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 and they have linked their grids so that they can use
      every available route to deliver power up to the limits of operational
      capabilities. Even with these measures, the Company believes that growth is
      outstripping available capacity. 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.





The
      installation of ACCC conductors on the grid introduces several new alternative
      solutions to existing problems and compares favorably with ACSR essentially
      as
      follows:


·
            Retrofitting
                to increase line capacity, or to eliminate the need for new transmission
                corridors: the replacement of the ACSR with a similar sized ACCC
                conductor
                allows the grid operator the ability to double the peak current capacity
                on the same line and introduces a reserve capacity allowing for large
                amounts of additional peak capacity without endangering the operation
                of
                the grid or causing a safety hazard. Retrofitting could also take
                the form
                of replacing existing ACSR lines with a larger capacity, same weight
                ACCC
                conductor in place of building new transmission corridors. This would
                result in more rapid expansion of capacity since new corridors are
                both
                expensive and time consuming to obtain the permits, rights of way
                and
                property required.


·
            The
                decreased sag and high-strength properties of ACCC conductor allows
                for
                previously impossible conductor installation scenarios: the conductor
                can
                be used effectively across large spans (chasms, gorges, river crossings,
                and large highways). In addition, we have found that the lower weight
                of
                our product will allow for the continued use of existing towers that
                would
                otherwise have been required to be replaced or upgraded at significant
                additional cost.


·
            Significant
                capital costs savings can be made on new line constructions. For
                a typical
                transmission conductor installation project, the costs of the towers
                and
                support structures are approximately 80% of the total project. The
                use of
                ACCC with its lower sag and higher strength profile enables the supporting
                structures to be built further apart, eliminating the overall number
                of
                towers and saving capital and construction
                costs.





ACCC
      conductor compares unfavorably with ACSR as follows:


·
            ACCC
                is a new product that has only been implemented in a limited capacity
                commercially in the US and China and despite our rigorous product
                testing
                and comprehensive life cycle modeling, there is no data for real-world
                product longevity. ACSR type conductor by comparison has been installed
                worldwide for nearly one hundred years and its life is well known
                and
                documented. We have addressed this issue by performing hundreds of
                hours
                of product testing using industry leading test facilities and by
                working
                to incorporate our test findings into the public domain. We have
                also been
                successful in adding our product data into several well known engineering
                data and design libraries. We have addressed the product longevity
                concerns by offering an extended product warranty as a customer purchase
                option.


·
            ACCC
                requires some additional training by utility linemen to install.
                In
                general, ACCC conductors are delivered on standard reels and installed
                by
                linemen using common linemen tools, however, splices and deadends
                are
                different as are certain aspects of installation. We require linemen
                to
                undergo training prior to installation. Installation manuals and
                assistance are available from the Company and we are implementing
                an
                installation certification program.


·
            Using
                a price per unit of length comparison to ACSR, ACCC is currently
                more
                expensive to our customers and potential customers. We believe that
                we can
                make a compelling argument that the price increase is more than offset
                by
                support structure savings, line loss decreases, and the opportunity
                for
                additional revenue when a transmission project is looked at on a
                total
                profit and loss basis. In addition, since the ACCC conductor contains
                more
                aluminum per foot, comparisons should be made to conductors with
                similar
                cross sectional areas rather than weight or size, which significantly
                reduces the price difference. However, not all transmission line
                projects
                result in such savings and if the initial purchase price is primary
                consideration, ACCC may not be the cheapest priced conductor for
                a
                project.





4


**DeWind
      Wind Energy Turbine Generator Product:**


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 552 turbines representing approximately 522.6 megawatts
      of
      generation installed. We currently sell two versions of turbines designated
      as
      the 1.25 megawatt D6, the 2 megawatt D8, and have a third version, the 2
      megawatt D8.2 that is expected to be produced and sold in 2007. All three
      versions are engineered to be among the most reliable wind turbines on the
      market resulting in more availability during productive winds and more
      profitability for the wind farm purchaser-operator. The DeWind D8 and D6 series
      are among the few wind turbines available on the market to have obtained 4
      and 5
      years respectively without major component failure, including the gearbox which
      historically has been an industry wide problem. We have recently entered into
      a
      license agreement with GE Infrastructure Technology International, Inc., that
      will allow us to produce and sell our D6 model in countries, such as the US,
      where GE enjoys patent protection on certain power conversion electronics.
      This
      license agreement also allows us to produce and sell our standard D8 model
      in
      its 50Hz version in any country where GE has a patent position on certain power
      conversion electronics. Our DeWind D8.2 model does not have power conversion
      electronics and therefore does not require a license from GE. Each turbine
      class
      is described as follows:





DeWind
      D6
      Series Turbines: The D6 wind turbines are available with 1,250-kilowatt rated
      power output. 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 104 D6 1.25 megawatt turbines installed and
      136
      installed of an earlier 1000 kilowatt 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 megawatts. 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. This latest generation of DeWind wind energy turbines is characterized
      by the industry’s highest power yields and safest operation. 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 43 installations of the D8,
      primarily in Germany, Austria and Belgium.





DeWind
      D8.2 Turbine: DeWind’s next generation turbine is expected to provide
      significant advantages over existing turbines on the market. The Company has
      produced a prototype turbine that is currently being installed at a wind test
      site in Germany for certification. Beginning in the third calendar quarter
      of
      2007, the Company plans to begin production of D8.2 turbines in the United
      States for deliveries in North America. The D8.2 incorporates the chassis and
      many of the components of the D8 turbine that has been in production since
      2002,
      but significantly improves the drive system and power delivery over the D8.
      The
      D8.2 will be the first turbine in the industry below 2.6 megawatts to use a
      mechanical variable speed hydro-dynamic drive coupled to a fixed speed
      conventional synchronous generator. Due to the speed controlling ability of
      the
      torque converter, the D8.2 can provide constant rotational speed to the
      electricity generator which allows the use of a similar synchronous generator
      as
      nearly every other typical utility generating system uses, from such systems
      as
      steam, or gas, or hydro driven turbines. This allows the D8.2 to connect at
      a
      higher voltage directly to the electrical grid, without the use of power
      conversion electronics. By comparison, the asynchronous generators used in
      our
      D6 and D8 turbines as well as our competition generate variable frequency
      alternating current that requires 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. Such turbine systems also
      typically require more transformers and various electronic systems to provide
      low and zero voltage ride through. The key to the D8.2 lies in the variable
      speed drive system which 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 155 years ago and is known for
      their highly engineered products. Over the past 55 years, Voith has experienced
      in excess of 38 year “mean time between failure” on their Vorecon technology. We
      believe that once the D8.2 turbine is introduced commercially and its improved
      reliability and efficiencies are confirmed that it will command a premium price
      over existing and competing turbines of similar sizes. See the competition
      section below for comparisons with our competitors’ turbines.





Product
      Service and Warranties: All 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 and 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.





5


DeWind
      turbines are controlled by 24-hour remote monitoring center. Automatic checks
      at
      regular intervals are performed of all wind turbines to ensure optimal
      performance of the plant 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 division 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. We expect that the new service company will benefit from cost
      savings, increased revenue streams, and more efficient service teams.





Licensing
      revenues: During 2005 and 2006, DeWind entered into licensing agreements with
      four companies located in China for the technology transfer and licensing of
      DeWind processes and product specifications for the D6 and D8 series of turbines
      for sale within China. The agreements govern the use of this technology and
      call
      for progress payments in cash as technology transfer deliverables are conducted
      and additional payments as turbines are produced by the Chinese companies.
      We
      have deferred all amounts received under these contracts as a deferred revenue
      liability and we will recognize revenues based on finished turbines produced,
      expected to begin in fiscal 2007.





**Conductor
      Market, Marketing, and Sales**


The
      Company divides the bare overhead conductor market into seven different
      geographical areas:





·
            North
                America; Central and South America;


·
            Europe,
                Middle East and Africa (EMEA);


·
            Russia
                and Central Asia;


·
            India;


·
            China;


·
            Japan,
                Korea, Southeast Asia; and


·
            Australasia.





We
      have
      made several important commercial sales in the United States and China. Our
      ACCC
      conductor targets an industry which is mature in most industrialized countries
      such as those in North America and Europe but developing in various other
      countries around the world, such as China and those in South America. Each
      market is characterized by long purchasing lead times due to the necessity
      of
      planning large infrastructure projects often many years in advance. In addition
      most organizations operating in accordance with strict budgeting requirements
      make it imperative that planned purchases are put into a budget at least a
      year
      in advance. Our US 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. At present, we sell 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 exceed finished conductor sales.





The
      data
      projections for the size of the market for bare overhead conductor currently
      available are conflicting with different sources assigning widely different
      figures to the overall market size and to the markets of different countries.
      In
      the United States, energy consumption continues to grow year by year. This
      demand will require increased investment in the transmission and distribution
      infrastructure to maintain current levels of transmission reliability. 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. Based on information published by North American Electric Reliability
      Council (NERC) in the Electric Supply and Demand (ES&D) database, total
      investment in planned transmission projects is expected to range from $500
      million to $2 billion per annum for the next five years. 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. Our goal
      is to
      penetrate the portion of the market that most requires a solution to an
      overloaded transmission and distribution grid system.





We
      supply
      a product that is incorporated, as a raw material component, into a conductor
      that is produced by stranding manufacturers and sold, often indirectly, to
      transmission or distribution customers. Electricity transmission and
      distribution is a service considered both dangerous and vital to an economy
      and
      to society in general. Electrical transmission and distribution is, thus, often
      highly regulated by one or more governmental or private agencies. The sales
      decision makers often involve multiple persons both within and outside the
      transmission utility that ultimately purchases the conductor, and may include
      intermediary engineering or construction companies, or agents purchasing for
      the
      utility. The overhead conductor can be a component in a tender or contract
      that
      incorporates many other components and parameters, or an entirely separate
      tender or contract specifically for a conductor. Our sales and marketing efforts
      require us to target and convince a number of different players, each with
      different interests; and to eliminate conservative and entrenched interest
      resistant to innovation. 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. And, most significantly, as with
      all
      commodities, the single most important factor in choosing a product is usually
      the price and confidence of delivery date.





6


Our
      challenge for marketing ACCC conductors is to force the industry to put
      additional capital into reducing electrical losses and to rethink many of the
      parameters used to design transmission and distribution lines: it is a matter
      of
      encouraging them to think outside the usual parameters. To communicate the
      value
      proposition of the ACCC 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. 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. This analysis of
      ACCC,
      when viewed in terms of “cost per delivered kilowatt” presents a compelling
      value proposition under most operating conditions.





We
      anticipate that once the ACCC product is established, our sales of ACCC will
      usually be made by conductor suppliers to customers that know the product and
      from repeat orders. We can only achieve this goal of becoming an accepted
      product by establishing ACCC as a more efficient conductor. While seemingly
      simple, given the entrenched interests of the market, and the focus on reducing
      capital expense rather that operating efficiency, this requires a highly
      developed marketing approach, sustained effort and time. We have had some
      success with this strategy with American Electric Power in the US, and in China
      through Jiangsu Far East, both of whom have given us repeat orders in
      2006.





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.





The
      sales
      effort required to break through in the market remains a concentrated and
      sustained marketing of the advantages of ACCC conductor to all the market
      players involved in the decision making process. We also note that the process
      of sales, if successful, will not be a steady linear growth as sales slowly
      accumulate. The successful sales graph is more likely to look like a series
      of
      steps. Typically, those using bare overhead conductor will not commit to large
      projects until such time as they are already familiar with the product and
      we
      expect that the initial small orders will be observed in the field after
      installation before additional ACCC orders are placed by new customers. We
      therefore expect a number of small sales to a variety of organizations as
      initial orders that, as the technology and the overall profitability are proven,
      will result in additional or larger orders. We view the additional orders from
      AEP and Jiangsu Far East in 2006 as evidence that this strategy is beginning
      to
      work and will result in additional orders of larger sizes for these and other
      customers.





We
      sell
      our conductor in the US and internationally through an inside sales force with
      operations in Irvine, California, and Dallas, Texas, and through distribution
      agreements with our conductor wrapping partners. Our initial agreement is 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 the ACCC product 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 cable 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 wrapped by General Cable that
      conforms with applicable industry standards for the U.S. and Canadian markets
      only. This agreement terminates on December 31, 2007. The signature of the
      Distribution Agreement and the subsequent launch of the General Cable ACCC
      product under the name TransPowr TM and the activation of its sales force at
      the
      beginning of the 2005 fiscal year heralded the full commercial availability
      of
      the product and opened up a much larger market of transmission operators. In
      November 2006, following its qualification as an ACCC conductor manufacturer,
      the Company began producing its ACCC conductor at Lamifil n.v. in Belgium in
      Europe. The resulting conductor is sold by the Company in Europe and worldwide.
      Since qualification Lamifil has been stranding an initial order of approximately
      100 kilometers with delivery expected before the end of December 2006. A second
      order has been placed for a UK customer for trials in early 2007.





Our
      immediate goals are to increase the number of ACCC conductor sales and to
      increase the number of companies stranding and installing the conductor, as
      well
      as to prepare ourselves for orders of increasing size that we believe will
      now
      be forthcoming. The success of the repeated sales to China and sales to
      Pacificorp and American Electric Power in the U.S., have given confidence to
      our
      efforts. In the U.S. and Canada, this continuing sales effort is closely
      coordinated with General Cable and together we have put together an extensive
      list of customers and their requirements. We are pursuing these opportunities
      and expect positive results to follow. We also expect to implement an external
      sales agent program to leverage our internal sales team by providing additional
      industry leads and contacts.





7


Our
      efforts resulted in initial sales with two of the largest U.S. utility companies
      in 2005. The PacifiCorp project representing approximately 24 linear miles
      was
      energized in January, 2006 in Salt Lake City, Utah. The American Electric Power
      installation comprised approximately 50 linear miles in San Antonio, Texas
      and
      was also energized in January, 2006. During 2006 we expanded our sales with
      China by selling 62 linear miles of ACCC conductor for approximately $1.7
      million to China and 79 miles of ACCC conductor and core in the U.S. for
      approximately $1.3 million.





We
      believe that during the past year we have made considerable progress towards
      our
      goals in the U.S. and Chinese markets through additional commercial sales and
      elsewhere internationally through a much larger and qualified sales pipeline
      in
      Europe, the Middle East, and Mexico. We also believe that the significance
      of
      the PacificCorp and American Electric Power orders in 2005, the additional
      US
      utilities’ orders in 2006 and the success with our China sales is not one of
      size or monetary value. We believe that they represent recognition of a superior
      value proposition over traditional cable products and indicate a significant
      level of new confidence in the product.





**The
      Alternative Energy Market**


We
      are
      marketing our DeWind wind energy turbine under the umbrella of alternative
      energy products. We are positioning our wind turbine as the best and most
      reliable wind turbine using an alternative drivetrain - and sold into a wind
      energy market that has been deemed by the media to be energy that is an
      alternative to fossil fuel energy. We are positioning our ACCC conductor as
      an
      energy efficient alternative to the older technology ACSR and newer All Aluminum
      Alloy conductors and also to other high temperature low sag alternatives. In
      addition ACCC conductors have the ability to solve other engineering and
      operational difficulties and to reduce overall capital expense in line
      replacement and new build.





DeWind
      market, marketing, and sales:


The
      wind
      industry of today is the world's fastest growing energy sector and offers the
      best 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 demonstrates 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 that date. By the end of 2005,
      the
      capacity of wind energy installed globally had reached a level of almost 60,000
      MW (megawatt), an increase of nearly 12,000 MW over 2004 figures. Europe
      accounts for over 40,000 MW or 69% of the total installed capacity followed
      by
      the U.S. with 9,150 MW and Asia (primarily China, India, and Japan) with 7,135
      MW. Areas with high growth in recent years also included Australia, Canada
      and
      Egypt. By 2020, it has been estimated that as much as 1,250 GW (gigawatt) of
      wind power could be installed worldwide, a more than 20 fold increase over
      2005
      installation levels. Typically, the turbine cost is between $900,000 and
      $1,300,000 per megawatt indicating approximately a $12 billion market in
      2005.





We
      are
      focusing our marketing efforts for our new DeWind D8.2 turbine in the United
      States primarily due to the rapid growth and high demand for wind turbines
      in
      that geography and secondarily to maximize the profitability of our 2007
      production due to our supply constraints in obtaining certain key parts as
      described below in raw materials. During 2005 in the U.S. more than 2,400 MW
      of
      wind energy production was added to the nation’s power grid and increased the
      production to 9,150 MW, enough to produce electricity for 2.4 million U.S.
      households. 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 was due to expire at the end of 2007 however in December, 2006
      the tax credit was extended to the end of 2008.





At
      the
      State level, a further 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. At the beginning of 2005, such
      renewable portfolio standards (RPS) existed in 18 states including the most
      populated - California, Texas and New York. Such standards are independent
      to
      the economic incentive of the Federal PTC.





The
      American Wind Energy Association (AWEA) estimates that the U.S. could reach
      15,000 MW of capacity by the end of 2009. Current AWEA estimates are 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.





8


Other
      markets offer similar opportunities and we are focusing sales and marketing
      efforts there as well.


·
            Canada,
                with one of the largest wind resources in the world, has experienced
                a 53%
                increase in wind energy generation in 2005. Wind power capacity has
                expanded more rapidly in Canada over the past two years as a result
                of a
                mixture of federal incentives and initiatives by individual provinces
                to
                increase the contribution from renewable
                energy.


·
            The
                European market continues to be strong increasing 18% from 2004 to
                2005
                with growth driven by new markets opening in France and Portugal.
                Wind
                energy now provides nearly 3% of the total EU electricity consumption
                and
                additional capacities of between 6,000 MW and 7,000 MW per year are
                expected in the EU15 through 2010.


·
            In
                India during 2005 almost 1,430 MW of generation was installed making
                India
                the fourth largest country-market with 4,430 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.


·
            The
                Chinese market was boosted in anticipation of the country’s new Renewable
                Energy Law, effective January 1, 2006. Over 500 MW were installed
                in 2005
                and according to the list of projects approved and those under
                construction, 2,000 MW of wind capacity could be installed by the
                end of
                2006. By the end of 2020 it is estimated that, in order to satisfy
                growing
                demand, the total power capacity in China will need to reach 1,000
                GW.


·
            Additional
                opportunities exist in Australia, as well in certain countries in
                Africa
                including Egypt and Morocco. As a medium technology with flexible
                hi-tech
                components, wind energy can be utilized both in industrialized and
                agricultural countries.





We
      serve
      all of these markets through a direct sales force with personnel located in
      Lübeck, Germany, and Dallas, Texas. 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 based effort
      involving multiple personnel within DeWind and the customer including
      engineering, sales, production, and supply chain with the final negotiations
      conducted by senior executives.





DeWind’s
      strategy has been to restructure and fundamentally alter 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,
      such as North America, China and India. This strategy allows DeWind to benefit
      substantially from leveraging its technical abilities across larger economies
      of
      scale. The sales strategy is a three pronged approach and is geared to
      significantly enhance revenues and market presence.


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


·
            For
                the Indian market we are working toward an agreement to form a joint
                venture for the manufacture of wind turbines. This is intended to
                address
                the Indian, Asian and possibly the Eastern European market
                opportunities.


·
            For
                North America and for other geographies not covered by the relationships
                in China or India, we are taking a direct selling approach. We are
                using a solution selling approach to include the wind turbine coupled
                with
                ACCC conductor. The goal of the solution is to provide best of breed
                technology for the long term profitability of the wind farm and to
                efficiently link the wind farm to the existing grid. This unique,
                highly
                cost effective solution-based approach is being very well received
                by wind
                farm developers.





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. The TRA may also include fees
      payable by the customer to reserve the production of turbines, specify the
      payment timing, and may be for one or multiple years in duration. Any funds
      received are deferred until all of our revenue recognition criteria are met.
      Turbine purchase agreements, 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.





As
      of
      September 30, 2006, DeWind has approximately $2.9 billion worth of agreements
      that call for turbines to be delivered beginning in 2007 through 2012 in the
      United States under Turbine Reserve Agreements, which still have to be
      finalized. No payments have been made by any of these customers. The TRAs
      require certain advance payments which have not been met and as such, the
      customers are in breach of the TRAs. Such breaches allow DeWind the opportunity
      to cancel the TRA at no penalty. We anticipate that we will cancel these TRAs
      as
      they currently exist and either enter into new contracts with these customers
      or
      enter into new contracts with other customers since we have seen a high level
      of
      demand both in the US and international markets for our turbines. 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.





9


**Connectivity
      and****ACCC
      Conductor Synergies with DeWind Wind Turbines**


All
      wind
      energy farms have to connect to the electric transmission grid. With the
      increasing demands placed on the grid, connection often represents a substantial
      investment by a wind farm operator in electrical towers, conductor, and
      installation costs to guarantee that the energy production capacity can be
      utilized and sold. There are already examples of wind farms that have to limit
      generation due to the capacity of the infrastructure to carry the energy from
      the wind farm. The reality is that for 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 take advantage of the opportunity
      to provide these benefits. In addition, the increased efficiencies due to lower
      line losses of ACCC 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
      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. 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.





**Manufacturing**


We
      produce the composite core component of the ACCC conductor through CTC Cable
      Corporation, for sale to conductor manufacturers that wrap and distribute the
      finished conductor in their particular markets. 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. 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 have been recently certified under ISO
      9001:2000. 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 24 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.





We
      deliver the ACCC core to conductor manufacturers for wrapping or stranding
      with
      aluminum. We ship the core on round reels in standard lengths that are received
      at the conductor stranding facility in much the same way as traditional steel
      wire cores. The conductor manufacturers then strand or wrap the core with fully
      annealed aluminum wires that have been drawn into trapezoidal shapes. In North
      America and Canada, General Cable Industries, Inc., is our current exclusive
      manufacturer of ACCC conductor in accordance with the terms of a Purchase
      Agreement signed on October 2, 2004 which grants General Cable exclusive rights
      to wrap, or apply aluminum strand around our ACCC composite core through
      December 31, 2007 and subject to termination clauses for non-performance.
      General Cable has agreed to certify that its materials, equipment and services
      covered by the purchase orders comply with the utility cable industry standard
      specifications and manufacturing processes work as well as our specifications.
      General Cable also additionally warrants for the shorter of 12 months after
      installation or 20 months from manufacture that the wrapped products sold under
      the purchase orders will meet government approved specifications in the U.S.
      or
      Canada and will comply with our written specifications and standards. General
      Cable's liability is limited to replacement of any wire or conductor that does
      not substantially meet the manufacturing specifications or fails during normal
      use within one year from the date of installation if such failure was caused
      by
      defects in material or workmanship at time of shipment. Our liability is limited
      to replacement of products within the warranty period that are defective due
      to
      failure of the core to meet applicable specifications or failure to perform
      as
      part of a finished product. This warranty is supplemented in the U.S. and Canada
      by a 3-year Original Equipment Manufacturer Warranty, extendable up to 10-years,
      as described in "Marketing, Sales and Distribution" above. As an ACCC conductor
      strander, we anticipate putting manufacturing arrangements in place with Lamifil
      to allow the Company to serve the European market and also with Midal Cables
      of
      Bahrain which has recently submitted sample conductor for qualification and
      whom
      it is anticipated will serve the Middle East and Indian markets. We are
      evaluating our conductor wrapping partners worldwide in order to maximize our
      ability to deliver ACCC conductor to our customers on the most cost-effective
      basis.





We
      are
      currently able to assemble our DeWind Turbines in limited quantities in our
      Lübeck, Germany facilities. DeWind is currently investigating alternative sites
      and manufacturing solutions where the turbines can be assembled in a more cost
      effective manner. We have been actively involved in discussions with TECO
      Westinghouse Motor Company to perform contract assembly manufacturing for our
      DeWind turbines in the US. When finalized, we intend to have our D8.2 and a
      60Hz
      version of the D6 produced under this agreement starting in 2007. We expect
      a
      6-9 month lead time for the manufacture of wind turbines, primarily lead times
      required for the sourcing of parts and materials. The supply chain requirements
      for wind turbine manufacture are complex and DeWind has not commercially
      produced turbines in any significant quantity since 2005. We therefore do not
      expect to be able to produce DeWind turbines in quantities greater than five
      turbines per quarter without the reconstitution of our supply chain and
      evaluation of our manufacturing options. We expect to be working through our
      supply chain requirements and to begin full production of our D8.2 turbine
      beginning in August, 2007.





10


**Raw
      Materials**


The
      principal raw materials in the production of the ACCC core are glass and carbon
      fibers, combined with specific polymer resins. Our conductor 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, we are working
      with alternative suppliers' carbon material in our production path. 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.





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 are working on establishing supply contracts for the
      remainder of our key turbine components. Certain of our key parts are
      sole-source vendors, such as for our WinDrive® torque converter. Due to the
      expected limited number of WinDrive® torque converters available from Voith
      during fiscal 2007, we do not expect significant numbers of DeWind D8.2 turbines
      to be produced and shipped during fiscal 2007. In addition, the number of
      vendors with available production for certain other key parts, 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.





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.





**Intellectual
      Property**


We
      are
      aggressively pursuing patent protection for all aspects of our composite
      materials, products, and processing.





In
      connection with our ACCC conductor business, we currently have 3 issued U.S.
      patents, 2 U.S. patent applications that have each been issued a Notice of
      Allowance and are pending issuance, two pending U.S. continuation-in-part
      applications, one pending PCT international application, and three PCT
      international applications that have entered the national phase and are
      currently pending in over 70 strategic countries world-wide including the United
      States. 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.





Through
      the acquisition of EU Energy, CTC, by means of its wholly owned subsidiaries,
      acquired a wind energy patent portfolio according to the following. 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 is still currently pending before the European Patent Office
      (EP1540811A1) and the US (10/527,205). Generally, these patents and applications
      are directed towards 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.


On
        October 6, 2006, our wholly-owned subsidiary, EU Energy Inc. (“EU”), 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 EU. In return for certain
        royalty payments, GE granted EU 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. 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.
 
 We
        have
        licensed on a [non-exclusive] basis, the right to manufacture, market and
        sell
        our D6 and D8 wind turbines in China to certain third parties.


11


**Competition**





**ACCC
      Conductor Competition**


The
      primary competing product to our ACCC in North America and in most parts of
      the
      world is still traditional ACSR, based upon a hundred year old technology.
      We
      believe that ACSR cannot satisfy a number of requirements facing the modern
      grid
      and distribution operator. Awareness of this issue has resulted in a number
      of
      companies with various alternative products coming forward. The competition
      may
      be summarized as ACSR together with the 3 additional categories of competing
      products as follows:





ACSR:


Our
      ACCC
      conductors have unique properties that provide them with significantly improved
      product characteristics over traditional bare overhead conductors known as
      ACSR
      and other alternatives to traditional ACSR conductor.





·
            ACCC
                has an increased aluminum cross section compared to conventional
                Aluminum
                Conductor Steel Reinforced, or ACSR, of the same diameter and weight
                and
                therefore increased transmission capacity per core
                weight;





·
            ACCC
                composite core has a significantly reduced high temperature sag as
                compared to ACSR which occurs in a transmission line conductor as
                it
                becomes hotter due to increasing power flows or high ambient
                temperature;





·
            ACCC
                is designed to provide energy savings resulting from lower line resistance
                or “line losses” due to more conductive aluminum as compared with ACSR
                under the same conditions;





·
            ACCC
                has a rated operating temperature of 180 degrees C, with the temporary
                ability to operate at 200 degrees C, which enables greater power
                transmission capacity, as compared to an ACSR operating temperature
                of
                75-100 degrees C;





·
            ACCC
                does not exhibit bimetallic corrosion, since it has no steel
                core;





·
            ACCC
                uses standard installation techniques and equipment with little need
                to
                retrain linesmen and reequip service vehicles, it can easily be
                retrofitted on existing towers and can replace existing lines easily,
                typically without modification to the poles and
                towers;





·
            ACCC
                can substitute for other conductors that require greater tensioning
                on
                older towers, to delay the need to replace down-rated aging towers,
                helping in the management of infrastructure renovation
                programs;





Buried
      Electrical Cables:


While
      these cables are preferred to bare overhead conductors in highly built up areas,
      the installation and maintenance costs are elevated and they are not extensively
      employed for long distance transmissions.


·
            Many
                companies produce various different types of buried cable used for
                conducting electricity, however, these are not considered by CTC
                to be
                direct competition since the projects employing these cables are
                usually
                fundamentally different from those involving bare overhead
                conductor.





·
            Several
                companies are in the preliminary stages of developing superconducting
                technology in the form of liquid nitrogen-cooled superconductor power
                conductors, which are capable of conducting with very low losses.
                The cost
                of such conductors is expected to be up to fifty times the current
                price
                of conventional underground systems. It would, therefore, only be
                practical in specific short underground installations in densely
                populated
                downtown metropolitan areas. Overhead use is not presently
                anticipated.





Conductors
      with increased conductive material:


·
            In
                Europe and other parts of the world a design emphasis on increasing
                throughput and lowering losses by increasing a conductor’s cross sectional
                area of conductive material has spurred the introduction of All Aluminum
                Conductors (AAC) and a range of All Aluminum Alloy Conductors (AAAC).
                The
                design philosophy is to eliminate the separate strength-member core
                by
                making the entire conductor from aluminum conductor, using alloying
                elements to render the aluminum stronger to increase its operating
                temperature and reduce its sag. AAC and AAAC conductors are still
                very
                soft and prone to sag requiring shorter spans between support structures;
                there are residual problems with their ability to recover from thermal
                sag
                (a phenomena known as creep), but most importantly their temperature
                of
                operation is very limited.





12


High
      Temperature Low Sag Conductors:


In
      North
      America and other parts of the world throughput has been has been improved
      with
      the introduction of various conductors that operate at higher temperatures.
      The
      use of high temperature technologies in conductors requires, however, a
      reduction in the conductor’s cross sectional area of conductive material to
      enable the conductor to operate at high temperatures without sag.


·
            Korea
                Electric Power Corporation completed 24 overhead transmission line
                upgrade
                projects between 1994 and 1997 where they replaced existing conductors
                with higher ampacity conductors using existing towers and rights-of-way.
                They used the Super Thermal Resistant Aluminum Alloy Conductor with
                Invar
                Reinforcement, or STACIR, first introduced in 1994. The conductor
                can
                operate to 210 degrees Celsius with its ampacity approximately doubled.
                The cost of STACIR is estimated to be four to seven times higher
                than
                ACSR, has slightly increased line losses and weighs more than comparable
                sized ACSR. Limited market acceptance of this product has occurred.
                While
                the Invar reinforced conductors can operate at higher temperatures,
                their
                sag characteristics are not good.





·
            A
                multi-sectioned conductor known as the GAP conductor was originally
                introduced by Sumitomo. This conductor has been used by a number
                of
                companies internationally and has reportedly experienced mixed results
                in
                various applications. Installation is difficult and expensive with
                more
                frequent, costly terminations of the conductor required. The GAP
                conductor
                design has not been accepted throughout the utility industry as a
                standard, cost-effective replacement for existing conductors. A number
                of
                manufacturers that promised to offer GAP in the past have discontinued,
                or
                do not actively offer the product and concerns regarding maintenance
                cost
                and longevity have led a number of utilities to seek an alternative.





·
            Certain
                conductor manufacturers already produce variations of Aluminum Conductor
                Strength Steel, or ACSS. This annealed aluminum conductor is reinforced
                with higher strength steel alloys in the core. The use of the annealed
                aluminum enables the conductor to operate at higher temperatures.
                Certain
                ACSS products offered use of trapezoidal shaped wires, however, the
                additional aluminum causes the conductor to become heavier and
                necessitates an even stronger core material. When compared with equivalent
                diameter ACSR conductors or ACCC conductors, the additional weight
                of the
                trapezoidal ACSS may also require higher tensioning, potentially
                resulting
                in additional tower modifications.





·
            Aluminum
                Conductor Composite Reinforced, or ACCR, a conductor with a core
                composed
                of aluminum-zirconium metal and Nextel ceramic fiber matrix composite
                wires was introduced by 3M who claim that their ACCR has increased
                ampacity over ACSR by 1.5 to 3 times at very high temperatures. Its
                price
                is reported to be seven to ten times higher than ACSR. Product literature
                also indicates that extensive modifications from the ACSR-norm in
                handling
                and installation procedures may be required since the ACCR core is
                reportedly brittle and may snap or shatter if handled incorrectly
                or bent
                too much. The product has been available for a number of years, and
                while
                commercial sales of the product have been claimed, the Company has
                been
                unable to identify any important conductor manufacturers that manufacture
                the product as their own conductor, nor any significant volumes of
                sales
                that would indicate general acceptance. Because of its excessively
                high
                price it is not considered effective volume
                competition.





With
      the
      exception of general use of AAAC in Europe, none of the above overhead products
      is established in the market. The majority of these ACSR alternatives has been
      available for some years and has failed to gain widespread acceptance. Designing
      an advanced conductor has been plagued by the necessity of either opting for
      more conductive material but restricting throughput through low operating
      temperatures or sacrificing the volume of conductive material to enable the
      conductor to operate at high temperature. The former operates with fewer losses,
      but cannot fulfill the needs of increased capacity and while the latter provides
      significant capacity throughput improvement, this is achieved only by increasing
      line losses.





ACCC
      conductors are a breakthrough in conductor design in that, for the first time
      a
      conductor is available that will not only operate at high temperature with
      low
      sag, but which can carry virtually the same conductive material cross sectional
      area as the ACCC alternative. Taking as an example an ACCC Dove size conductor
      illustrates this. When comparing similar weight conductors, the original ACSR
      technology allows around 240-280 mm 2 of
      conductive material on the wire. The equivalent weight AAAC conductor, widely
      used in Europe for its greener operating characteristics has a massive cross
      sectional area of 362 mm 2 ,
      just
      more than the Company’s ACCC 713 kcmil conductor that measures 360
      mm 2 .
      In
      spite of having less conductive material, ACCC conductor is more efficient
      because it uses a purer aluminum that conducts electricity better. Thus the
      ACCC
      has lower line losses than the AAAC and still has the advantage of high
      temperature operation to increase throughput where and when necessary. When
      compared to other high temperature similar weight conductors, these competing
      products have less conductive material with inferior electrical properties:
      ACSS
      provides about 285 mm 2 ,
      GAP is
      265mm 2 and
      Invar reinforced only 241 mm 2 .
      Most
      are forced to use alloys that further inhibit electrical performance. In terms
      of the efficiency of operation at high temperature, ACCC has significantly
      better performance. On tests at an independent laboratory, using a Drake size
      conductor, it was shown that an ACCC conductor carrying 1,600 amps was operating
      at approximately 180 degrees Celsius. In the same test at 1,600 amps, the
      equivalent conductors were operating as follows: Invar reinforced reached
      approximately 260 degrees Celsius while, the ACSS, ACCR and GAP stood at around
      240 degrees Celsius. The efficient design of the ACCC means that in practice
      the
      ACCC conductor will carry the same amount of power at a much cooler temperature,
      and therefore with significantly lower line losses.





13


We
      believe our ACCC product is superior to the ACSR, ACSS, AAAC, and ACCR products
      that are the most often cited as competition in that it allows greater ampacity,
      or electricity throughput on identically sized lines at same temperature
      operation and has the least high temperature sag of any reported commercial
      conductor.





We
      believe ACCC has two disadvantages compared to our competition. First, our
      ACCC
      conductor is a new product that incorporates technology that, while proven
      in
      other industrial applications, has not been proven in the utility markets.
      At
      present, approximately 351 kilometers has been installed world wide, with an
      additional 100 kilometers under installation at present. 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. While we believe that installation
      of our product will result in capital cost savings of the overall project and
      increased efficiency of electrical transmission that will offset the higher
      cost
      per foot of conductor, we may have difficulty in convincing the purchasers
      of
      the conductor of this contention.





**DeWind
      Turbine Competition:**


The
      buying decision for a wind farm developer is driven by a combination of price,
      availability and reliability. Our competition consists of wind turbine
      manufacturers including General Electric’s Wind division, Vestas, Gamesa,
      Suzlon, Siemens and Mitsubishi. GE is the largest wind turbine supplier in
      North
      America, with over 7,000 wind turbine installations, comprising more than 5,600
      MW of capacity, representing 62% of the US market.





We
      believe that our DeWind turbines offer a comparably priced product per megawatt
      of generation that is superior in performance and reliability to the competition
      and our innovations with our D8.2 model result in improved efficiency and a
      significant reduction in the failure rate of our competition’s products.


·
            One
                of the most expensive turbine failures is gearbox failure. Gearboxes
                can
                cost between $100,000 and $200,000 per unit in addition to shipping
                and
                cranage to install. Although it is difficult to quantify since the
                actual
                figures are trade secrets, we believe that the failure rate for some
                of
                our competitors is often approximately 18 months. Our D8 turbines
                by
                comparison have had no gearbox failures in its four year
                history.


·
            A
                second area of failure is the power conversion electronics package.
                With
                our D8.2, we have replaced the drive train with our innovative WinDrive®
                system that supplies constant speed to a synchronous generator, which
                is
                connected directly to the grid, thereby eliminating the power conversion
                electronics. This reduces our servicing costs as well as eliminates
                the
                need for a license from GE concerning power conversion electronics.


The
      ability to use a continuous speed synchronous generator, as opposed to a
      variable speed asynchronous or synchronous generators required by other
      turbines, results in a much more efficient AC power output at a higher voltage
      connected directly to the grid that results in a more “grid friendly” power
      generation. This allows the D8.2 to meet the Grid Code standards published
      by
      FERC as a synchronous generator.





We
      believe that our DeWind turbines have several disadvantages to our
      competition:


·
            Our
                company is thinly capitalized with limited financial reserves as
                compared
                to our largest competitor, General Electric. This position is a barrier
                to
                companies willing to purchase our turbines since they typically like
                to
                see a stronger balance sheet.


·
            Our
                D8.2, while based on our existing and very reliable D8 turbine has
                not
                been placed into commercial production and has not been fully tested
                for
                the new drive train components. These components may fail, resulting
                in a
                negative impact to our business. Our competition has more real world
                experience with their production
                models.


·
            We
                have not operated any of the DeWind turbines in a North American
                wind
                regime which is more robust than that typically found in Germany
                and
                Austria.


·
            We
                have not had commercial production of our wind turbines in any significant
                capacity since the first half of calendar year 2005 and we have an
                inadequate supply chain. In order to produce quantities sufficient
                to be
                profitable, we will need to re-engineer and implement a more robust
                supply
                chain and a production system.





**Governmental
      Regulation**


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 US 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.





14


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.





**Research
      and Development**


We
      have
      spent considerable funds on research and development of our proprietary, patent
      pending ACCC and related electrical system 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 cheaper 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 technologies.





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 chassis. In the wind energy industry, increased blade length translates
      into
      improved power generation yield. A development project is currently underway
      to
      add 90 meter rotor options to the D8 range. This will increase the swept blade
      area by 27% over the 80 meter rotor. 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 potential to increase the rated output from 2.0 MW to up to
      2.6MW in the existing form, resulting in a potential 30% increase in revenues
      per unit sold. 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
      spent
      $4,855,175, $5,413,787, and $3,258,055 on research and development activities
      in
      fiscal years 2006, 2005, and 2004 respectively.





**Employees**


As
      of
      November 15, 2006, we had a total of 188 full time employees including 63
      employees in the United States and 125 employees in Europe. We also used the
      services of 6 consultants on a regular basis for a variety of tasks and
      responsibilities. Additional consultants are employed as required for specific
      tasks. None of our employees are currently represented by a labor organization.
      We believe that relations with our employees is good.





15


**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.


Prior
      to
      acquiring Transmission Technology Corporation, or TTC, in November 2001, we
      were
      a shell corporation having no operating history, revenues from operations,
      or
      assets since December 31, 1989. We have recorded approximately $4.0 million
      in
      ACCC product sales since inception and we have $6.5 million in Turbine and
      related services revenues as a result of the acquisition on July 3, 2006.
      Historically, we have incurred substantial losses and we may experience
      significant quarterly and annual losses for the foreseeable future. We may
      never
      become profitable. If we do achieve profitability, we may not be able to sustain
      or increase profitability on a quarterly or annual basis. We expect the need
      to
      significantly increase our general administrative and product prototype and
      equipment prototype production expenses, as necessary. As a result, we will
      need
      to generate significant revenues and earnings to achieve and maintain
      profitability.




OUR
        INDEPENDENT AUDITORS HAVE ISSUED A QUALIFIED REPORT AS OF AND FOR THE YEAR
        ENDED
        SEPTEMBER 30, 2006 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, 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 $2,439,151. For the fiscal year ended
        September 30, 2004, we had net losses of $14,687,875 and negative cash flows
        from operations of $18,735,430. As of September 30, 2006, our accumulated
        deficit was $95,125,955.
 BECAUSE
        WE ARE IN AN EARLY STAGE OF COMMERCIALIZATION, OUR LIMITED HISTORY OF CABLE
        OPERATIONS MAKES EVALUATION OF OUR BUSINESS AND FUTURE GROWTH PROSPECTS
        DIFFICULT.


Since
      the
      reorganization of the Company in 2001, we have had a limited operating history
      and are at an early stage of commercialization of a new technology product
      to a
      market unused to using new technologies. We made our ACCC available and entered
      into our first commercial agreement in 2003. Our technology is a relatively
      new
      advance for the electrical utility industry technology and has not yet achieved
      widespread 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 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 partners and customers that our
      technology is an attractive alternative to conventional methods used by the
      electric utility industry;




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




(iv)
      our
      ability to change our customers' evaluation of the economics of powerline
      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 product 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 DEMONSTRATED IN REAL WORLD WIND
      GENERATION APPLICATIONS. THE WINDRIVE TM DRIVETRAIN IS UNPROVEN IN WIND GENERATION APPLICATIONS AND HAS NOT BEEN
      CERTIFIED FOR COMMERCIAL 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 either Europe or the United
      States. 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.




16


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 to direct marketing efforts 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 is not
      expected until the second half of 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.





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
      existing turbines, 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 geographies such as the United
      States and Canada and requires us to pay a royalty on turbines using their
      technology in other geographies. 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, another wind energy manufacturer, including
      without limitations 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 into the US, we expect that for the foreseeable future, we will
      purchase a substantial quantity of parts from European suppliers in Euro
      denominations for delivery into the US and elsewhere. Our current sales
      contracts have the revenue payments denominated in the local currencies and
      at
      contracted amounts. Since we currently do not have a foreign exchange hedging
      strategy in place, if the local currency value depreciates against the Euro
      we
      may incur substantial foreign currency losses or incur additional
      expenses




17


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 OUR GOING OUT OF 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 will 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 will need to raise additional capital until such time, if any,
      as we become cash-flow positive. It is highly 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.





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 industry, establishment of
      patents and other proprietary rights is important to our success and our
      competitive position. Performance in the electrical utility industry 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, Michael Porter, our President, Jorg Kubitza, General Manager of our
      Wind Division and Marv Sepe, President of our Cable Division. If Mssrs.
      Wilcoxon, Porter, Kubitza, or Sepe were unable to provide services to us for
      whatever reason, our business would be adversely affected. Neither Mr. Wilcoxon
      nor Mr. Sepe 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.





18


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


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




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




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




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




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




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




Our
      business could be seriously harmed if: (i) we cannot obtain suitable partners;
      (ii) our partners fail to achieve significant sales of ACCC conductor or
      products incorporating our technology; or (iii) we otherwise fail to implement
      our business strategy successfully.





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. The prices for these raw materials are subject
      to
      market forces largely beyond our control, including energy costs, organic
      chemical feed stocks, market demand, and freight costs. The prices for these
      raw
      materials have varied significantly and may vary significantly in the future.
      We
      may not be able to adjust our product prices, especially in the short-term,
      to
      recover the costs of increases in these raw materials. Our future profitability
      may be adversely affected to the extent we are unable to pass on higher raw
      material and energy costs to our customers.





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


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 suppliers that we use. 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.





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


As
      of
      November 30, 2006, Benton H Wilcoxon, our Chairman of the Board, Chief Executive
      Officer and Acting Chief Financial Officer, and Michael Porter, CTC President
      and former majority shareholder of EU Energy in the aggregate beneficially
      own
      or control approximately 21% of the outstanding common stock. As a result,
      these
      persons have controlling influence in determining the outcome of any corporate
      matters submitted to our shareholders for approval, including mergers,
      consolidations and the sale of all or substantially all of our assets, election
      of directors and other significant corporate actions. They also have the power
      to prevent or cause a change in control. The interests of these shareholders
      may
      differ from the interests of the other shareholders, and may limit the ability
      of other shareholders to affect our management and affairs.





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


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.





19


OUR
      BUSINESS MAY BE SUBJECT TO INTERNATIONAL RISKS.


We
      are
      pursuing international business opportunities, including in Europe, India,
      China, Mexico, Brazil, Europe, 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, we have not engaged in any transactions on these countries. Our wind
      division has historically operated only in Western Europe, primarily Germany
      and
      Austria. Our Cable business model has been implemented only in the United States
      and Canada where we produce the ACCC core for delivery to General Cable under
      a
      manufacturing agreement and for ACCC conductor orders in China. Expansion
      internationally will depend on our adaptation of this model to international
      markets and may be costly and time consuming. Risks inherent in international
      operations in general include:




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




(ii)
      challenges in staffing and managing foreign operations;




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




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




(v)
      political instability;




(vi)
      changes in currency exchange rates;




(vii)
      currency exchange controls; and




(viii)
      potentially adverse tax consequences.




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





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


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





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


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





Our
      turbines are subject to regulatory approval and certification as described
      above. Our turbine customers also rely upon tax credits as incentives to build
      wind turbine farms. These tax credits may lapse or expire prior to the
      installation of turbines or delays in shipments of turbines as the result of
      production issues may result in the loss of such credits to the developer In
      the
      United States and elsewhere around the world, there are alternative energy
      tax
      credits and tax advantages that have been enacted that are designed to promote
      the building of renewable and alternative energy including wind turbine farms.
      These tax credits may be significant enough to swing the difference as to
      whether a wind farm is economically feasible or not. Currently in the US, such
      tax credits are set to expire at the end of 2007. 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 IN THE ELECTRICAL UTILITY INDUSTRY,
      WHICH COULD RENDER OUR PRODUCTS OBSOLETE OR SUBSTANTIALLY LIMIT THE VOLUME
      OF
      PRODUCTS THAT WE SELL. THIS WOULD LIMIT OUR ABILITY TO COMPETE AND ACHIEVE
      PROFITABILITY.


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





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.





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 $1.77 to a low of $0.72. Fluctuations in the
      trading price or liquidity of our common stock may adversely affect our ability
      to raise capital through future equity financings.





21


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.





WE
      ISSUED
      DULY AUTHORIZED SHARES TO EMPLOYEES AND CONSULTANTS UNDER OUR 2002 NON-QUALIFIED
      STOCK COMPENSATION PLAN UNDER THE INCORRECT ASSUMPTION THAT WE HAD REGISTERED
      THE SHARES PURSUANT TO FEDERAL SECURITIES LAWS. HOWEVER, WE SUBSEQUENTLY
      REALIZED THAT THESE SHARES HAD NOT BEEN REGISTERED PRIOR TO ISSUANCE. AS A
      RESULT, OUR ISSUANCE MAY HAVE VIOLATED FEDERAL AND STATE SECURITIES LAWS, AND
      MAY RESULT IN OUR LIABILITY TO CERTAIN SUBSEQUENT PURCHASERS OF THESE SHARES.


Between
      March 18, 2003 and February 4, 2004 we issued common stock and options
      representing 1,504,780 shares of common stock to nine employees and consultants
      in satisfaction of bona fide services rendered and valued at an aggregate amount
      of $880,266 pursuant to our 2002 Non-Qualified Stock Compensation Plan. Although
      we believed that we and our counsel had filed the appropriate registration
      statement on Form S-8, it came to our attention in February, 2004 in connection
      with the preparation of a registration statement that an appropriate Form S-8
      had not been filed. It may be determined that such issuances were not exempt
      from registration or qualification under federal and state securities laws,
      and
      we did not obtain the required registrations or qualifications. As a result,
      we
      may be subject to contingent liabilities from these investors, as well as
      subsequent purchasers of the shares directly and indirectly issued. These
      liabilities may include an obligation to make a rescission offer to the holders
      of these shares and options. If rescission is required and accepted, we could
      be
      required to make payments to the holders of these shares and options. In
      addition, federal securities laws do not expressly provide that a rescission
      offer will terminate a purchaser's right to rescind a sale of stock that was
      not
      registered as required. If rescission is required, and any or all of the
      offerees reject the rescission offer, we may continue to be liable under federal
      and state securities laws.





AS
      OF
      December 11, 2006 6,201,366 COMMON SHARES ARE ISSUABLE UPON EXERCISE OF ALL
      OUTSTANDING OPTIONS, WARRANTS AND CONVERSION OF CONVERTIBLE NOTES FOR LESS
      THAN
      THE MARKET PRICE OF $1.04 PER SHARE. CASH PROCEEDS RESULTING FROM THE FULL
      EXERCISE AND CONVERSION OF THESE SECURITIES WOULD BE APPROXIMATELY $3,332,757.
      THE EXERCISE OR CONVERSION OF THESE SECURITIES COULD RESULT IN THE SUBSTANTIAL
      DILUTION OF THE COMPANY IN TERMS OF A PARTICULAR PERCENTAGE OWNERSHIP IN THE
      COMPANY AS WELL AS THE BOOK VALUE OF THE COMMON SHARES. THE SALE OF A LARGE
      AMOUNT OF COMMON SHARES RECEIVED UPON EXERCISE OF THESE OPTIONS OR WARRANTS
      ON
      THE PUBLIC MARKET 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. FULL CONVERSION OF SUCH
      SHARES WOULD INCREASE THE OUTSTANDING COMMON SHARES BY 3.5% TO APPROXIMATELY 185,064,000
      SHARES.


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 book value of the common shares held.
      At the December 11, 2006 market price of $1.04 per share, 6,201,366 shares
      would
      be exercisable or convertible for less than the market prices. Full exercise
      and
      conversion of these below market shares would result in us receiving cash
      proceeds of $3,332,757 and would increase the outstanding common shares by
      3.5%
      to approximately 185,064,000 shares.




22


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. Because we have not had any
      substantial ACCC product revenues to date, we can have no assurance that our
      revenues will materialize. Since our revenues may fluctuate and are difficult
      to
      predict, and our expenses are largely independent of revenues in any particular
      period, it is difficult for us to accurately forecast revenues and
      profitability.





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




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




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




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




(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.





RISKS
      RELATED TO THE EU ENERGY ACQUISITION





COMPOSITE
      TECHNOLOGY CORPORATION MAY NOT REALIZE ANY BENEFITS FROM THE ACQUISITION OF
      EU
      ENERGY.


We
      are in
      the process of integrating EU Energy's products and services offerings. If
      Composite Technology Corporation cannot integrate the products effectively
      or if
      management spends too much time on integration issues, it could harm the
      combined company's 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.


Composite
      Technology Corporation has no experience in integrating operations on the scale
      represented by the proposed acquisition, and we are not certain that Composite
      Technology Corporation and EU Energy can be successfully integrated in a timely
      or efficient manner or that any of the anticipated benefits of the proposed
      acquisition will be realized. Failure to do so could have a material adverse
      effect on the business, financial condition and operating results of the
      combined company.





23


SALES
      OF
      SUBSTANTIAL AMOUNTS OF COMPOSITE TECHNOLOGY CORPORATION COMMON STOCK AFTER
      THE
      ACQUISITION COULD MATERIALLY ADVERSELY AFFECT THE MARKET PRICE OF COMPOSITE
      TECHNOLOGY CORPORATION COMMON STOCK.


The
      EUE
      shareholders, as a condition of the proposed acquisition acquired approximately
      39,170,000 shares of unregistered, restricted Composite Technology Corporation
      common stock. The shares to be issued carry piggyback registration rights.
      As a
      condition precedent to closing, the majority shareholders have entered into
      contractual arrangements that limit the amount of shares of Composite Technology
      Corporation common stock that they may sell into the public market after closing
      of the proposed acquisition. The specific limits are generally leak out
      provisions extending twelve months from the closing date.


The
      issuance of the stock represents 22.3% of the issued and outstanding common
      shares of Composite Technology Corporation after the issuance of the proposed
      acquisition shares and 19.1% of the fully diluted shares, assuming full
      conversion and exercise of all convertible debt, and common stock options and
      warrants. The sale of substantial amounts of Composite Technology Corporation
      common stock following the proposed acquisition may cause substantial
      fluctuations in the public market price of Composite Technology Corporation
      common stock.





THE
      ACQUISITION OF EU ENERGY MAY RESULT IN ADDITIONAL SARBANES-OXLEY ISSUES AND
      MATERIAL WEAKNESSES IN THE CONTROL STRUCTURE OF COMPOSITE TECHNOLOGY
      CORPORATION.


EU
      Energy
      is a UK company that has not been subject to the requirements of the
      Sarbanes-Oxley Act of 2002. The operations of EU Energy are expected to be
      material to the results of the post-acquisition combined entity and management
      may not have sufficient time to document, assess, test, and remedy the control
      structure of EU; to identify any material control weaknesses; and to disclose
      any such weaknesses in time to comply with the reporting requirements of
      Sarbanes-Oxley.





**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 approximatelly 103,440 square feet.





24


**ITEM
      3 - LEGAL PROCEEDINGS**





Below
      we
      describe the legal proceedings we are currently involved in or resolved during
      the fiscal year ended September 30, 2006 through the date we prepared this
      report:





From
      time
      to time we become party to legal proceedings and claims in the ordinary course
      of business. We do not believe that the outcome of any of these claims will
      have
      a material adverse effect on our consolidated financial position, results of
      operations or cash flow.





See
      Item
      1 above and footnote 3 in Item 8 below for Bankruptcy related legal proceedings.





Composite
      Technology Corporation v. Acquvest (OCSC Case No. 03 CC 12640):





On
      October 16, 2003, CTC filed suit against Acquvest, Inc., Paul Koch, Victoria
      Koch, Patricia Manolis, and Michael Tarbox in Orange County Superior Court.
      CTC
      alleges causes of action for declaratory relief, breach of contract, fraudulent
      inducement, rescission and economic duress arising out of certain subscription
      and related agreements among the Company and the defendants. In connection
      with


such
      agreements, CTC issued to Acquvest, Inc. and Patricia Manolis, in April 2003
      and
      September 2003, a total of 150,000 units for a total purchase price of $375,000.
      Each unit consists of 10 shares of unregistered, restricted common stock and
      10
      Series I warrants to purchase one share of unregistered, restricted common
      stock. Each Series I warrant entitles the holder to purchase a share of common
      stock at $0.50 per share and expires on March 30, 2005. The agreements provide
      for the issuance of up to an additional 550,000 of such units for the same
      purchase price of $2.50 per unit, subject to certain conditions, and
      registration of share issuances under the Securities Act of 1933. The additional
      units have not been issued and the additional purchase consideration has not
      been paid. The parties disagree as to their respective rights and obligations
      with respect to the original issuances and such additional units. 10,000 units
      were also issued to Paul Koch for services in connection with such agreements,
      and a dispute has arisen as to his entitlement to those and additional units
      and
      warrants in connection with the agreements. CTC is seeking actual damages,
      punitive damages, statutory costs, attorneys' fees and injunctive relief against
      the defendants. CTC also seeks rescission of the pertinent agreements based
      on
      numerous grounds, including fraudulent inducement. By a letter to CTC's counsel
      dated September 8, 2004, Acquvest stated that it was waiving the contractual
      conditions to its purchase of an additional 400,000 units under its subscription
      agreement and was tendering $1,000,000, which was available on deposit, to
      CTC
      as payment for the units. Acquvest, Koch, and Manolis filed a Cross-Complaint
      on
      September 16, 2004, which they amended per stipulation on December 17, 2004.
      On
      April 14, 2005, CTC was served with notice that the Court granted defendants
      and
      cross-complainants' application for Writs of Attachment allowing for the
      attachment of CTC's assets totaling $2.55 million. The Court had denied two
      prior applications by defendants and cross-complainants for Writs of Attachment.
      CTC 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.
      Trial date was set for May 9, 2005, but was vacated as a result of the
      bankruptcy filing. The bankruptcy court has ordered that the trial be re-set
      in
      Orange County Superior Court. On October 31, 2005, CTC agreed to a complete
      settlement of the claims of Acquvest, Inc., Paul R. Koch, Victoria Koch and
      Patricia Manolis (the "Acquvest Parties"). CTC agreed to transfer 6.5 million
      shares (the "Settlement Shares") to settle all of the Acquvest Parties claims.
      There is an existing dispute over one of the settlement terms. CTC contends
      that
      an additional term of the settlement was that the Acquvest Parties would be
      responsibility for settling any claims of Michael Tarbox against CTC. An
      evidentiary hearing on this issue is set for February, 2006 in the bankruptcy
      court. On November 18, 2005, CTC entered into a Mutual Release Agreement to
      settle claims made by Acquvest, Inc., Paul R. Koch, Victoria Koch and Patricia
      Manolis against CTC and Benton H. Wilcoxon, CTC's CEO, in consideration for
      the
      issuance of 6,500,000 shares of CTC's common stock. As part of this settlement,
      it was recorded that Acquvest, Inc., Paul R. Koch, Victoria Koch and Patricia
      Manolis would be responsible for resolving CTC's issues with Michael Tarbox
      (see
      "Tarbox v. Koch"). Acquvest, Inc., Paul R. Koch, Victoria Koch and Patricia
      Manolis now claim that no such agreement was reached. Resolution of this matter
      will have no effect on the main release of CTC in the Acquvest, Inc., Paul
      R.
      Koch, Victoria Koch and Patricia Manolis litigation. One half of the Settlement
      Shares were transferred to the Acquvest Parties on delivery of the Mutual
      Release Settlement with the remaining shares being released 45 days thereafter.
      On November 21, 2005, the Company issued the 6,500,000 shares.





25


Ascendiant
      Capital Group, LLC v. Composite Technology Corporation (JAMS Arb. No. 1200034701
      and OCSC Case Nos. 03CC13314 & 03CC13531):




On
      November 4, 2003, Ascendiant Capital Group LLC, Mark Bergendahl, and Bradley
      Wilhite ("Plaintiffs") filed suit in Orange County Superior Court alleging
      causes of action against CTC and its CEO, Benton Wilcoxon, personally
      ("Defendants") for breach of contract, specific performance, fraud and deceit,
      negligent misrepresentations, breach of covenant of good faith and fair dealing,
      and declaratory relief arising out of a business advisory and consulting
      agreement (the "Agreement") allegedly executed between CTC and Ascendiant.
      CTC
      denies the material allegations and, on November 10, 2003, CTC filed a case
      in
      Orange County Superior Court against Plaintiffs alleging causes of action for
      declaratory relief, breach of contract, fraudulent inducement, and economic
      coercion arising out of the Agreement as well as various unrelated business
      agreements between Plaintiffs and Wilcoxon. CTC is seeking actual damages,
      punitive damages, statutory costs, attorneys' fees and injunctive relief against
      Plaintiffs. The principal parties are Ascendiant, Bergendahl, Wilhite, CTC
      and
      Wilcoxon. On November 24, 2003, the court entered an order consolidating the
      cases. On January 15, 2004, the parties agreed to submit all claims and
      cross-claims arising out of the Agreement to binding arbitration before the
      Honorable Robert Thomas Ret. at JAMS - Orange County. The remaining claims
      and
      cross-claims not arising out of the Agreement are pending before the Honorable
      Kazuharu Makino of Orange County Superior Court. On May 28, 2004, CTC's
      demurrers to Plaintiffs' causes of action in the arbitration for specific
      performance, negligent misrepresentation and breach of covenant of good faith
      and fair dealing were sustained, with leave to amend, as well as CTC's motion
      to
      strike Plaintiff's claims for punitive damages. Plaintiffs subsequently filed
      an
      amended complaint. Judge Thomas has reserved ruling on Plaintiffs' demurrers
      and
      motion to strike in the arbitration pending the outcome of the ruling on
      Plaintiffs' demurrers and motions to strike filed with respect to CTC's
      cross-claim pending in the superior court. An order has issued in the Orange
      County Superior Court action exempting this case from various pre-trial
      deadlines and noting that he expects that the case will not proceed to trial
      within 24 months of the date of filing. On February 22, 2005, CTC and Wilcoxon
      filed a Demurrer to Plaintiffs' causes of action for breach of contract and
      alter ego liability. The court overruled the Demurrer on April 1, 2005 and
      set
      Trial in the State court action for November 7, 2005. The arbitration commenced
      on February 9, 2005. Prior to completion of the arbitration, a settlement was
      reached on or about August 10, 2005 to resolve all claims by the parties. CTC
      agreed to pay $200,000 and issue 650,000 shares of common stock as part of
      the
      settlement. The Motion to Approve the Ascendiant Settlement was granted by
      the
      bankruptcy court on October 10, 2005. The Company recorded an accrual as of
      September 30, 2005 of $1,396,000 representing the $200,000 cash and $1,196,000
      for the value of the stock, representing the market value of $1.84 per share
      on
      the date immediately prior to the settlement date. On November 2, 2005 the
      Company released the $200,000 payment in cash and on November 21, 2005, the
      Company issued the shares.





Tarbox
      v.
      Koch (OCSC Case No. 04CC10345):





On
      October 13, 2004, Michael Tarbox ("Tarbox") filed an action in Orange County
      Superior Court (Case No. 04-CC-10345) against Paul Koch, Acquvest, CTC and
      Doe
      Defendants. Tarbox alleges that Koch made fraudulent transfers to Acquvest
      and
      the Doe Defendants for the purpose of avoiding the debt owed to Tarbox. Tarbox
      alleges that CTC securities were intended to serve as security for a debt owed
      by Koch to Tarbox. Tarbox alleges that Defendants were not bona fide purchasers
      of the CTC securities since they were receiving such securities for the benefit
      of Tarbox. Tarbox further alleges that CTC breached an agreement to pay him
      a
      finder's fee in connection with investments made by Koch. Tarbox alleges that
      CTC's breach has caused him to suffer damages in excess of $750,000. On November
      14, 2004, CTC filed a demurrer to the Complaint, and the other defendants also
      filed a demurrer. The Court granted leave to amend, and Tarbox then filed an
      amended Complaint. CTC just recently filed an Answer to the Tarbox's Amended
      Complaint. A demurrer filed by the other Defendants was granted on February
      22,
      2005, and Tarbox was again granted leave to amend. Tarbox filed a Second Amended
      Complaint. CTC answered the Second Amended Complaint. However, since CTC
      delivered to Koch the finder's fee which Tarbox might have otherwise been
      entitled to, on April 11, 2003, Tarbox executed a written release, whereby
      Tarbox released CTC of any obligation to pay him a finder's fee in connection
      with the introductions made to Paul Koch and Acquvest, Inc. Concurrent with
      the
      Bankruptcy filing, the claim was removed to the Bankruptcy Court. On August
      9,
      2005 Tarbox filed a proof of claim asserting a right to shares and warrants
      in
      CTC securities. On April 13, 2006, CTC and Tarbox agreed to settle all
      outstanding claims and provide for a full release between CTC and Tarbox for
      $100,000 payable in cash in equal monthly installments commencing on entry
      of
      the approval of the settlement by the Bankruptcy court. The Company has $50,000
      remaining recorded to accounts payable and other accrued expenses as of
      September 30, 2006.





Jeremiah
      O'Keeffe v. C. William Arrington and Composite Technology Corporation:





On
      December 31, 2004, Jeremiah O'Keeffe ("Plaintiff") filed suit against C. William
      Arrington and Composite Technology Corporation ("Defendants") in the District
      Court of Dallas, Texas (Cause No. 04-13004-A). Plaintiff alleged causes of
      action for breach of agreement and quantum meruit, arising out of an alleged
      failure, based on a verbal agreement, to compensate Plaintiff for unspecified
      services provided to Defendants. Plaintiff seeks compensatory damages, including
      the transfer 5,500,000 shares of common stock, $22,880,000 in monetary damages,
      attorneys' fees, interest and costs. Defendants deny the claims and intend
      to
      vigorously defend against them. On February 7, 2005, Defendants removed the
      case
      to Federal Court (Case No. 3-05CV0257N). On February 14, 2005, Defendants filed
      a Motion to Dismiss for lack of jurisdiction, and on March 7, 2005, Plaintiff
      filed a Motion to Extend Time to File Response to the Motion to Dismiss and
      to
      Allow Discovery on the Jurisdiction Issue. On May 5, 2005, CTC filed a motion
      to
      transfer the case to the U.S. Bankruptcy Court in the Central District of
      California. Plaintiff dismissed CTC without prejudice on May 11, 2005. On June
      13, 2005, Defendant C. William Arrington filed a Motion to Dismiss for Failure
      to Join CTC as a Party to the Action, and on June 29, 2005, Plaintiff filed
      a
      Motion for Leave to File First Amended Complaint. On July 19, 2005, the Court
      granted Plaintiff's Motion to Extend Time to Respond to the Motion to Dismiss,
      which was due on or before September 1, 2005, and granted Plaintiff's motion
      to
      conduct discovery of Defendants' contacts for the purposes of establishing
      personal jurisdiction over the Defendants with all other motions pending in
      Federal Court. On September 27, 2005, the Court granted Mr. Arrington's Motion
      to Dismiss for lack of jurisdiction and entered final judgment against O'Keefe.





26


David
      S.
      Shields v. Composite Technology Corporation:





On
      January 21, 2005, David S. Shields filed suit against CTC in Santa Clara
      Superior Court (Case No. 1-05-CV-034368) alleging CTC breached a subscription
      agreement by failing to issue the appropriate number of shares thereunder.
      CTC
      denied the claims. CTC filed an answer and Cross-Complaint against Shields
      for
      Rescission and Declaratory Relief on April 18, 2005. The case was then removed
      to the U.S. Bankruptcy Court in the Central District of California and a status
      conference was set for January 10, 2006. On or about September 2, 2005, the
      parties entered into a settlement agreement whereby CTC agreed to issue Shields
      an additional 25,000 shares of common stock in exchange for a complete release
      of all claims. The Motion to Approve the Settlement was granted by the
      bankruptcy court on October 4, 2005. On November 21, 2005, the Company issued
      the shares.





Litigation
      Involving DeWind:





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





These
      are
      two related legal actions involving our subsidiaries, Dewind Holdings Ltd and
      Dewind GmbH. The first action is commenced in England by FKI Engineering and
      FKI
      plc against Dewind Holdings Ltd and Dewind GmbH The second action is commenced
      by DeWind GmbH against FKI Engineering Ltd in Germany. All
      financial figures are stated in US Dollars at the September 30, 2006 exchange
      rates.





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





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 our subsidiaries, DeWind Holdings Ltd. and DeWind GmbH claiming
      damages of $2,225,910, including accrued interest, in connection with
      reimbursement of a performance bond payment. On July 4, 2005, FKI Engineering
      Ltd. agreed to sell to DeWind Holdings Ltd., the entire issued share capital
      of
      DeWind GmbH pursuant to a Share Sale Agreement (SSA). FKI Engineering Ltd.
      argues that according to the SSA, DeWind Holdings Ltd. had agreed to fully
      indemnify FKI Engineering Ltd. against liabilities and expenses suffered or
      incurred by FKI Engineering Ltd. or other related parties arising directly
      or
      indirectly in connection with any claim under existing performance bonds and
      guarantees paid by FKI which were related to DeWind’s then existing turbines. In
      second quarter of 2006, FKI Engineering Ltd. alleged that FKI plc paid Deutsche
      Bank AG the sum of $2,183,000 pursuant to an FKI deed of guarantee related
      to a
      DeWind turbine.




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. The Company believes 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 this claim the Company has accrued 100% of
      the
      FKI Engineering Ltd. claim for $1,662,900 or $2,092,900, net of the $430,000
      counterclaim , against receipt of deferred purchase consideration of $2,537,300.




The
      FKI
      legal action also seeks a declaratory relief from the DeWind lawsuit filed
      in
      Germany described below. The FKI Companies seek relief from English courts
      that
      DeWind GmbH has no claim of up to $72,525,350 plus interest, against them out
      of
      capital reserve agreements or unlawful repayments in accordance with German
      law.
      Furthermore, the FKI Companies seek a 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. DeWind and DeWind Holdings have
      contested the jurisdictional competency of the English court since it is not
      apparent that it does have jurisdiction according to Art. 2 et seq\. and Art.
      6
      Nr. 1 of the European Council Regulation (EC) No. 44/2001.




In
      respect of all claims mentioned above, 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. There has been no oral court
      hearing so far. From December 11, 2006 until December 13, 2006, an oral hearing
      will be held in front of the English High Court regarding the competency of
      the
      English court to hear the cases.





Except
      as
      noted above, we have not recorded a liability for any of these actions under
      SFAS 5 due to the uncertainty of the outcome.





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,
      FKI Engineering Ltd. shall be ordered to pay to DeWind GmbH the sum of
      $72,525,350, with interest and 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.





27


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 believes
      that FKI either did not pay the capital reserves as in accordance with the
      Capital Reserve Agreement executed 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 has time until January 2, 2007 to file its detailed statement of defense.
      There has been no oral court hearing so far. In respect of this claim, the
      court
      costs of $347,600 have been accrued as of September 30, 2006. We have not
      recorded a contingent asset for any of these actions as of September 30,
      2006.





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 692,438.27 (approximately $1.3 million at September
      30, 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 June
      30, 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. An accrual of $871,555 has been included in the September 30, 2006
      balance sheet in accounts payable and other accrued liabilities.








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 $1,345,799 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 $215,168. 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. Further court
      orders have not been rendered yet. 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. We have incorporated the fair value of these assets
      as $0
      in our acquisition date balance sheet and to the extent that any of these funds
      are recovered, we intend to adjust the fair value of our assets and our goodwill
      acquired under the guidance of SFAS 141.







**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, 2006.





28


**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 2006/2005**


**HIGH
      LOW**





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





**QUARTER
      ENDED 2004/2005**


**HIGH
      LOW**





December
                31, 2004
            $6.24
            $1.50March
                31, 2005
            $5.23
            $2.37June
                30, 2005
            $2.70
            $0.45September
                30, 2005
            $3.17
            $1.09





These
      quotations reflect inter-dealer prices, without retail mark-up, mark-down or
      commission, and may not represent actual transactions. As of November 30, 2006,
      there were approximately 550 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**





None




29


**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, 2006,
      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 302002
            
            2003
            
            2004*
            
            2005
            
            2006Statement
                of Operations Data
            
            
            
            
            
            RestatedTotal
                Revenue
            
            
            --
            
            
            --
            
            $
            2,500,000
            
            $
            1,008,970
            
            
            10,135,314Cost
                of Revenues
            
            
            --
            
            
            --
            
            
            314,548
            
            
            650,563
            
            
            10,379,039Gross
                Margin
            
            
            --
            
            
            --
            
            
            2,185,452
            
            
            358,407
            
            
            (243,725
            )Operating Expenses
            
            
            4,501,264
            
            
            6,645,752
            
            
            15,748,802
            
            
            17,063,288
            
            
            17,734,863Operating
                income (loss)
            
            
            (4,501,264
            )
            
            (6,645,752
            )
            
            (13,563,350
            )
            
            (16,704,881
            )
            
            (17,978,588
            )Interest
                expense, net of Interest income
            
            
            (16,818
            )
            
            --
            
            
            (395,001
            )
            
            (2,527,280
            )
            
            (2,901,364
            )Other
                income (loss) **
            
            
            --
            
            
            (105,500
            )
            
            (729,524
            )
            
            (20,931,246
            )
            
            (7,638,984
            )Income/(loss)
                before Income Taxes and cumulative effect of change in
                accounting
            
            
            (4,518,082
            )
            
            (6,751,252
            )
            
            (14,687,875
            )
            
            (40,163,407
            )
            
            (28,518,936
            )Provision
                for Taxes
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            4,256Income/(loss)before
                cumulative effect of change in accounting
            
            
            (4,518,082
            )
            
            (6,751,252
            )
            
            (14,687,875
            )
            
            (40,163,407
            )
            
            (28,523,192
            )Cumulative
                effect of change in accounting
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --Net
                income (loss)
            
            
            (4,518,082
            )
            
            (6,751,252
            )
            
            (14,687,875
            )
            
            (40,163,407
            )
            
            (28,523,192
            )Preferred
                Stock Dividends
            
            
            5,871
            
            
            20,000
            
            
            --
            
            
            --
            
            
            --Net
                Loss Available to Common Shareholders
            
            
            (4,523,953
            )
            
            (6,771,252
            )
            
            (14,687,875
            )
            
            (40,163,407
            )
            
            (28,523,192
            )Basic
                net income per common share
            
            $
            (0.07
            )
            $
            (0.07
            )
            $
            (0.
                14
            )
            $
            (0.35
            )
            $
            (0.20
            )











*
      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.





**During
      the fiscal year ending September 30, 2005, the Company recorded $14.4 million
      in
      litigation and bankruptcy related claims and recorded $4.8 million as an
      adjustment to the carrying value of our $15M debenture as a consequence of
      our
      filing for Chapter 11 bankruptcy protection. We segregated the litigation and
      claims charges on our Statement of Operations and reclassified $739,000 and
      $105,500 from Operating expense to Other expense for the fiscal years 2004
      and 2003, respectively.








30





At
                September 30,(All
                  figures are presented in dollars)
            
            2002
            
            2003
            
            2004
            
            2005
            
            2006Audited
            
            Audited
            
            Audited
            
            Audited
            
            Audited(Restated)Balance
                Sheet DataCash
                and cash equivalents
            
            $
            13,956
            
            
            1,130,498
            
            $
            2,930,615
            
            $
            807,815
            
            $
            2,578,347Restricted
                Cash
            
            
            --
            
            
            --
            
            
            10,010,060
            
            
            --
            
            
            --Accounts
                Receivable, net of allowance
            
            
            --
            
            
            --
            
            
            2,501,994
            
            
            56,998
            
            
            11,502,790Inventory
            
            
            --
            
            
            --
            
            
            788,799
            
            
            1,233,334
            
            
            23,891,867Prepaid
                expenses and other current assets
            
            
            96,571
            
            
            79,036
            
            
            378,052
            
            
            395,978
            
            
            3,433,936Property
                and Equipment, net of accumulated depreciation and
                amortization
            
            
            20,608
            
            
            200,733
            
            
            1,253,123
            
            
            2,765,609
            
            
            4,714,084Other
                Assets
            
            
            166,000
            
            
            9,000
            
            
            218,600
            
            
            511,581
            
            
            515,800Goodwill
                and Intangibles
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            49,616,000Total
                Assets
            
            
            297,135
            
            
            1,419,267
            
            
            18,081,243
            
            
            5,771,315
            
            
            96,252,824Liabilities
                and Shareholders Equity (Deficiency)Accounts
                Payable and other accrued liabilities
            
            
            1,269,708
            
            
            969,307
            
            
            2,278,286
            
            
            4,700,553
            
            
            12,965,468Accrued
                legal settlement
            
            
            --
            
            
            --
            
            
            --
            
            
            14,244,792
            
            
            --Deferred
                Revenues and Customer Advances
            
            
            --
            
            
            --
            
            
            564,750
            
            
            621,748
            
            
            20,112,701Warranty
                Provision
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            14,654,204Capital
                Leases Payable
            
            
            
            
            
            
            
            
            734,382
            
            
            847,887
            
            
            397,688Convertible
                Debentures *
            
            
            
            
            
            
            
            
            8,901,106
            
            
            10,860,442
            
            
            6,023,250Stockholders
                Equity (Deficit)
            
            
            (972,573
            )
            
            449,960
            
            
            5,602,719
            
            
            (25,504,107
            )
            
            42,099,513Total
                Liabilities and Shareholders Equity (Deficit)
            
            
            297,135
            
            
            1,419,267
            
            
            18,081,243
            
            
            5,771,315
            
            
            96,252,824Supplemental
                information (unaudited)Working
                capital (deficiency) **
            
            $
            (1,159,541
            )
            $
            240,227
            
            $
            14,267,312
            
            
            (1,564,485
            )
            
            (3,277,190
            )Total
                long-term debt ***
            
            
            --
            
            
            --
            
            $
            9,635,488
            
            $
            11,708,329
            
            $
            6,420,938





*
      In
      2005, as a consequence of the Chapter 11 bankruptcy, the Company recorded a
      $4.8M 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.





31


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





**MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF**


**FINANCIAL
      CONDITION AND RESULTS OF OPERATIONS**





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**





We
      develop, manufacture and market products relating to technologically advanced
      wind turbines and products incorporating composite technologies to the global
      electric utility industry, which are designed to improve the performance of
      renewable energy wind turbines as well as the capacity and performance of
      electrical transmission and distribution grid systems.





Our
      two
      primary products consist of: (i) DeWind wind energy turbines in the 1.25 and
      2.0
      megawatt range of rated power generation and (ii) our proprietary patent pending
      composite reinforced overhead conductor known as ACCC conductor sold to
      utilities in the United States and China for electrical transmission
      systems.





**DEVELOPMENTS
      THIS FISCAL YEAR**





**Emergence
      from Bankruptcy and Settlement of all Litigation:**





We
      entered fiscal year 2006 in October, 2005 preparing for bankruptcy court
      hearings for confirmation of our bankruptcy plan. Due in large part to the
      settlement of the last remaining significant litigation case, the hearings
      concluded on October 31, 2005 with the approval of our bankruptcy plan by the
      Court. The Court signed and entered an order on November 21, 2005 that confirmed
      our emergence from bankruptcy. Throughout the remainder of the year, we had
      several small disputed claims reviewed and adjudicated culminating with the
      settlement of our final claim in June, 2006.





The
      Company believes that the bankruptcy proceedings resulted in additional delays
      of sales orders that were anticipated in fiscal 2006. Conductor sales involve
      a
      lengthy sales cycle and we believe that our bankruptcy filing interrupted the
      sales pipeline and likely delayed the market acceptance of our ACCC product.
      Further, the Company's management was required to devote a substantial amount
      of
      time during the months of October and November preparing for and testifying
      in
      the bankruptcy court hearings which resulted in less attention and focus on
      the
      sales of our primary product. With the emergence from Bankruptcy, the Company's
      management can now focus on the financial, operational, and marketing related
      functions necessary to successfully commercialize our products. Further, the
      exit from bankruptcy along with the elimination of the litigation has
      significantly reduced the drain on our financial resources resulting from the
      hiring of outside legal counsel to assist management and defend against the
      litigation.





Litigation
      settlements and resolution:





On
      October 31, 2005, we settled with the Acquvest, Koch, and Manolis parties
      whereby we would issue 6,500,000 shares of common stock in full settlement
      of
      the litigation. We recorded an expense of $12,675,000 in fiscal 2005 for this
      settlement as a SFAS 5 contingent liability at a price per share of $1.95,
      the
      market price on the date prior to the settlement. The settlement was approved
      by
      the bankruptcy court in November, 2005.





On
      November 1, 2005 we consummated our bankruptcy plan by the payment of
      approximately $1.1 million of pre-petition accounts payable and other
      liabilities, as directed by our approved plan of reorganization.





During
      fiscal 2006, under the direction of the Bankruptcy Court, we issued 7,175,000
      shares of common stock to settle litigation claims including the aforementioned
      settlement of 6,500,000 shares with Acquvest, Koch, and Manolis, 796,425 shares
      of common stock to settle bankruptcy claims, and 259,790 shares to pay for
      interest accrued on our $15,000,000 August 14, 2004 Debentures earned between
      April 1, 2005 and September 30, 2005. All 8,231,215 shares were registered
      for
      resale under Section 1145 of the Bankruptcy Statutes.





32


In
      April,
      2006 we settled the $750,000 Tarbox claim and the $157,000 Zenith claim for
      $100,000 and $100,000 respectively, in cash. The Tarbox claim is being paid
      out
      over twelve months and the Zenith claims is being paid out over ten months.
      We
      are current on all required payments. In June, 2006 the bankruptcy court ruled
      in our favor on the VanMidde stock claim. In June, 2006, prior to a court
      hearing, we settled with the last remaining claim by issuing 450,000 shares
      of
      stock to the August, 2004 Debenture holders claim for liquidated damages
      relating to delays in obtaining an effective registration statement on the
      shares underlying their conversion shares and related warrant
      shares.





See
      Footnotes 3 and 18 to the consolidated financial statements for further
      discussion of bankruptcy claims and litigation activities. See also item 3,
      "Legal Proceeding"





**Acquisition
      of EU Energy**





In
      March,
      2006 we signed a letter of intent to purchase EU Energy, plc a United Kingdom
      holding company that owns several subsidiaries including EU Energy Wind Ltd,
      that owns rights to manufacture and sell the DeWind family of wind turbines
      designed and certified in Germany.. In June, 2006 EU Energy Plc re-organized
      as
      a private company and became EU Energy Ltd. In June, 2006 we executed a Share
      Exchange Agreement with substantially all of the shareholders of EU Energy
      Ltd.
      The Share Exchange Agreement includes provisions for a 12 month lock-up for
      all
      CTC stock issued or issuable to major shareholders and allows for
      indemnification of CTC by major shareholders of EU under certain events. The
      Share Exchange Agreement is available on Form 8-K filed on June 8, 2006. On
      July
      3, 2006, we issued 39,169,670 of restricted CTC common stock in exchange for
      100% of EU Energy stock outstanding. We intend to operate EU Energy as a wholly
      owned subsidiary under the trade name DeWind.





The
      purchase of DeWind is a long term investment in wind energy and we purchased
      DeWind for several reasons including their brand name and reliability and their
      position in the emerging wind energy market. DeWind produces two turbine models,
      the DeWind 1.25 Megawatt D6 and the 2 Megawatt D8 models of wind turbines.
      These
      turbines have proven themselves in over 140 installations as being highly
      reliable and demonstrate consistently high performance for converting wind
      energy to electricity. We believe that the upgraded DeWind D8.2 model
      incorporate technologies that enable next-generation wind turbine machines
      and
      which should result in substantial improvements in electrical generation, power
      grid integration, and increased reliability as compared to the existing wind
      turbines on the market. The D8.2 turbine incorporates the use of a proven
      technology that is novel to wind generation that we believe will result in
      a
      more effective approach to converting wind energy to electrical energy. Although
      the technology used in this approach has been proven in other industrial
      applications, it has not yet been demonstrated in our D8.2 wind turbines in
      that
      the D8.2 turbine has not been commercially produced and a D8.2 prototype is
      expected to complete operational testing begun in December, 2006. The D8.2
      model
      is based upon our proven and type certified D8 model and is expected to be
      demonstrated in December of 2006 in Germany and presented for type certification
      at the DEWI-OCC facility in Germany. Type certification should be obtained
      in
      early 2007. We believe that the success of this prototype and the resultant
      certification will be a milestone event for this next generation product. The
      DeWind D8.2 will be available in both 50Hz and 60Hz variants.





At
      the
      time of the acquisition, EU Energy had approximately $2.7 billion
      in Turbine Reserve Agreements (TRAs) for their current and future wind
      turbines, substantially all of which are for deliveries scheduled to begin
      in
      late 2007 through 2012 and which represents a substantial portion of the
      projected production capacity of EU Energy during that time frame. The TRAs
      represented the intent for wind farm operators and other individuals to purchase
      wind turbines and as such are not binding agreements to purchase turbines,
      although they call for advance payments according to a schedule in advance
      of
      intended delivery dates. We reviewed the TRAs during our due diligence
      procedures and we believed that they represented valid intents to purchase
      the
      turbines at the prices indicated. Each of these TRAs required cash payments
      which have not materialized and are therefore cancelable. We now expect that
      the
      TRAs in existence at the acquisition date will be cancelled and either rewritten
      with these customers or replaced with other customer orders in terms that are
      more beneficial to us and we are in discussion with several parties to sell
      all
      of our expected production capacity for 2007 and 2008. We remain even more
      optimistic about our opportunities to sell our D6, D8, and D8.2 models.





**ACCC
      Conductor sales**





We
      continued our commercialization efforts for domestic and international sales
      of
      our ACCC product by hiring additional employees and consultants, establishing
      business relationships, and implementing and enhancing our sales processes.
      Our
      sales efforts consist of direct and indirect sales efforts. Our indirect efforts
      are through our distribution agreement with General Cable (see below) which
      is a
      non-exclusive distribution agreement for the US and Canada. Our direct sales
      efforts are for sales areas in the US and Canada without a General Cable
      presence and for international sales. We currently have a Domestic and
      International sales and marketing team of twelve employees and consultants
      and
      we leverage the sales efforts of our distribution partner, General Cable, for
      our North American sales efforts. Our worldwide ACCC conductor related revenues
      increased 200% from fiscal 2005 levels of $1.0 million to $3.0 million in fiscal
      2006 of which $1.3 million was sold in the United States and $1.7 million was
      sold to Jiangsu Far East in China.





33


Of
      the
      $1.3 million in the US, approximately $1.0 million was for an ACCC conductor
      sale made to the City of Kingman, Kansas as part of the bankruptcy settlement.
      We now believe that our current and future customer base in the US delayed
      their
      selection of ACCC for two primary reasons: (i) our 2005 Chapter 11 bankruptcy
      filing caused a large degree of uncertainty with our customers and likely
      delayed their decisions to purchase ACCC conductor and (ii) there was a problem
      resulting from installation issues with our first American Electric Power order
      in January, 2006. The latter issue necessitated a full quality review to
      ascertain the root cause of the problem which was later determined to be
      improper installation procedures. We subsequently redesigned and enhanced our
      installation procedure manuals and we implemented a total quality review that
      culminated recently with our ISO 9001:2000 certification in November, 2006.
      Due
      in large part to our efforts with this customer to resolve the issue, we
      received two additional orders from American Electric Power sold through our
      General Cable partner totaling approximately $1.5 million for ACCC core
      deliverable in December, 2006 and we are working with American Electric Power
      on
      additional orders. In addition to an order from a new fiscal 2007 customer,
      we
      currently have a United States ACCC core backlog of approximately $2.4 million.
      We believe that our sales strategy, coupled with our improved quality and our
      emergence from bankruptcy positions us well as we continue to commercialize
      our
      product.





We
      made
      significant progress with our China sales during 2006 continuing into fiscal
      2007. During fiscal 2006, we sold approximately $1.7 million of ACCC conductor
      representing 103.5 linear kilometers (62 miles) of conductor to Jiangsu Far
      East
      during fiscal 2006 as compared to approximately $36,000 or 2 kilometers in
      fiscal 2005. In addition, we currently have an order for $1.5 million
      representing 100 km (60 miles) of ACCC conductor for delivery in December,
      2006.
      This December, 2006 order is the first ACCC conductor order where we will use
      an
      aluminum stranding supplier other than General Cable to wrap our ACCC core.
      We
      anticipate that we will continue with our success with this Chinese distributor
      with additional orders as we see demand for our products increasing in China.
      We
      further expect that our projected fiscal 2007 growth will be primarily in the
      international markets and we see substantial revenue growth opportunities in
      China, Europe and the Middle East.





**Wind
      Turbine sales and operations**





Our
      Wind
      Turbine sales represent activity from the date of the EU Energy acquisition
      of
      July 3, 2006 through our fiscal year end September 30, 2006. Total wind turbine
      and related service revenues was $6.6 million for the quarter and fiscal year.





Recorded
      product revenues consisted of the sale of three DeWind D6 turbines delivered
      during the quarter to Shanghai Electric Group for $3.1 million or approximately
      $1.04 million for each turbine. The turbines were sold out of inventory acquired
      from EU Energy during the acquisition. In addition, during the quarter, three
      additional DeWind D6 turbines and three DeWind D8 turbines were sold to existing
      customers for a combined total of approximately $8.9 million. Billings
      and cash received from these six turbines have been deferred at September 30,
      2006. After the shipment of these six turbines, we have two each of D6
      and D8 turbines available for sale out of our acquired inventory. 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.





Service
      revenues consisted of approximately $3.5 million of revenues recognized from
      turbine repairs and turbine maintenance contracts. Service costs of $4.7 million
      represents personnel and other operating costs and costs related to additional
      availability provisions. The service group operated at a negative gross margin
      for two primary reasons: a) between 2003 and 2005, under the ownership of FKI,
      DeWind sold turbines with extended warranties and contracts for annual billings
      for maintenance below the costs required to service the turbines and b)
      operational inefficiencies resulting from a small number of turbines under
      service contract. To resolve these issues, subsequent to our fiscal year end,
      on
      October 1, 2006 we sold 50% of the formerly 100% owned EU Energy Service &
Maintenance GmbH subsidiary of DeWind to Enertrag AG. Enertrag had previously
      been one of our largest turbine and service customers. We anticipate that the
      Enertrag transaction will provide economic advantages by bringing more turbines
      under service which will in turn result in greater revenues and increased
      operational cost efficiencies. Further, the turbines sold in 2003 to 2005 under
      two to five year warranties and related service contracts expire in 2007 and
      2008 which we expect will be renewed at service rates higher than the original
      contract rates.





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. To provide for a high
      quality, low cost assembly facility with a minimum in initial outlays for
      equipment we evaluated several alternative production facilities and partners.
      Subsequent to our fiscal year end, on November 27, 2006 we signed an agreement
      with TECO/Westinghouse Motor Company to outsource the production of our DeWind
      D8.2 model turbines in the United States beginning in 2007. See also subsequent
      events footnote 21 in Item 8 below. We anticipate that other turbine production
      outside of Europe will be outsourced in a similar manner.





34


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 turbine 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 Purchase Agreements or TPAs 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 5-15% 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 TPA 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 in 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.





**Operational
      changes:**





A
      number
      of changes have been made to our operations capabilities, both in terms of
      systems implementation and human resources.





Since
      our
      acquisition of DeWind in July, 2006 we have worked to incorporate and merge
      our
      management teams together so as to provide a seamless integration of our
      operations. In July, 2006 subsequent to the acquisition, we appointed Mr.
      Michael Porter, former CEO of EU Energy as the President of CTC Corporation
      with
      managerial responsibility of day to day operations overseeing both of our
      operational divisions of CTC Cable and DeWind. Mr. Porter reports to Mr. Benton
      Wilcoxon who retains his Chief Executive Officer and Acting Chief Financial
      Officer roles. We have also retained the services of several former EU
      Executives including Mr. Andrew Lockhart as VP of Marketing, Mr. Victor Lilly
      as
      our VP of Technology, and Mr. Joerg Kubitza as General Manager of the DeWind
      division. Our efforts in the DeWind division have centered on selling and
      product development. We are actively seeking to sell all of our remaining
      acquired inventory stocks as well as finalizing our first substantial sale
      of
      our next generation D8.2 turbine in the United States as described above. Our
      product development efforts have centered on the completion and commissioning
      of
      our D8.2 turbine at a world class test site in Cuxhaven, Germany. This turbine
      was shipped to the test site in November, 2006 and is expected to be
      commissioned in December, 2006.





We
      continued to develop and refine the ACCC product during 2006. In February of
      2006, we reorganized our management structure by eliminating the position of
      Acting Chief Operating Officer held by Brian Brittsan, and added Marvin Sepe
      as
      the new VP of Manufacturing for CTC Cable and subsequently promoted Mr. Sepe
      to
      the President of CTC Cable in July, 2006. Mr. Sepe has brought to our company
      significant experience in the management of the production of technology
      products as well as quality assurance programs. Mr. Sepe has implemented a
      complete quality review and significantly enhanced our quality control
      procedures. We began to seek ISO 9001:2000 certification in March, 2006 and
      were
      successfully certified in November, 2006. We now believe that we have complete
      quality control over every reel of ACCC core produced in Irvine. Refinements
      and
      improvements to our ACCC product during the year centered on the design and
      build of a new pultrusion machine that is less expensive to build and which
      we
      believe has the potential to increase our line speed considerably. We also
      worked on additional materials optimization projects throughout the year.





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. We expect that we will be required
      to
      incur substantial expense to bring our Lubeck accounting and finance operations
      into compliance with the Sarbanes-Oxley requirements.





During
      the year, we added two Directors to our Board of Directors and had one Director
      retire. In December, 2005, Mr. William Arrington, formerly the Chief Operating
      Officer, retired from the company. In January, 2006 he resigned as a Director
      of
      the Company. We added two Directors, Mr. Michael McIntosh and Mr. Dean McCormick
      III in January, 2006 by appointment and they were voted in as Directors at
      our
      annual shareholders meeting in March, 2006. Mr. McCormick is an independent
      Director who has agreed to function as the compensation committee chairman
      and
      is a financial expert who will chair our audit committee. Mr. McIntosh currently
      and previously worked as a consultant to the company, primarily as the lead
      intellectual property attorney and he therefore is not considered independent.





35


**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, 2006,  September 30, 2005 and September 30,
      2004




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





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.





We
      anticipate that unless we receive a significant influx of working capital due
      to
      a large commercial order that we will need to raise additional capital through
      the issuance of debt or equity securities, or both. 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, 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, CTC was served with notice that pursuant to the Acquvest litigation,
      the Orange County Superior Court granted an attachment of CTC's assets totaling
      $2.55 million. The Court had denied two prior applications by defendants and
      cross-complainants for Writs of Attachment. CTC 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.





Our
      reorganization plan was approved by the Court subsequent to year end, on October
      31, 2005. Our bankruptcy plan of reorganization is expected to have 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. We have accrued all interest payable on our balance sheet as accrued
      interest payable.





ii.
      any
      litigation related claims settled or resolved under the bankruptcy plan will
      be
      payable 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 is payable at the direction of the US Trustee and there are additional
      restrictions on cash payments while we are 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.





36


Cash
      used
      by operations for the year ended September 30, 2004 of $8,735,430 was primarily
      the result of $14.7 million of operating losses offset by non-cash compensation
      expenses of approximately $8.1 million including charges relating to deferred
      stock options, compensation expense, issuance of common stock and warrants
      for
      services and legal settlements, and a $2.1 million increase in working capital
      requirements. Cash used for investing activities consisted of fixed asset
      purchases of $846,535 offset by proceeds from equipment sold on sale-leaseback
      arrangements of $500,000 and $10 million in cash restricted related to the
      August 2004 Debentures. Cash provided by financing activities of $20,881,932
      was
      primarily due to the $15.0 million debentures sold in August, 2004 as well
      as
      private equity sales of $3.3 million net of offering costs and warrant exercises
      for cash of $2.8 million.





As
      of
      November 30, 2006, the Company had approximately 2.0 million warrants "in the
      money" at current market prices that, if exercised, would result in $2,009,000
      in cash proceeds. The Company also had 5,032,366 of "in the money" vested
      employee stock options that, if exercised would result in $2,168,000 of cash
      proceeds to the Company.





As
      of
      November 30, 2006 the Company had approximately $0.6 million in cash. We believe
      our cash position as of November 30, 2006 and expected cash flows from
      revenue orders will not be sufficient to fund operations for the next four
      calendar quarters. We anticipate that additional cash is needed to fund
      operations beyond December, 2006 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 2006 to 2005 and 2004





PRODUCT
      REVENUES. For fiscal 2004 and 2005, product revenues consisted of revenue from
      the sale of ACCC cable products to utility companies and composite core to
      General Cable. In fiscal 2006, with the acquisition of EU Energy product
      revenues included sales of wind turbines in addition to ACCC sales. Product
      revenues increased $1.0 million from $0 in fiscal 2004 to $1.0 million in fiscal
      2005 as the result of our initial sales of ACCC conductor and increased $5.1
      million from $1.0 million in fiscal 2005 to $6.1 million in fiscal 2006. The
      fiscal 2006 increase was due to $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. The increase to $3.5 million was due to the acquisition of wind
      turbines under service and is described in greater detail in the segment
      breakdown below.





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.
      Consulting revenue for 2004 consisted of $2,500,000 for a single consulting
      contract that was completed during the year ended September 30, 2004. No
      consulting contracts were completed during either the 2005. While this contract
      provided us with significant revenues, we currently are not concentrating our
      efforts to increase our consulting business and instead are focused on
      increasing our product revenues through commercialization of the ACCC Cable.





COST
      OF
      PRODUCT REVENUES For 2006, our costs include the costs to produce and ship
      ACCC
      cable and the acquisition value and costs to complete and ship turbines acquired
      from EU Energy. Fiscal 2006 costs increased $4.8 million to $5.4 million due
      to
      the increase in ACCC revenues and the shipment of three EU turbines. Fiscal
      2006
      costs are further broken down in the segment costs described below. Cost of
      product revenues for 2005 represented material, labor, and overhead costs to
      produce and ship ACCC cable sold and recognized as revenues. Cost of product
      revenues increased from $0 for 2004 to $651,000 for the 2005. The dollar
      increase was due to 2005 revenues recognized.





Cost
      of
      product revenues by segment for fiscal 2006 were $2.35 million for cable
      products and $3.07 million for turbine products representing gross margins
      of
      $651,000 for cable products or 21.7% of revenues and $49,000 or 1.6% of revenues
      for turbine products.





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 liabilities. Cost of service
      increased from $0 in fiscal 2005 and 2004 to $4.6 million in fiscal 2006 and
      resulted in a negative gross margin of $1.2 million. Included in the service
      revenue costs was approximately $400,000 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.





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





Cost
      of
      contract revenue 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.





37


**Segment
      Analysis:**





Revenues
      in fiscal 2006 totaled $10.13 million consisting of $3.55 million for the cable
      segment and $6.58 million for the wind segment against respective costs totaling
      $2.66 million for the cable segment and $7.7 million for the wind segment.





**Cable
      Segment**





Revenues :
      Cable
      revenues consisted of $3.0 million of ACCC conductor products and $0.55 million
      of consulting revenue. Conductor products sold consisted of 135.7 miles of
      ACCC
      conductor cable and 7.5 miles of ACCC conductor core including 63.5 miles of
      ACCC conductor representing $1,693,000 sold to Jiangsu Far East in China and
      70
      miles of ACCC conductor representing $988,000 sold to the City of Kingman,
      Kansas under a bankruptcy settlement described below. These two customers
      represented 58% and 43% of our cable segment revenues respectively for the
      year.
      These sales represent 17% and 15% of our consolidated fiscal 2006 revenues
      for
      Jiangsu Far East and the City of Kingman, KS respectively. For fiscal 2007,
      we
      expect to continue and increase our sales to China through Jiangsu Far East
      as
      our relationship with this customer grows. Since the transaction with the City
      of Kingman was the result of a bankruptcy settlement, we do not expect that
      this
      revenue stream will recur in 2007.





Subsequent
      to fiscal year end, we sold two additional orders of ACCC to one of our first
      two US utility customers, American Electric Power through General Cable for
      approximately $1.5 million of ACCC core. We also sold an additional $1.5 million
      of ACCC conductor to Jiangsu Far East for shipment to China. Including several
      smaller orders, our backlog for ACCC products as of November 30, 2006 is
      approximately $4.0 million.





City
      of
      Kingman: In the fiscal quarter ended December 31, 2003 CTC commenced providing
      services under a $2.675 million contract for design, production, and
      installation of a 21 mile long new ACCC transmission line in Kansas. Under
      the
      original contract, revenue from this contract will be recognized upon completion
      and as of September 30, 2004 and 2005; CTC had received $564,750 under the
      initial milestones of the contract that were recorded as deferred
      revenue.





The
      original contract included the requirement for the Company to provide composite
      poles and to provide project management services along with the project design
      and ACCC cable. The original contract was successfully renegotiated under the
      bankruptcy to reduce the contract to approximately $1.5 million and to include
      only the project design of approximately $550,000 and ACCC cable products
      delivery of $988,000. The cash received to date will be applied against the
      revised contract. This revised contract was approved by the Bankruptcy Court
      in
      November, 2005 and the product was shipped and installed during fiscal
      2006.





We
      recognized no product revenues for 2004 and prior to the fourth fiscal quarter
      of 2005, all product revenues recorded were the result of "trial basis" sales.
      During the last fiscal quarter of 2005, we sold $1.0 million of ACCC products
      including $866,000 of cable core representing 74 linear miles through our
      agreement with General Cable in the United States and $32,000 representing
      2
      linear kilometers of ACCC conductor cable to Jiangsu Far East in China.





Due
      to
      the uncertainty surrounding new revenue orders, potential delays in delivery,
      and the lack of product sales history for our conductor core, ACCC product
      sales
      or related hardware sales, we can not determine at this time with any reasonable
      certainty when we expect to recognize our current billings, additional billings
      on existing sales orders, or future sales orders as revenues. Although we
      anticipate closing additional sales orders as our ACCC product is accepted
      into
      the market, the sales cycle in the utility industry is lengthy and may result
      in
      substantial delays to the acquisition of new customers or additional sales
      to
      existing customers.








Cost
      of Cable Revenues and Gross Margin:


Gross
      margin for cable products increased $293,000 from $358,000 in fiscal 2005 to
      $651,000 in fiscal 2006. Gross margin as a percent of revenue for cable products
      was 21.7% for fiscal 2006 as compared to 35.5% for fiscal 2005. Our fiscal
      2006
      cable product revenue costs were higher than expected due to two factors: (i)
      approximately 33% of our fiscal 2006 sales represented a bankruptcy settlement
      sale to the City of Kingman which had very low margins and which we were
      negatively impacted by an unhedged market price change in aluminum and (ii)
      our
      remaining product sales in 2006 were primarily lower margin ACCC conductor
      sales
      to China. In 2005, a much larger proportion of our cable product sales were
      made
      as ACCC core sales to General Cable, which carry higher margin per revenue
      dollar.





38


We
      value
      our cable inventory on a standard cost basis which incorporates materials costs
      as well as capitalized labor and overhead costs. As our ACCC product gains
      acceptance and our production increases, we anticipate that we will gain
      additional operational efficiencies primarily involving labor and overhead
      efficiencies that will result in manufacturing cost savings. To date, we have
      not experienced these savings since we have not been at or near our production
      capacity and therefore full utilization of our labor and overhead expenses
      has
      not provided us with these efficiencies. We do not anticipate significant cost
      savings related to our materials cost since a large component of our materials
      cost is in composite grade carbon which is in short global supply and for which
      we have limited redundant supplies. As such, our gross margins may be negatively
      impacted by price increases of composite grade carbon. Our ACCC conductor
      product is wrapped with aluminum which has experienced cost appreciation during
      2006 and is dependent on global supply and demand. During 2006, sales prices
      for
      our Kingman order were negotiated in October, 2005 and delivered in February,
      2006 and during the interim, we experienced an approximately 15% increase in
      aluminum prices which we did not hedge and which resulted in additional costs
      of
      sales. To the extent we do not hedge the price of aluminum or we do not pass
      the
      risk of aluminum price swings to our customers, as is typically the case, we
      may
      experience cost increases or decreases for our ACCC conductor product. Finally,
      we have a limited history of our sales mix of higher margin composite core,
      or
      lower margin wrapped core (ACCC) or ACCC hardware products both in North America
      and outside of North America that would allow for greater visibility as to
      costs
      of product revenues and gross margins.





Our
      cost
      of turbine products sold for 2006 represent the costs involved with the sale
      of
      the three turbines sold to SEC in China. These turbines were held in inventory
      as of the acquisition date. Under acquisition accounting, using the guidance
      of
      SFAS 141, we are required to value the inventory acquired at the estimated
      selling price of the inventory, reduced by the estimated costs to prepare the
      turbines for sale including additional materials, labor, and shipping. Any
      asset
      revaluations are recorded to the goodwill acquired during the acquisition.
      In
      effect, the turbine inventory is valued at liquidation value and results in
      very
      little gross profit recorded. We expect that as we complete the liquidation
      of
      our acquired turbine inventory that our product costs of sales will approximate
      our product revenues for our turbines until we sell through our acquired
      turbines. As discussed above, we have identified customers for six of the ten
      remaining nacelles and hubs and we expect to sell the remaining turbines within
      the next two fiscal quarters. We do not anticipate any substantial sales of
      turbines sourced and produced by DeWind subsequent to the acquisition until
      late
      in fiscal 2007. Any turbines sales recognized as revenues during fiscal 2007
      that were acquired during the purchase of EU Energy will be recorded at gross
      margins below what we believe to be indicative of future turbine margins.





Gross
      margin for cable consulting consisted of previously capitalized costs of $0.3
      million and resulted in gross margins of $0.25 million representing a 44.5%
      gross margin percentage of revenues. As previously mentioned, we do not expect
      cable consulting services revenues or gross margin to recur in the
      future.





Wind
      Segment


Wind
      segment product revenues consisted of the sale of three version D6 turbines
      delivered during the quarter to Shanghai Electric Group for $3.1 million or
      approximately $1.04 million for each 1.25 rated Megawatt turbine. The turbines
      were sold out of inventory acquired from EU Energy during the acquisition.
      In
      addition, during the quarter, three additional 1.25 Megawatt D6 turbines and
      three 2.0 Megawatt D8 turbines were sold to existing customers for a combined
      total of approximately $8.9 million. These turbines are expected to be shipped
      by March, 2007 at margins similar to our fiscal 2006 margins. After the shipment
      of these six turbines, we have two each of D6 and D8 turbines available for
      sale
      out of our acquired inventory. 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.





Wind
      Segment service revenues consisted of approximately $3.46 million of revenues
      recognized from turbine repairs and turbine maintenance contracts. Service
      costs
      of $4.65 million represents personnel and other operating costs and costs
      related to additional availability provisions. The service group operates at
      a
      negative gross margin for three primary reasons: a) between 2003 and 2005,
      under
      the ownership of FKI, DeWind sold turbines with extended warranties and
      contracts for annual billings for maintenance
      below the costs required to service the turbines, b) operational inefficiencies
      resulting from a small number of turbines under service contract resulted in
      excess costs per turbine serviced, and c) during the quarter ended September
      30,
      2006 subsequent to the acquisition, we incurred approximately $400,000 in
      additional estimated potential availability penalties related to inoperative
      turbines under warranty, caused by a parts shortage that we believe to be short
      lived. To resolve these issues, subsequent to our fiscal year end, on October
      1,
      2006 we sold 50% of the formerly 100% owned EU Energy Service & Maintenance
      GmbH subsidiary of DeWind to Entertrag AG. Entertrag had previously been one
      of
      our largest turbine and service customers. We anticipate that the Entertrag
      transaction will provide economic advantages by bringing more turbines under
      service which will in turn result in greater revenues and increased operational
      cost efficiencies. Further, the turbines sold in 2003 to 2005 under two to
      five
      year warranties and related service contracts expire in 2007 and 2008 which
      we
      expect will be renewed at service rates higher than the original contract rates.
      We also believe that Entertrag will improve our sourcing of turbine parts by
      providing an improved supply chain and an improved working capital position.
      We
      hope to achieve improved margins due to a combination of cost savings and
      increased revenues due to the addition of more Entertrag turbines and increased
      billing rates for DeWind turbines under legacy contracts approaching
      renewal.





39


We
      expect
      to account for the service revenues and service operations by consolidating
      the
      service subsidiary into our operations as a 50% owned subsidiary. As a result,
      the operational results for the quarter ending September 30, 2006 may not be
      indicative of the future performance of DeWind’s service
      organization.





Operating
      Expenses:





Except
      for the fourth fiscal quarter of 2006 subsequent to the July 3, 2006 acquisition
      date of DeWind, we did not track our Cable and Corporate expenses as separate
      segments. Therefore, the Cable segment operating expense analysis below will
      include 2006 expenses of a corporate nature. Any references to Cable expenses
      below are intended to include expenses of a corporate nature that are consistent
      with the consolidated expense reporting of fiscal years 2005 and 2004 and which
      are representative of operations prior to the DeWind acquisition. To the extent
      available, we have identified below those expenses of a corporate nature to
      provide better clarity. The Cable segment expense analysis is intended to
      provide consistent comparisons with historical operating expenses for fiscal
      2004 and 2005. The following table provides a comparative analysis of operating
      expenses. All expense for fiscal years ended September 30, 2005 and 2004
      represented the combined CTC Cable and Corporate expenses.





2006
            
            2006
            
            2006
            
            2005
            
            2004Wind
                Segment
            
            Cable
                Segment and Corporate
            
            Consolidated
            
            Consolidated
            
            ConsolidatedOPERATING
                EXPENSES
            
            
            
            
            
            
            
            
            
            (restated)Officer
                Compensation
            
            
            --
            
            
            566,293
            
            
            566,293
            
            
            246,838
            
            
            845,000General
                and administrative
            
            
            1,677,444
            
            
            4,204,028
            
            
            5,881,472
            
            
            5,234,015
            
            
            3,717,583Legal,
                professional & consulting
            
            
            --
            
            
            1,864,893
            
            
            1,864,893
            
            
            3,212,082
            
            
            6,051,568Research
                and development
            
            
            564,505
            
            
            4,290,670
            
            
            4,855,175
            
            
            5,413,787
            
            
            3,258,055Sales
                and Marketing
            
            
            920,767
            
            
            1,659,317
            
            
            2,580,084
            
            
            1,121,789
            
            
            1,723,557Depreciation
                and Amortization
            
            
            558,325
            
            
            793,219
            
            
            1,351,544
            
            
            559,084
            
            
            153,039Reorganization
                Expense - Bankruptcy legal fees
            
            
            --
            
            
            635,402
            
            
            635,402
            
            
            1,275,693
            
            
            --Total
                operating expenses
            
            
            3,721,041
            
            
            14,013,822
            
            
            17,734,863
            
            
            17,063,288
            
            
            15,748,802





Our
      overall 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 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, consulting fees paid in cash, and the fair
      value
      of stock grants issued to officers of the Company. Officer compensation
      increased 129% or $319,000 to $566,293 in fiscal 2006 and decreased 71% or
      $599,000 to $246,000 in fiscal 2005 from $845,000 in fiscal 2004. The fiscal
      2006 increase was due to $189,000 in stock compensation expense and the addition
      of one officer. The fiscal 2005 decrease from 2004 was due to a reduction in
      the
      number of officers representing cash officer compensation of $169,000 and a
      reduction in non cash officer compensation related to the issuance of company
      stock of $410,000, valued at the fair market value on the date of issuance
      in
      August, 2004. No such company stock was issued in 2005 or 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 12% or $647,000 from
      $5,234,000 in fiscal 2005 to $5,881,000 in fiscal 2006. The increase was due
      to
      a $1,677,000 increase from DeWind offset by a $1,030,000 decrease from CTC
      Cable
      and Corporate expenses. The CTC Cable decrease 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.





The
      increase of $1,516,000 or 42% from $3,718,000 in FY 04 to $5,234,000 in FY
      05
      was due to an increase in bad debt reserve of $2,500,000 offset by a $739,000
      decrease in non cash expenses paid in stock warrants and expenses related to
      cashless option exercises, a decrease in facilities and overhead costs of
      $162,000, and a decrease in other G&A expenses of $83,000.





40


LEGAL,
      PROFESSIONAL, AND CONSULTING: Legal, Professional, and Consulting expenses
      consist of legal fees paid to outside attorneys for litigation and general
      corporate purposes both in cash and in common stock valued at fair market value
      upon date of issuance, costs associated with financing arrangements including
      finders fees and financing costs, and compensation expense related to variable
      accounting treatment of a decrease in the exercise price of warrants granted.
      Legal, Professional, and Consulting expenses are all related to CTC Corporate
      activities during fiscal 2006.





Legal,
      Professional, and Consulting expense decreased $1,347,000 from $3,212,082 in
      FY
      05 to $1,864,893 for fiscal 2006. The decrease was due to a decrease in cash
      basis litigation, general legal, and SEC legal fees of $2,043,000 to $806,000,
      the result of the settlement of substantially all of our litigation at the
      end
      of November; offset by the net effect of finders fees and financing fees paid
      in
      stock for the October, 2005 and March, 2006 convertible debt financings and
      the
      conversion settlements in January, 2006 and September, 2006 totaling
      approximately $1,058,000 in aggregate in FY 06, an increase of $690,000 from
      the
      $368,000 expensed in FY05 and relating to the release of the $10M restricted
      cash in November, 2004.





Legal,
      Professional and Consulting decreased 47% or approximately $2,839,000 from
      fiscal 2004 to $3,212,082 in fiscal 2005. The 2004 to 2005 decrease was
      primarily due to a decrease of non-cash expenses of $3.9 million offset by
      an
      increase in cash expenses of $1.1 million. The non-cash expenses were equity
      based payments including: a $1,540,000 decrease in expenses related to warrant
      price modification in FY 2004, a decrease in $1,190,000 for litigation related
      legal expenses paid in stock, a decrease of $1,067,000 for warrants expensed
      in
      2004 for 2004 services, and a decrease of $127,000 in the fair value of vested
      option expenses. The cash basis increase was the net effect of a decrease of
      $370,000 in cash financing fees relating to the $15M debenture offering in
      FY04,
      offset by an increase of $1,439,000 for SEC registration services and litigation
      legal expenses associated with the defense of the Acquvest, Ascendiant, and
      other litigation activities.








PRODUCT
      DEVELOPMENT: Product development expenses consist primarily of salaries,
      consulting fees, materials, tools, and related expenses for work performed
      in
      designing and development of manufacturing processes for the Company's products.
      Product Development expenses decreased 10% or $559,000 from $5,413,787 in fiscal
      2005 to $4,855,175 in fiscal 2006 on a consolidated basis and increased
      $2,156,000 or 66% to $5,413,787 in fiscal 2005.





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 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.





The
      increase from 2004 to 2005 of $2,156,000 is due primarily to increased R&D
      efforts related to bringing our production of Composite Core and related
      hardware products on-line throughout the year including increased headcount
      of
      $1,692,000, $341,000 increase in expensed tools, equipment, and materials and
      $271,000 in additional overhead costs offset by a decrease of $367,000 in
      product development costs paid in stock, or related to stock option expenses.





SALES
      AND
      MARKETING: Sales and marketing expenses consist primarily of salaries,
      consulting fees, materials, travel, and other expenses performed in marketing,
      sales, and business development efforts for the Company. Sales and marketing
      expenses increased 130% or $1,458,295 from $1,121,789 in 2005 to $2,580,084
      in
      2006 and decreased $601,768 or 35% from 1,723,557 in 2004 to $1,121,789 in
      2005.
      The increase was due to DeWind sales and marketing costs of $920,000 and
      increased spending on CTC Cable sales of $537,000 consisting of increased sales
      and marketing employees and consultant costs related to the expansion of our
      sales efforts in the US, Europe, and China including $21,000 of employee stock
      option expense. The decrease of $602,000 from 2004 to 2005 is attributable
      to
      $746,000 of non-cash equity compensation expenses in 2004 that were not issued
      in 2005, a reduction of $123,000 related to lower 2005 media purchases and
      offset by $284,000 of increased headcount and consulting related costs
      associated with bringing our Composite Core products to market





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 $792,460 or 141% from fiscal 2005 to
      $1,351,544 in fiscal 2006. The increase was due to $558,325 of depreciation
      and
      amortization attributable to the operations of DeWind, including $326,000 of
      amortization of acquired intangibles and an increase of $234,135 due to an
      increase in assets attributable to CTC Cable and Corporate assets. The increase
      from $153,039 for fiscal 2004 to $559,084 in fiscal 2005 is due to an increasing
      asset base from 2004 to 2005.





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 2004. See also bankruptcy and litigation section
      below and the bankruptcy and litigation footnote disclosures.





41


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 of13% 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. The increase of $2,178,374 or 532% to $2,587,272
      in 2005 from $408,898 in 2004 is due to both the August, 2004 debentures and
      the
      capital lease obligations being in existence for an entire year in 2005 as
      compared to a partial year in 2004. As of September 20, 2006 we had no debt
      with
      unamortized debt discounts and our debt balance consisted of approximately
      $6.0
      million at 6% interest.





INTEREST
      INCOME Interest income increased from $13,897 in 2004 to $59,992 in 2005 and
      decreased to $29,820 in fiscal 2006. The respective changes from year to year
      were due to the change in the underlying cash balances.





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 2004 and
      we
      do not expect these expenses to recur.





EXPENSE
      RELATED TO MODIFICATION OF WARRANTS DUE TO ANTI-DILUTIVE EVENTS Expenses related
      to the modification of warrants due to anti-dilutive events of $696,350 consists
      of the expenses resulting from the two anti-dilutive events in fiscal 2006.
      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 either
      fiscal 2004. 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.





42


LITIGATION
      AND BANKRUPTCY RELATED CLAIMS SETTLEMENTS:





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.





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.





We
      recorded $739,000 in expenses related to litigation settlements in 2004 as
      follows:





1)
      $575,000 recorded for the settlement of the Nikoley litigation in July, 2004
      for
      the issuance of 575,000 shares of common stock valued at $1.00 per share.





2)
      $164,000 recorded for the settlement of the Cope litigation in August, 2004
      for
      the issuance of 100,000 shares of common stock valued at $1.64 per share.





See
      also
      litigation footnote.





INCOME
      TAXES We made no provision for income taxes for the years ending September
      30,
      2006, 2005 and 2004 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, 2006, 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.





43


**Net
      Loss**





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





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.





Our
      net
      loss increased to $40.2 million from $14.7 million for the years ended September
      30, 2005 and 2004 respectively. The net loss increase of $25.5 million is due
      to:





o
      A
      decrease in Gross Margin of $1.8 million from 2004 to 2005,





o
      An
      increase in Operating Expenses of $1.4 million from 2004 to 2005





o
      An
      increase in Other Expenses of $22.3 million from 2004 to 2005





Gross
      Margin: The Gross Margin decrease is due to a change in product mix. In 2004,
      we
      had one consulting contract for $2.5 million in revenue resulting in $2.2
      million in gross margin with no revenues from our Composite Core products.
      In
      2005, our revenues were derived solely from our ACCC cable products and
      consisted of $1.0 million in revenue at approximately 36% gross margin or
      $358,000 in gross margin.





Operating
      Expenses: The increase in operating expenses of $1.4 million consists of "cash
      basis" increases from 2004 to 2005 of $4.8 million and "non cash" expense
      decreases of $3.3 million. "Cash basis" changes include: a $1.3 million increase
      for Bankruptcy related legal and other costs, a $2.5 million increase in
      personnel and related overhead and materials cost increases related to
      production ramp up and increased sales & marketing efforts, a $1.4 million
      increase in legal and accounting related to increased litigation and SEC
      activity, and a decrease in finance fees of $0.4 million. "Non-cash" decreases
      consisted of a $3.9 million decrease in legal and consulting expenses for stock
      and warrant issuances at fair value and $1.9 million decrease in compensation
      charges related to option and warrant modifications, offset by a $2.5 million
      charge to fully reserve the 2004 receivable.





Other
      Expenses: The increase in other expenses is due to litigation settlements of
      $13.7 million, a the carrying value adjustment of $6.5 million related to our
      Bankruptcy filing, and $2.1 million in increased interest expense on our $15.0
      million debentures and our capital leases.





**CAPITAL
      EXPENDITURES**





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





44


**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.





**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, 2006:








Less
              than
            
            
            
            
            
            More
                thanContractual
                Obligations
            
            Total
            
            1
                Year
            
            1-3
                Years
            
            3-5
                Years
            
            5
                YearsLong-Term
                Debt Obligations
            
            $
            6,345,594
            
            $
            6,345,594
            
            
            --
            
            
            --
            
            
            --Capital
                Lease Obligations
            
            $
            430,950
            
            $
            316,390
            
            $
            114,560
            
            
            --
            
            
            --Operating
                Lease Obligations
            
            $
            5,722,758
            
            $
            1,795,734
            
            $
            3,649,106
            
            $
            277,918
            
            $
            --





**NEW
      ACCOUNTING PROUNOUNCEMENTS** I n
      July
      2006, the Financial Accounting Standards Board ("FASB") issued Financial
      Accounting Standards Interpretation No. 48 ("FIN 48"), "Accounting for
      Uncertainty in Income Taxes." FIN 48 clarifies the accounting for uncertainty
      in
      income tax positions taken or expected to be taken in tax returns that effect
      amounts reported in a company's financial statements in accordance with FASB
      Statement No. 109, "Accounting for Income Taxes." FIN 48 establishes a threshold
      condition that a tax position must meet for any part of the benefit of that
      position to be recognized in the financial statements. FIN 48 also provides
      guidance concerning derecognition, measurement, classification, interest and
      penalties and disclosure of tax positions. FIN 48 is effective for fiscal years
      beginning after December 15, 2006. The Company is currently analyzing the
      effects of FIN 48.




In
      May
      2005, the FASB issued FASB Statement No. 154, "Accounting Changes and Error
      Corrections, a replacement of APB Opinion No. 20, Accounting Changes and FASB
      Statement No. 3, Reporting Accounting Changes in Interim Financial Statements"
      ("FAS 154"). FAS 154 provides guidance on the accounting for and reporting
      of
      accounting changes and error corrections. It establishes, unless impracticable,
      retrospective application as the required method for reporting a change in
      accounting principle in the absence of explicit transition requirements specific
      to the newly adopted accounting principle. FAS 154 also provides guidance for
      determining whether retrospective application of a change in accounting
      principle is impracticable and for reporting a change when retrospective
      application is impracticable. The provisions of this Statement are effective
      for
      accounting changes and corrections of errors made in fiscal periods beginning
      after December 15, 2005. The adoption of the provisions of FAS 154 is not
      expected to have a material impact on the Company's financial position or
      results of operations.




In
      September 2006 the FASB issued Statement No. 157, FAIR VALUE MEASUREMENTS.
      The
      Statement provides guidance for using fair value to measure assets and
      liabilities. This Statement references fair value as the price that would be
      received to sell an asset or paid to transfer a liability in an orderly
      transaction between market participants in the market in which the reporting
      entity transacts. The Statement applies whenever other standards require (or
      permit) assets or liabilities to be measured at fair value. The Statement does
      not expand the use of fair value in any new circumstances. It 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.




45





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 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, 2006 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, 2006, we had $2.6 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.





46


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





PageINDEPENDENT
                REGISTERED PUBLIC ACCOUNTING FIRM REPORTS
            
            
            48Composite
                Technology Corporation and Subsidiaries Consolidated Financial
                StatementsConsolidated
                Balance Sheets As of September 30, 2006 and September 30,
                2005
            
            
            51Consolidated
                Statements of Operations and Comprehensive Loss For the Years Ended
                September 30, 2006, 2005, and 2004 (restated)
            
            
            52Consolidated
                Statements of Shareholder's Equity for the Years Ended September
                30, 2006,
                2005, and 2004 (restated)
            
            
            54Consolidated
                Statements of Cash Flows for the Years Ended September 30, 2006,
                2005, and
                2004 (restated)
            
            
            56Supplemental
                Schedule for Non Cash Financing Activities
            
            
            58Notes
                to the Consolidated Financial Statements
            
            
            59








47


**REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 To
        the
        Board of Directors
 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, 2006 and 2005,
        and the related consolidated statements of operations and comprehensive loss,
        shareholders’ deficit and cash flows for each of the three years in the period
        ended September 30, 2006. Our audits also included the financial statement
        schedules of Composite Technology Corporation listed in Item 15(1). These
        financial statements and financial statement schedules 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 provided 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 Composite Technology
        Corporation and subsidiaries as of September 30, 2006, and 2005, and the
        results
        of their operations and their cash flows for each of the three years in the
        period ended September 30, 2006, in conformity with U.S. generally accepted
        accounting principles. Also, in our opinion, the related financial statement
        schedules, 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 4 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 4. 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 effectiveness of Composite Technology
        Corporation's and subsidiaries’ internal control over financial reporting as of
        September 30, 2006, 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 21, 2006 expressed an unqualified
        opinion on management’s assessment of the effectiveness of Composite Technology
        Corporation’s internal control over financial reporting and an opinion that
        Composite Technology Corporation and subsidiaries had not maintained effective
        internal control over financial reporting as of September 30, 2006, 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 & GOLDSTEIN LLP
 
 Santa
        Ana, California
 December
        21, 2006




48


**REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
  To
        the
        Board of Directors
 Composite
        Technology Corporation
 Irvine,
        California
 
 We
        have
        audited management's assessment, included in the accompanying “Management’s
        Report on Assessment of Internal Control Over Financial Reporting”, included in
        item 9A, that Composite Technology Corporation (the “Company”) did not maintain
        effective internal control over financial reporting as of September 30, 2006,
        because of the effect of material weakness identified in management's
        assessment, based on criteria established in Internal Control—Integrated
        Framework issued by the Committee of Sponsoring Organizations of the Treadway
        Commission (COSO). Composite Technology Corporation’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.
        Our responsibility is to express an opinion on management's assessment and
        an
        opinion on the effectiveness of 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, evaluating management's assessment, testing and evaluating
        the design and operating effectiveness of internal control, and 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 control deficiency, or combination of control
        deficiencies, that results in more than a remote likelihood that a material
        misstatement of the annual or interim financial statements will not be prevented
        or detected. The following material weakness has been identified and included
        in
        management's assessment:
 
 **Entity
        Level Processes and Weaknesses**
 As
        of
        September 30, 2006, the following material weaknesses existed related to
        general
        processes and weaknesses for the entity taken as a whole:
 
 ·
            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. 
 ·
            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. Until December, 2005 the Company only had
                a two
                person non-independent Board of Directors and from January, 2006
                through
                November, 2006 the Company had one independent director and two
                non-independent directors comprising their Board of
                Directors. 
 ·
            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. **** Information
        technology general controls (ITGCs) 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, 2006, a material weakness existed relating to the
        Company’s information technology general controls, including ineffective
        controls relating to:
 
 ·
            Access
                to programs and data including (1) user administration, (2) application
                and system configurations, and (3) periodic user access
                validation 
 **Inventory
        Processes**
 As
        of
        September 30, 2006, the following material weaknesses existed related to
        ineffective controls over the Company’s inventory processes:
 
 ·
            Perpetual
                Inventory records: Ineffective controls to (a) accurately record
                the raw
                materials inventory moved out of inventory stores and into manufacturing
                production and later into finished goods and, (b) accurately record
                manufacturing variances.


49


**Procure
        to Pay Process**
 During
        the Company’s fiscal 2006 assessment of the Company’s procure to pay (cash
        payments and disbursements) cycle, the Company 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 the Company believes
        the
        following constitute a material weakness:
 
 ·
            An
                effective purchasing function did not exist during the entire fiscal
                year. ·
            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. ·
            There
                was a lack of segregation of duties between the purchasing and payable
                processing functions. ·
            There
                were inadequate vendor management duties and responsibilities during
                the
                year ·
            There
                was a lack of sufficient purchasing reports for management
                review. 
 These
        material weaknesses were considered in determining the nature, timing, and
        extent of audit tests applied in our audit of the 2006 financial statements,
        and
        this report does not affect our report dated December 21, 2006 on those
        financial statements.
 
 In
        our
        opinion, management's assessment that Composite Technology Corporation did
        not
        maintain effective internal control over financial reporting as of September
        30,
        2006, is fairly stated, in all material respects, based on criteria established
        in Internal Control—Integrated Framework issued by the Committee of Sponsoring
        Organizations of the Treadway Commission (COSO). Also, in our opinion, because
        of the effect of the material weakness described above on the achievement
        of the
        objectives of the control criteria, Composite Technology Corporation has
        not
        maintained effective internal control over financial reporting as of September
        30, 2006, based on criteria established in Internal Control—Integrated Framework
        issued by the Committee of Sponsoring Organizations of the Treadway Commission
        (COSO).
 
 
 SINGER
        LEWAK GREENBAUM & GOLDSTEIN LLP
 
 Santa
        Ana, California
 December
        21, 2006




50


**PART
      1 - FINANCIAL STATEMENTS**


**COMPOSITE
      TECHNOLOGY CORPORATION**


**AND
      SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**





September
                  30, 2006
              
              September
                  30, 2005ASSETSCURRENT
                  ASSETSCash
                  and Cash Equivalents
              
              $
              2,578,347
              
              $
              807,815Accounts
                  Receivable, current, net of reserve of $2,500,000 and $
                  2,500,000
              
              
              9,473,863
              
              
              56,998Inventory,
                  net
              
              
              23,891,867
              
              
              1,233,334Prepaid
                  Expenses and Other Current Assets
              
              
              3,433,936
              
              
              395,978Total
                  Current Assets
              
              
              39,378,013
              
              
              2,494,125Long
                  Term Trade Receivables
              
              
              2,028,927
              
              
              --Property
                  and Equipment, net
              
              
              4,714,084
              
              
              2,765,609Goodwill
                  and Intangible Assets
              
              
              49,616,000
              
              
              --Other
                  Assets
              
              
              515,800
              
              
              511,581TOTAL
                  ASSETS
              
              $
              96,252,824
              
              $
              5,771,315LIABILITIES
                  AND SHAREHOLDERS' EQUITYCURRENT
                  LIABILITIESAccounts
                  Payable and Other Accrued Liabilities
              
              $
              12,965,468
              
              $
              4,700,553Deferred
                  Revenues and Customer Advances
              
              
              17,808,209
              
              
              621,748Warranty
                  Provision
              
              
              11,594,876
              
              
              --Accrued
                  Litigation Settlements
              
              
              --
              
              
              14,244,792Lease
                  Obligation - Current
              
              
              286,650
              
              
              403,191Current
                  Portion - Convertible Notes
              
              
              6,023,250
              
              
              --Total
                  Current Liabilities
              
              
              48,678,453
              
              
              19,970,284LONG
                  TERM LIABILITIESConvertible
                  Notes - Long Term
              
              
              --
              
              
              10,860,442Long
                  Term Portion of Warranty Provision
              
              
              3,059,328
              
              
              --Long-Term
                  Portion of Deferred Revenues
              
              
              2,304,492
              
              
              --Lease
                  Obligation - Long-Term
              
              
              111,038
              
              
              444,696Total
                  Long-Term Liabilities
              
              
              5,474,858
              
              
              11,305,138Total
                  Liabilities
              
              $
              54,153,311
              
              $
              31,275,422COMMITMENTS
                    AND CONTINGENCIESSHAREHOLDERS'
                  EQUITY (DEFICIT)Common
                  Stock, $.001 par value 300,000,000 shares authorized 178,635,325
                  and
                  118,744,359 issued and outstanding
              
              
              178,635
              
              
              118,744Additional
                  Paid in Capital
              
              
              137,461,330
              
              
              40,979,912Subscription
                  Receivable
              
              
              (378,000
              )
              
              --AccumulatedDeficit
              
              
              (95,125,955
              )
              
              (66,602,763
              )Accumulated
                  Other Comprehensive Loss
              
              
              (36,497
              )
              
              --Total
                  Shareholders’ Equity (Deficit)
              
              
              42,099,513
              
              
              (25,504,107
              )TOTAL
                  LIABILITIES AND SHAREHOLDERS’ EQUITY
              
              $
              96,252,824
              
              $
              5,771,315








The
      accompanying notes are an integral part of these financial statements




51


**COMPOSITE
      TECHNOLOGY CORPORATION**


**AND
      SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS AND
      COMPREHENSIVE LOSS**





For
                the Years ended September 30,2006
            
            2005
            
            2004(restated)RevenueProduct
                Sales
            
            $
            6,127,718
            
            $
            1,008,970
            
            $
            -Service
                Revenue
            
            
            3,457,596
            
            
            -
            
            
            -Consulting
                Revenue
            
            
            550,000
            
            
            -
            
            
            2,500,000Total
                Revenue
            
            
            10,135,314
            
            
            1,008,970
            
            
            2,500,000Cost
                of Product Sold
            
            
            5,427,510
            
            
            650,563
            
            
            -Cost
                of Service Revenue
            
            
            4,646,742
            
            
            -
            
            
            -Cost
                of Consulting Revenue
            
            
            304,787
            
            
            -
            
            
            314,548Gross Profit
                (Loss)
            
            
            (243,725
            )
            
            358,407
            
            
            2,185,452OPERATING
                EXPENSESOfficer
                Compensation
            
            
            566,293
            
            
            246,838
            
            
            845,000General
                and Administrative
            
            
            5,881,472
            
            
            5,234,015
            
            
            3,717,583Legal,
                Professional & Consulting
            
            
            1,864,893
            
            
            3,212,082
            
            
            6,051,568Research
                and Development
            
            
            4,855,175
            
            
            5,413,787
            
            
            3,258,055Sales
                and Marketing
            
            
            2,580,084
            
            
            1,121,789
            
            
            1,723,557Depreciation
                and Amortization
            
            
            1,351,544
            
            
            559,084
            
            
            153,039Reorganization
                Expense - Bankruptcy Legal Fees
            
            
            635,402
            
            
            1,275,693
            
            
            -Total
                Operating Expenses
            
            
            17,734,863
            
            
            17,063,288
            
            
            15,748,802LOSS
                FROM OPERATIONS
            
            
            (17,978,588
            )
            
            (16,704,881
            )
            
            (13,563,350
            )OTHER
                INCOME / EXPENSEInterest
                Expense
            
            
            (2,931,184
            )
            
            (2,587,272
            )
            
            (408,898
            )Interest
                Income
            
            
            29,820
            
            
            59,992
            
            
            13,897Reorganization
                Item - adjustment to Carrying value of Convertible Debentures
            
            
            (2,622,240
            )
            
            (6,477,455
            )
            
            -Expense
                related to Inducement of Convertible Debt
            
            
            (3,586,236
            )
            
            -
            
            
            -Expense
                related to Modification of Warrants due to Anti-Dilution
                Events
            
            
            (696,350
            )
            
            -
            
            
            -Litigation
                and Bankruptcy Claims Settlements
            
            
            (802,000
            )
            
            (14,464,417
            )
            
            (739,000
            )Other
                Income/ (Expense)
            
            
            67,842
            
            
            10,626
            
            
            9,476Total
                Other Income / Expense
            
            
            (10,540,348
            )
            
            (23,458,526
            )
            
            (1,124,525
            )Loss
                before Income Taxes
            
            
            (28,518,936
            )
            
            (40,163,407
            )
            
            (14,687,875
            )Income
                Taxes
            
            
            4,256
            
            
            --
            
            
            --NET
                LOSS
            
            
            (28,523,192
            )
            
            (40,163,407
            )
            
            (14,687,875
            )OTHER
                COMPREHENSIVE LOSSForeign
                Currency Translation adjustment, net of tax of $0, $0, and
                $0
            
            
            (36,497
            )
            
            --
            
            
            --COMPREHENSIVE
                LOSS
            
            $
            (28,559,689
            )
            $
            (40,163,407
            )
            $
            (14,687,875
            )








52


**COMPOSITE
      TECHNOLOGY CORPORATION**


**AND
      SUBSIDIARIES**


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





For
                the years ended September 30,2006
            
            2005
            
            2004(restated)BASIC
                AND DILUTED LOSS PER SHARELoss
                per share
            
            
            ($0.20
            )
            
            ($0.35
            )
            
            ($0.14
            )TOTAL
                BASIC AND DILUTED LOSS PER SHARE AVAILABLE TO COMMON
                SHAREHOLDERS
            
            
            ($0.20
            )
            
            ($0.35
            )
            
            ($0.14
            )WEIGHTED-AVERAGE
                COMMON SHARES OUTSTANDING
            
            
            142,462,240
            
            
            114,384,274
            
            
            103,168,626




The
      accompanying notes are an integral part of these financial
      statements




53


**COMPOSITE
      TECHNOLOGY CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENT OF SHAREHOLDERS’ EQUITY
      FOR**


**THE
      YEARS ENDED SEPTEMBER 30, 2006, 2005 and 2004 (restated)**




**Convertible**
              **Preferred
                Stock**
            
            **Common
                Stock****Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **Common
                Stock Committed**
            
            **Subscription
                Receivable**
            
            **Additional
                paid-in capital**
            
            **Accumulated**
              **Other
                Comprehensive Loss**
            
            **Accumulated
                deficit**
            
            **Total**Balance
                at September 30, 2003
            
            
            1,000
            
            $
            1
            
            
            102,012,815
            
            $
            102,014
            
            $
            194,375
            
            $
            (1,150,000
            )
            $
            13,100,245
            
            
            --
            
            $
            (11,796,877
            )
            $
            449,758Issuance
                of common stock forCash
                at a price of $0.40 per share with 120,000 detachable Series P warrants
                with an exercise price of $0.80 valued at $1.212 per
                warrant
            
            
            --
            
            $
            --
            
            
            600,000
            
            $
            600
            
            $
            (100,000
            )
            $
            --
            
            $
            239,400
            
            $
            -
                -
            
            $
            -
                -
            
            $
            140,000Cash
                at a price of $1.25 per share with 1,200,000 detachable warrants
                with an
                exercise price of $2.04 valued at $1.212 per warrant
            
            
            --
            
            
            --
            
            
            2,400,000
            
            
            2,400
            
            
            --
            
            
            --
            
            
            2,997,600
            
            
            --
            
            
            --
            
            
            3,000,000Cash
                at the price of $1.40 per share
            
            
            --
            
            
            --
            
            
            89,360
            
            
            88
            
            
            --
            
            
            --
            
            
            125,016
            
            
            --
            
            
            --
            
            
            125,104Cash
                pursuant to warrant exercises
            
            
            --
            
            
            --
            
            
            6,718,555
            
            
            6,718
            
            
            (76,875
            )
            
            --
            
            
            2,887,560
            
            
            --
            
            
            --
            
            
            2,817,403Cash
                pursuant to option exercises
            
            
            --
            
            
            --
            
            
            370,000
            
            
            370
            
            
            (15,000
            )
            
            --
            
            
            92,130
            
            
            --
            
            
            --
            
            
            77,500Cashless
                warrant exercises
            
            
            --
            
            
            --
            
            
            11,325
            
            
            12
            
            
            --
            
            
            --
            
            
            (12
            )
            
            --
            
            
            --
            
            
            --Cashless
                options exercises
            
            
            --
            
            
            --
            
            
            237,220
            
            
            237
            
            
            --
            
            
            --
            
            
            (237
            )
            
            --
            
            
            --
            
            
            -
                -Fair
                value of facility rents
            
            
            --
            
            
            --
            
            
            140,160
            
            
            140
            
            
            --
            
            
            --
            
            
            147,028
            
            
            --
            
            
            --
            
            
            147,168Fair
                value of services
            
            
            --
            
            
            --
            
            
            1,913,254
            
            
            1,914
            
            
            --
            
            
            --
            
            
            2,576,132
            
            
            --
            
            
            --
            
            
            2,578,046Settlement
                of litigation
            
            
            --
            
            
            --
            
            
            675,000
            
            
            675
            
            
            --
            
            
            --
            
            
            738,325
            
            
            --
            
            
            --
            
            
            739,000Common
                Shares issued in exchange for Preferred stock
            
            
            (1,000
            )
            
            (1
            )
            
            107,631
            
            
            107
            
            
            --
            
            
            --
            
            
            (107
            )
            
            
            
            
            45,395
            
            
            45,394Issuance
                of warrants for:Inducement
                for early exercise of Series E warrants
            
            
            --
            
            
            --
            
            
            --
            
            
            
            
            
            --
            
            
            --
            
            
            106.120
            
            
            --
            
            
            --
            
            
            106,120$15
                million debenture offering
            
            
            --
            
            
            --
            
            
            --
            
            
            
            
            
            --
            
            
            --
            
            
            6,364,063
            
            
            --
            
            
            --
            
            
            6,364,063Services
            
            
            --
            
            
            --
            
            
            --
            
            
            
            
            
            --
            
            
            --
            
            
            1,792,509
            
            
            --
            
            
            --
            
            
            1,792,509Cancellation
                of Series I PPM Common Shares previously issued
            
            
            --
            
            
            --
            
            
            (4,400,000
            )
            
            (4,400
            )
            
            --
            
            
            259,600
            
            
            (255,200
            )
            
            --
            
            
            --
            
            
            --Cancellation
                of Series I PPM Warrants previously issued
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            840,400
            
            
            (840,400
            )
            
            --
            
            
            --
            
            
            --Cancellation
                of shares previously issued for Series B warrant exercises
            
            
            --
            
            
            --
            
            
            (34,000
            )
            
            (34
            )
            
            --
            
            
            --
            
            
            (6,086
            )
            
            --
            
            
            --
            
            
            (6,120
            )Induced
                conversion of warrants exercised on June 24, 2004 related to Securities
                Purchase Agreement
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            1,433,880
            
            
            --
            
            
            --
            
            
            1,433,880Compensation
                expense related to modification of stock option awards
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            364,277
            
            
            --
            
            
            --
            
            
            364,277Recognition
                of deferred compensation expense
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            298,821
            
            
            --
            
            
            --
            
            
            298,821Committed
                Stock adjustment
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            (2,500
            )
            
            50,000
            
            
            (9,800
            )
            
            --
            
            
            --
            
            
            37,700Offering
                Costs paid in cash
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            (220,030
            )
            
            --
            
            
            --
            
            
            (220,030
            )Net
                Loss
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            (14,687,874
            )
            
            (14,687,874
            )Balance
                at September 30, 2004
            
            
            -
            
            $
            --
            
            
            110,841,320
            
            $
            110,841
            
            $
            --
            
            $
            --
            
            $
            31,931,234
            
            $
            --
            
            $
            (26,439,356
            )
            $
            5,602,719




The
      accompanying notes are an integral part of these financial
      statements





54


**COMPOSITE
      TECHNOLOGY CORPORATION**


**AND
      SUBSIDIARIES**


**CONSOLIDATED
      STATEMENT OF SHAREHOLDERS’ EQUITY
      FOR**


**THE
      YEARS ENDED SEPTEMBER 30, 2006, 2005, and 2004 (restated),
      Continued**




**Convertible**
              **Preferred
                Stock**
            
            **Common
                Stock****Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **Common
                Stock Committed**
            
            **Subscription
                  Receivable**
            
            **Additional
                  paid-in capital**
            
            **Accumulated**
                  **Other
                    Comprehensive Loss**
            
            **Accumulated
                    deficit**
            
            **Total**Issuance
                of Common Stock forCash
                pursuant to warrant exercise
            
            
            --
            
            
            --
            
            
            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
            )
            
            (10.00
            )
            
            --
            
            
            --
            
            
            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
            
            
            --
            
            
            --
            
            
            1,956,526Warrant
                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
            )
            $
            42,099,513




The
      accompanying notes are an integral part of these financial statements





55





**COMPOSITE
      TECHNOLOGY CORPORATION**


**AND
      SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS FOR**


**THE
      YEARS ENDED SEPTEMBER 30, 2006, 2005, and 2004 (restated)**





Year
                Ending September 30,2006
            
            2005
            
            2004(restated)**OPERATING
                ACTIVITIES**NET
                LOSS
            
            $
            (28,523,192
            )
            $
            (40,163,407
            )
            $
            (14,687,875
            )Interest
                on fixed conversion features
            
            
            1,956,526
            
            
            1,266,924
            
            
            265,169Depreciation
                and Amortization
            
            
            1,351,544
            
            
            559,084
            
            
            153,039Compensation
                expense for fair value of options
            
            
            977,509
            
            
            248,675
            
            
            298,821Carrying
                value adjustment-convertible debt
            
            
            2,622,240
            
            
            -
            
            
            -Amortization
                of prepaid services originally paid in common stock
            
            
            398,107
            
            
            -
            
            
            234,350Issuance
                of warrants for services
            
            
            410,386
            
            
            2,006,666
            
            
            1,792,510Issuance
                of common stock for legal settlement
            
            
            3,586,236
            
            
            -
            
            
            739,000Issuance
                of common stock for services
            
            
            1,002,423
            
            
            325,769
            
            
            2,725,215Issuance
                of common stock for interest
            
            
            17,325
            
            
            -
            
            
            -Bad
                debt expense
            
            
            -
            
            
            2,500,000
            
            
            -Modification
                of warrants due to antidilution provision
            
            
            696,079
            
            
            -
            
            
            -Litigation
                and bankruptcy settlements
            
            
            702,000
            
            
            14,455,792
            
            
            -Inventory
                reserve expense
            
            
            -
            
            
            239,367
            
            
            -Carrying
                value adjustment for liabilities
            
            
            -
            
            
            4,831,970
            
            
            -Compensation
                expense related to warrant modification
            
            
            -
            
            
            -
            
            
            1,540,000Compensation
                expense for modification of options
            
            
            -
            
            
            54,626
            
            
            364,277Other
            
            
            (11,732
            )
            
            147,649
            
            
            (9,482
            )CHANGES
                IN ASSETS / LIABILITIESInventory
            
            
            (209,143
            )
            
            (672,028
            )
            
            (788,799
            )Accounts
                receivable
            
            
            493,006
            
            
            (55,004
            )
            
            (2,501,994
            )Prepaids
                and other current assets
            
            
            1,051,860
            
            
            (18,926
            )
            
            (485,750
            )Other
                assets
            
            
            (4,219
            )
            
            (304,855
            )
            
            (209,600
            )Accounts
                payable and other accruals
            
            
            675,597
            
            
            2,071,489
            
            
            1,426,593Deferred
                revenue
            
            
            7,662,903
            
            
            56,998
            
            
            564,750Accrued
                legal settlement
            
            
            -
            
            
            -
            
            
            (145,600
            )Accrued
                warranty liability
            
            
            (1,119,158
            )
            
            -
            
            
            -Net
                Cash - Operating
            
            $
            (6,263,703
            )
            $
            (12,449,211
            )
            $
            (8,725,376
            )INVESTING
                ACTIVITIESCash
                received from EU acquisition
            
            
            1,163,712
            
            
            -
            
            
            -Cash
                paid for EU acquisition
            
            
            (237,487
            )
            
            -
            
            
            -Restricted
                cash
            
            
            -
            
            
            10,010,060
            
            
            (10,010,060
            )Proceeds
                from sale of assets
            
            
            -
            
            
            210,570
            
            
            500,000Purchase
                of PP&E
            
            
            (527,366
            )
            
            (1,833,052
            )
            
            (846,385
            )Net
                Cash - Investing
            
            $
            398,859
            
            $
            8,387,578
            
            $
            (10,356,445
            )








56


**COMPOSITE
      TECHNOLOGY CORPORATION**


**AND
      SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS FOR**


**THE
      YEARS ENDED SEPTEMBER 30, 2006, 2005, and 2004 (restated), Continued**




FINANCING
                ACTIVITIESProceeds
                from issuance of convertible debt
            
            
            9,500,000
            
            
            -
            
            
            15,000,000Convertible
                debt repayment - $3.5M bridge
            
            
            (2,175,000
            )
            
            -
            
            
            -Payments
                on capital leased assets
            
            
            (450,199
            )
            
            (342,455
            )
            
            (65,618
            )Proceeds
                from sale of common stock
            
            
            -
            
            
            -
            
            
            3,265,105Common
                stock subscription receivable
            
            
            -
            
            
            -
            
            
            50,000Proceeds
                from exercise of warrants
            
            
            698,575
            
            
            1,986,288
            
            
            2,817,403Proceeds
                from exercise of options
            
            
            -
            
            
            295,000
            
            
            65,000Cash
                advances (to)/from officers
            
            
            62,000
            
            
            -
            
            
            (29,928
            )Offering
                costs
            
            
            -
            
            
            -
            
            
            (220,030
            )Net
                Cash - Financing
            
            $
            7,635,376
            
            $
            1,938,833
            
            $
            20,881,932Net
                Change in Cash
            
            $
            1,770,532
            
            $
            (2,122,800
            )
            $
            1,800,117Cash
                at Beginning of Year
            
            $
            807,815
            
            $
            2,930,615
            
            $
            1,130,498Cash
                at End of Year
            
            $
            2,578,347
            
            $
            807,815
            
            $
            2,930,615SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW
              INFORMATION:INTEREST
                PAID
            
            $
            831,807
            
            $
            527,556
            
            $
            408,898TAXES
                PAID
            
            $
            4,256
            
            $
            -
            
            $
            1,600CASH
                PAID FOR REORGANIZATION ITEMS
            
            $
            949,871
            
            $
            240,876
            
            $
            -




**Supplemental
                  Disclosure of Non-cash Activities:**On
                  July 3, 2006, we acquired EU Energy. (Note 5)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





57








**Supplemental
      Schedule for Non Cash Financing Activities**





During
      the year ending September 30, 2006, the Company issued 3,089,236 shares of
      common stock for the conversion of $4,837,192 of the August, 2004 Convertible
      Debentures as follows:


-
            $680,191
                of principal was converted at $1.67 per share into 407,300 shares
                of
                common stock


-
            $4,157,001
                of principal was converted at $1.55 per share into 2,681,936 shares
                of
                common stock.





During
      the year ending September 30, 2006, in October, 2005 the Company raised
      $6,000,000 in convertible notes. In conjunction with these notes:


-
            The
                Company issued 1,354,838 warrants and valued the conversion features
                of
                the notes and warrants at $1,834,092. Under bankruptcy accounting,
                the
                entire balance was expensed as a reorganization item immediately
                following
                issuance. See also footnotes 3 14, and
                18.


-
            The
                Company issued 232,258 shares of common stock for debt financing
                services
                valued at $360,000.


-
            The
                Company triggered certain anti-dilution provisions in the August,
                2004
                Convertible debentures including the re-pricing of warrants issued
                to the
                debenture holders and a re-setting of the debt conversion price from
                $1.67
                to $1.55. The company re-priced 4,537,538 warrants and recorded an
                expense
                charge of $388,962 to other expense. The Company recorded the intrinsic
                value of the change to the conversion price at $788,148 as additional
                debt
                discount to the August, 2004 debentures. Under bankruptcy accounting,
                the
                debt discount was immediately charged to expense as a reorganization
                item
                - adjustment to debt carrying value immediately following the re-pricing
                .
                See also footnotes 3, 13, and 18.


-
            The
                Company induced full conversion of these notes in January, 2006.
                The
                Company issued 3,870,972 shares of common stock registered under
                Bankruptcy code section 1145 at a conversion price of $1.55 per share
                for
                the conversion of the $6.0 million in notes. To facilitate the conversion
                and to settle other outstanding issues, the Company issued 1,308,142
                unregistered shares valued at the previous trading day’s closing market
                price of $1.72 per share. The company recorded a charge of $2,250,005
                to
                other expense relating to inducement of convertible debt as a result
                of
                this transaction. To facilitate this transaction, 78,459 shares of
                stock
                valued at $1.72 per share were issued and the Company recorded a
                charge to
                legal, professional, and consulting expense of $135,000 for these
                services.


During
      the year ending September 30, 2006, in March, 2006 the Company issued $3,500,000
      in convertible notes due September, 2006. In conjunction with these notes
      2,750,000 warrants were issued and the company valued the conversion features
      of
      the notes and warrants at $1,956,526 which was recorded as a discount to the
      note principal on the balance sheet. In September, 2006, $1,325,000 of the
      $3,500,000 in principal was converted at $1.55 per share into 854,840 shares
      of
      common stock. As an inducement to convert the principal and in exchange for
      the
      waiver of future antidilution of the note holders’ remaining warrants, we issued
      1,260,595 shares of common stock valued at $1,336,230 or $1.06 per share. To
      facilitate this transaction, 72,000 shares of unregistered stock were issued
      and
      the Company recorded a charge to legal, professional, and consulting expense
      of
      $76,320 for these services.





During
      fiscal 2006, the Company issued 7,971,425 shares of common stock for settlement
      of bankruptcy claims and litigation settlements valued at $15,209,522 of which
      $14,153,522 had been accrued as of September 30, 2005 and $702,000 was recorded
      as a bankruptcy claims expense during fiscal 2006.





During
      fiscal 2006, the Company issued 265,427 shares of common stock in settlement
      of
      Accounts Payable totaling $428,424.





During
      fiscal 2006, the Company issued 526,840 shares of common stock as prepayment
      for
      public and media relations consulting services from January, 2006 through March,
      2008 valued at $832,407.





During
      fiscal 2006, the Company issued 277,476 shares of common stock in lieu of
      interest totaling $450,760.





58





**COMPOSITE
      TECHNOLOGY CORPORATION**


**AND
      SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED SEPTEMBER 30, 2006, 2005, AND 2004
      (restated)**





**NOTE
      1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES**





Composite
      Technology Corporation, 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 advanced composite core conductor
      ("ACCC") cables for electric transmission and distribution lines. The Wind
      segment sells wind turbine electric generators under the brand name DeWind.
      CTC
      Cable sells ACCC cable. ACCC cable is commercially available in the United
      States and Canada through distribution and purchase agreements with General
      Cable Industries, Inc. and directly through the 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 facility in Germany for sale worldwide for our new D6 and D8.2
      turbine models and worldwide outside of the US for our 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, in particular the reclassification of fiscal 2005 balance
      previously disclosed as liabilities subject to compromise under bankruptcy
      accounting. 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
      from the period since the July 3, 2006 acquisition date through September 30,
      2006.





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, 2006 includes approximately $1.0 million in
      share-based employee compensation expense 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.





59


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, 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.





(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) wrapped composite core and related
      hardware to utilities either sold directly by the Company or through our
      distributor, ii) composite core sold to a cable wrapping partner not subject
      to
      a distributor agreement and where title passes to the partner, or iii) turbines
      or turbine parts sold to wind farm operators. For most 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 revenue: (i) upon shipment when cable products are shipped FOB
      shipping point to end users (ii) upon delivery at the end-user customer's
      location when cable products are shipped FOB destination or (iii) 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 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.





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.





SERVICE
      REVENUE Service revenues consist of service and maintenance on our wind turbines
      under flat rate contracts, typically billed in advanced 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.





60


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 Septemer 30, 2006 to value options and warrants granted or issued
      are
      as follows:






**Year
                ended****September
                30,****2006**
            
            **2005**
            
            **2004**Risk
                Free Rate of Return
            
            
            3.97%-4.95
            %
            
            3.66%-4.14
            %
            
            4.14
            %Volatility
            
            
            95%-107
            %
            
            73%-106
            %
            
            80
            %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.





61


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 included in the results
      of operations for the years ended September 30, 2006, 2005, and 2004 is as
      follows:





**Year
                ended**
            
            **Year
                ended**
            
            **Year
                ended****September
                30**
            
            **September
                30**
            
            **September
                30****2006**
            
            **2005**
            
            **2004**Officer
                Compensation
            
            $
            189,245
            
            $
            --
            
            $
            --Selling
                and marketing
            
            
            21,259
            
            
            --
            
            
            --Research
                and development
            
            
            206,763
            
            
            248,675
            
            
            298,821General
                and administrative
            
            
            560,242
            
            
            --
            
            
            --Totals
            
            $
            977,509
            
            $
            248,675
            
            $
            298,821





As
      of
      September 30, 2006, there was $7.2 million of total unrecognized compensation
      cost related to non-vested share-based compensation arrangements related to
      stock options consisting of $5.0 million related to employee grants and $2.2
      million related to consultant and director grants. The costs are expected to
      be
      recognized over a weighted-average period of 3.2 years. See also footnote
      15.





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. The Company’s volatility estimate for option grants
      varies by the year issued. Due to the lack of an efficient public market in
      the
      Company’s stock prior to 2003 it was determined that the use of a volatility
      period that matches the expected term was not meaningful. Options granted prior
      to January 1, 2004 had their volatility based on historical volatility of 181
      days. Options granted in fiscal 2004 had their volatility based on one year
      and
      options granted in fiscal 2005 had their volatility based on two years. All
      volatility calculations were made on a daily basis. The Company has valued
      fiscal 2006 grants using 3 year volatility. Options granted from fiscal 2004
      through fiscal 2006 used the following range of assumptions:




Expected
                term
            
            
            5-7
                yearsExpected
                and weighted average volatility
            
            
            100.38
            %Risk-free
                rate
            
            
            3.97-4.95
            %








**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.





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.





62


**DEVELOPMENT
      STAGE ENTERPRISE**


Prior
      to
      fiscal 2005, the Company operated as a development stage company as defined
      in
      Statement of Financial Accounting Standards ("SFAS") No. 7, "Accounting and
      Reporting by Development Stage Enterprises." All losses accumulated prior to
      August, 2005 since inception have been considered as part of the Company's
      development stage activities. Beginning with the initial sales of our composite
      conductor in the fourth fiscal quarter of 2005, we are no longer considered
      to
      be a development stage company.





**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 we 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 includes:


-
            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 16% of the total net receivables balance.


CTC
      and
      its wholly owned subsidiaries maintains allowances for doubtful accounts for
      estimated losses resulting from the inability of its customers to make required
      payments. If the financial condition of CTC’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.




Revenues
        from one customer of Composite Technology Corporation represented all of
        the
        company's revenues for the fiscal year ended September 30, 2004. Revenue
        from
        one company of Composite Technology Corporation represented 86% of the Company's
        revenues for the fiscal year ended September 30, 2005. Revenue from two
        customers represented 31% and 16% of the Company’s revenues for the fiscal year
        ended September 30, 2006.


**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 2006, 2005, or 2004.
      Expenditures for maintenance and repairs are charged to operations as incurred
      while renewals and betterments are capitalized. Gains or losses on the sale
      of
      property and equipment are reflected in the statements of operations.





**ACQUISITIONS**


The
      Company utilizes SFAS No. 141 “Business Combinations.” The acquisition of EU
      Energy was accounted for under the purchase method. All acquired assets were
      adjusted to their fair values on the acquisition date and the liabilities
      incurred were adjusted to the present values of the amounts expected to be
      paid.
      See also note 5.





63


**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.





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 is 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 function 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 products
        manufactured internally are valued at standard cost which approximates
        replacement cost.Turbine products assembled internally are valued at materials
        costs plus labor and overhead costs involved with the turbine assembly. Costs
        to
        ship product held for sale or for product sold is recorded to cost of goods
        sold
        as the expenses are incurred.


**INCOME
      TAXES**


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





As
      of
      September 30, 2006, 2005, and 2004, 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.





64





**LOSS
      PER SHARE**


The
      Company utilizes SFAS No. 128, "Earnings per Share." Basic loss per share is
      computed by dividing net loss 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 since their effect would have been
      anti-dilutive:





2006
            
            2005
            
            2004Convertible
                Debentures, if converted
            
            
            3,885,968
            
            
            6,503,258
            
            
            8,982,036Options
                for Common Stock
            
            
            15,965,336
            
            
            6,167,936
            
            
            7,195,336Warrants
                for Common Stock
            
            
            11,488,393
            
            
            8,796,393
            
            
            13,081,681Total
            
            
            31,339,697
            
            
            21,467,587
            
            
            29,259,053




**NEW
      ACCOUNTING PROUNOUNCEMENTS**


In
      July
      2006, the Financial Accounting Standards Board ("FASB") issued Financial
      Accounting Standards Interpretation No. 48 ("FIN 48"), "Accounting for
      Uncertainty in
      Income
      Taxes." FIN 48 clarifies the accounting for uncertainty in income tax positions
      taken or expected to be taken in tax returns that effect amounts reported in
      a
      company's financial statements in accordance with FASB Statement No. 109,
      "Accounting for Income Taxes." FIN 48 establishes a threshold condition that
      a
      tax position must meet for any part of the benefit of that position to be
      recognized in the financial statements. FIN 48 also provides guidance concerning
      derecognition, measurement, classification, interest and penalties and
      disclosure of tax positions. FIN 48 is effective for fiscal years beginning
      after December 15, 2006. The Company is currently analyzing the effects of
      FIN
      48.




In
      May
      2005, the FASB issued FASB Statement No. 154, "Accounting Changes and Error
      Corrections, a replacement of APB Opinion No. 20, Accounting Changes and FASB
      Statement No. 3, Reporting Accounting Changes in Interim Financial Statements"
      ("FAS 154"). FAS 154 provides guidance on the accounting for and reporting
      of
      accounting changes and error corrections. It establishes, unless impracticable,
      retrospective application as the required method for reporting a change in
      accounting principle in the absence of explicit transition requirements specific
      to the newly adopted accounting principle. FAS 154 also provides guidance for
      determining whether retrospective application of a change in accounting
      principle is impracticable and for reporting a change when retrospective
      application is impracticable. The provisions of this Statement are effective
      for
      accounting changes and corrections of errors made in fiscal periods beginning
      after December 15, 2005. The adoption of the provisions of FAS 154 is not
      expected to have a material impact on the Company's financial position or
      results of operations.




In
      September 2006 the FASB issued Statement No. 157, FAIR VALUE MEASUREMENTS.
      The
      Statement provides guidance for using fair value to measure assets and
      liabilities. This Statement references fair value as the price that would be
      received to sell an asset or paid to transfer a liability in an orderly
      transaction between market participants in the market in which the reporting
      entity transacts. The Statement applies whenever other standards require (or
      permit) assets or liabilities to be measured at fair value. The Statement does
      not expand the use of fair value in any new circumstances. It 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.




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 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.







65


**NOTE
      2 - RESTATEMENT AND RECLASSIFICATIONS**





In
      May
      2005, the Company determined that certain fiscal 2004 transactions with employee
      and settlements of former employee non-qualifying stock options that were
      exercised on a "cashless" basis were improperly recorded in fiscal 2004. For
      these transactions, both the exercise price and any payroll taxes owed by the
      employee or former employees were allowed to be paid for in shares of the stock
      exercised. Under FIN 44, such changes are considered to be modifications of
      the
      option grant and the transactions are required to be accounted for at the fair
      value of the stock issued on the date of the cashless exercise.





In
      May,
      2005, the Company also reclassified certain consulting related expenses in
      the
      Statement of Operations for the fiscal year ended September 30, 2004.





Below
      is
      the effect on the Balance Sheet as of September 30, 2004 and the Statements
      of
      Operations for the fiscal year ended September 30, 2004


**Balance
      Sheet as of September 30, 2004**





As
                Originally Reported
            
            Restatement
                Adjustment
            
            
            
            As
              RestatedShareholders’
                DeficitAdditional
                paid-in capital
            
            
            31,929,882
            
            
            364,277
            
            
            1
            
            
            32,294,159Deficit
                accumulated during the development stage
            
            
            (26,075,079
            )
            
            (364,277
            )
            
            1
            
            
            (26,439,356
            )Total
                stockholders’ equity
            
            
            5,602,719
            
            
            --
            
            
            
            
            
            5,602,719





**Statement
      of Operations for Fiscal Year Ended September 30, 2004**





As
                Originally Reported
            
            Restatement
                Adjustment
            
            
            
            As
                RestatedOperating
                ExpensesOfficer
                Compensation
            
            
            282,259
            
            
            562,741
            
            
            2
            
            
            845,000266,529
            
            
            1General
                and administrative
            
            
            5,519,506
            
            
            (2,068,452
            )
            
            2
            
            
            3,717,5833,360,267
            
            
            13,750
            
            
            13,416,551
            
            
            2Legal,
                Professional, and consulting
            
            
            
            
            
            (739,000
            )
            
            3
            
            
            6,051,568114,959
            
            
            68,000
            
            
            1Research
                and Development
            
            
            
            
            
            3,075,096
            
            
            2
            
            
            3,258,05515,998
            
            
            1Sales
                and Marketing
            
            
            --
            
            
            1,707,559
            
            
            2
            
            
            1,723,557Depreciation
            
            
            153,039
            
            
            --
            
            
            
            
            
            153,039Compensation
                expense related to issuance of common stock - legal
            
            
            1,058,000
            
            
            (1,058,000
            )
            
            2
            
            
            --Stock
                issued for legal settlement
            
            
            739,000
            
            
            (739,000
            )
            
            2
            
            
            --Compensation
                expense related to fair value of warrants - consultants
            
            
            1,792,510
            
            
            (1,792,510
            )
            
            2
            
            
            --Compensation
                expense related to issuance of common stock - consulting
            
            
            1,265,165
            
            
            (1,265,165
            )
            
            2
            
            
            --Compensation
                expense related to fair value warrants
            
            
            1,540,000
            
            
            (1,540,000
            )
            
            2
            
            
            --Compensation
                expense related to fair value of stock options - Legal
            
            
            128,250
            
            
            (128,250
            )
            
            2
            
            
            --Compensation
                expense related to fair value of stock options research and
                development
            
            
            170,570
            
            
            (170,570
            )
            
            2
            
            
            --Total
                Operating Expenses
            
            
            16,123,524
            
            
            (374,723
            )
            
            
            
            
            15,748,801Litigation
                settlements
            
            
            --
            
            
            (739,000
            )
            
            3
            
            
            (739,000
            )Net
                loss
            
            
            (14,323,597
            )
            
            (364,277
            )
            
            
            
            
            (14,687,874
            )








66


1)
      During
      fiscal 2004, the Company allowed the cashless exercise of non qualifying
      employee stock options by four former employees as part of the settlement of
      their option vesting and by one employee. A total of 280,265 shares were
      exercised between $0.25 per share and $1.00 per share. As a result of these
      transactions, the Company had initially recorded $64,005 in compensation
      expense. Under FIN 44, a cashless exercise where the exercise price is paid
      for
      by the stock being exercised is considered to be a modification of the option
      grant and the fair value of the transaction must be recorded as expense. For
      the
      280,265 shares exercised, 237,220 shares of Common Stock of the Company were
      issued and additional compensation expense was recorded as follows: the fair
      value was determined using the difference between the closing market value
      of
      the Company's common stock on the date of each underlying transaction and the
      exercise price per share of the options exercised. For fiscal 2004, the total
      additional non-cash expense of $364,277 represents the fair value of the 280,265
      shares, valued at $496,217 less the exercise cost of $65,935 and less the
      previously recorded expense of $64,005.





The
      Company does not intend to allow for the cashless exercise of additional stock
      options in the future. The impact on the fiscal 2004 loss per share for this
      error correction was less than $0.01 per share on both a basic and fully diluted
      basis.





2)
      The
      Company has changed the classification of certain consulting expenses related
      to
      general and administrative, product development, and sales and marketing
      activities and the classification of misc. receivables. To be consistent with
      the current period presentation, certain operating expense balances for the
      fiscal year ended September 30, 2004 were reclassified. No additional expense
      was recorded as a result of this reclassification.





3)
      Prior
      to 2005, we recorded our litigation settlements in Legal, Professional, and
      Consulting. Due to the large balance of litigation settlements recorded in
      2005,
      we segregated the litigation settlements on a separate line item in other
      expenses. We therefore reclassified $739,000 and from fiscal year 2004 out
      of
      legal, professional and consulting and into Litigation settlements.





**NOTE
      3 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 $15MM 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.





67


-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
      with fiscal 2006 presentation.





Liabilities
      classified on the September 30, 2005 as reported in our Form 10-K filed in
      December, 2005 under the heading Liabilities Subject to Compromise consisted
      of
      the following amounts:





Pre-Petition
                Accounts Payable
            
            $
            1,180,202Accrued
                Officer Compensation
            
            
            255,619Accrued
                disputed balances
            
            
            65,000Accrued
                pre-petition interest payable
            
            
            89,286Accrued
                pre-petition employee benefits
            
            
            35,413Total
            
            $
            1,625,520




For
      consistency of presentation, these balances are included in Accounts Payable
      and
      other Accrued Expenses for the comparative balance sheets reported
      above.





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, see Equity note 14. 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.
        See also footnote 14.





**NOTE
      4 - GOING CONCERN**





The
      Company has received a report from its independent auditors for the year ended
      September 30, 2006 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, 2006, the Company incurred a net loss of
      $28,523,192 and negative cash flows from operations of $6,263,703. In addition,
      the Company had an accumulated deficit of $95,125,955 at September 30, 2006.
      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.





68


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 $8.0 million
      in
      ACCC conductor products and $16.4 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, 2006 of $2.6 million and expected
      cash flows from revenue orders may not be sufficient to fund operations for
      the
      next four calendar quarters and to repay our remaining $6.0 million of our
      convertible debentures due in August, 2007. We anticipate that additional cash
      is needed to fund operations beyond December, 2006 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
      5 - 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, 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.


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 original purchase price of $56,549,000
      (including transaction costs) is as follows:





Goodwill
                
                
                
                
                $
                25,469,000Identifiable
                    intangibles (see note 9)
                
                
                
                
                
                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
                
                
                
                
                $
                56,549,000Fair
                    Value of Stock Issued
                
                
                
                
                $
                55,229,000Transaction
                    Costs
                
                
                
                
                
                1,320,000Total
                    Consideration
                
                
                
                
                $
                56,549,000




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.





69


Our
      purchase price allocation is preliminary and is based on the best available
      knowledge as of the acquisition date. We expect that we will finalize the
      purchase price allocation by June 30, 2007, approximately one year after the
      acquisition date. Balances subject to change to reflect fair value adjustments
      include those acquired balance sheet categories that are subject to estimates
      of
      their fair values and include: Accounts Receivable, Inventories, Other Assets,
      Accounts Payable and Accrued Liabilities, and Warranty Reserves.




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.





70


**NOTE
      6 - ACCOUNTS RECEIVABLE**





Current
      accounts receivable, net consists of the following:




September
                30, 2006
            
            September
                30, 2005Turbine
                products and services receivables
            
            $
            11,320,185
            
            $
            --Cable
                products receivables
            
            
            2,682,605
            
            
            2,556,998Gross
                receivables
            
            
            14,002,790
            
            
            2,556,998Reserves
            
            
            (2,500,000
            )
            
            (2,500,000
            )Net
                receivables
            
            
            11,502,790
            
            
            56,998Portion
                relating to greater than one year, net of reserves of $0 and
                $0
            
            
            2,028,927
            
            
            --Net
                current accounts receivable
            
            $
            9,473,863
            
            $
            56,998




Included
        in accounts receivable at September 30, 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, 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, 2006 there were $3,130,738 of
        retention payments receivable of which $1,230,058 is expected to be collected
        within one year and $1,900,680 is expected to be collected after September
        30,
        2007. Substantially all of the long term retention receivables are expected
        to
        be collected in the fiscal year ending September 30, 2008.





**NOTE
      7 - INVENTORY**





Inventories
      consist of the following:


September
                30, 2006
            
            September
                30, 2005Raw
                Materials and Turbine Parts
            
            $
            15,614,107
            
            $
            473,007Work
                in Progress
            
            $
            6,714,281
            
            
            --Finished
                Goods
            
            $
            1,821,857
            
            
            994,999Gross
                Inventory
            
            $
            24,150,245
            
            $
            1,468,006Reserves
            
            
            (258,378
            )
            
            (234,673
            )Net
                Inventory
            
            $
            23,891,867
            
            $
            1,233,334





Inventory
      acquired from 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, 2006.





71


The
      following table is offered to provide additional information regarding the
      composition of inventory as at September 30, 2006:





Cable
                Division
            
            Wind
                Division
            
            TotalRaw
                Materials and Turbine Parts
            
            
            905,780
            
            
            20,642,507
            
            
            21,548,287WIP
            
            
            65,634
            
            
            6,648,647
            
            
            6,714,281ACCC
                Finished Core, Cable, & Related Hardware
            
            
            1,821,857
            
            
            --
            
            
            1,821,857Gross
                Inventory
            
            
            2,793,271
            
            
            27,291,154
            
            
            30,084,425Reserves
            
            
            (258,378
            )
            
            (5,934,180
            )
            
            (6,192,558
            )Net
                Inventory
            
            
            2,534,893
            
            
            21,356,974
            
            
            23,891,867








**NOTE
      8- PROPERTY AND EQUIPMENT**





Property
      and equipment consisted of the following:


September
                30,Estimated
                Useful Lives
            
            2006
            
            2005Office
                furniture and equipment
            
            
            3-10
                yrs
            
            
            782,622
            
            
            299,147Production
                Equipment
            
            
            3-10
                yrs
            
            
            4,600,560
            
            
            2,735,467Automobiles
            
            
            3-5
                yrs
            
            
            360,056
            
            
            --Leasehold
                improvements
            
            
            7
                yrs
            
            
            408,095
            
            
            406,236Total
                Property
            
            
            
            
            
            6,151,333
            
            
            3,440,850Accumulated
                Depreciation
            
            
            
            
            
            (1,437,249
            )
            
            (675,241
            )Property,
                net
            
            
            
            
            
            4,714,084
            
            
            2,765,609





Property
      and equipment acquired from the EU Energy acquisition consisted of primarily
      production equipment, office equipment, and automobiles and totaled $2,446,653
      in the aggregate at fair value. We evaluated all property acquired to determine
      the fair value under the guidance of SFAS 141 and all property was valued as
      of
      the acquisition date at the more accurate of replacement value or, as for the
      automobiles, market value.





Depreciation
      expense was $1,025,544, $ 559,084, and $153,039, for the years ended September
      30, 2006, 2005, and 2004, respectively.





**NOTE
      9 - INTANGIBLE ASSETS**


The
      Company adopted SFAS No. 142 “Goodwill and Other Intangible Assets” (SFAS
      142) effective January 1, 2002. In accordance with SFAS 142, the Company
      does not amortize goodwill. The Company’s goodwill of $25,469,000 at September
      30, 2006 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.


As
      of
      September 30, 2006, 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, 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
      $326,000, $0 and $0 for the years ended September 30, 2006, 2005, and 2004
      respectively.





72


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
      late fiscal 2007 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 is 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 and we amortize this asset on the turbines remaining under contracts
      expiring through 2009. 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**2007
            
            $
            2,185,0002008
            
            
            3,872,0002009
            
            
            4,379,0002010
            
            
            4,546,0002011
            
            
            3,595,000Thereafter
            
            
            5,570,000$
            24,147,000





**NOTE
      10 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES**





Accounts
      payable and Accrued Liabilities consisted of the following:





September
                30,2006
            
            2005Trade
                Payables
            
            $
            8,895,196
            
            $
            3,598,829Legal
                Provision
            
            
            1,479,218
            
            
            --Accrued
                Acquisition Costs
            
            
            1,167,069
            
            
            --Accrued
                Payroll
            
            
            1,081,132
            
            
            387,422Accrued
                Interest
            
            
            --
            
            
            430,755Due
                to Affiliates
            
            
            120,320
            
            
            97,200Deferred
                Rents
            
            
            217,598
            
            
            170,294Other
                accruals
            
            
            4,935
            
            
            16,053Total
                Accounts Payable and Accrued Liabilities
            
            $
            12,965,468
            
            $
            4,700,553





Included
      in the legal provision are primarily the accruals related to the Brush Electric
      and Dewind v. FKI legal accruals as described in note 18 below. Accrued
      acquisition costs represent primarily legal and statutory payments required
      as a
      result of the EU acquisition.




**NOTE
      11 - 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.
      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.





73


Warranty
      reserves consisted of:




Fair
                  value at Acquisition Date of July 3, 2006
              
              Additional
                  reserves recorded to September 30, 2006
              
              Reserves
                  charged off to expense period ending September 30, 2006
              
              Balance
                  at September 30, 2006Warranty
                  reserves
              
              
              6,100,742
              
              
              7,215
              
              
              (538,984
              )
              
              5,568,973Reserve
                  for turbine retrofitting
              
              
              5,183,060
              
              
              --
              
              
              (443,466
              )
              
              4,739,594Reserve
                  for turbine availability
              
              
              4,489,560
              
              
              433,011
              
              
              (576,934
              )
              
              4,345,637Total
                  Warranty and Product Guarantee reserves
              
              
              15,773,362
              
              
              440,226
              
              
              (1,559,384
              )
              
              14,654,204Less
                  Amount classified as current liabilities
              
              
              
              
              
              
              
              
              
              
              
              11,594,876Long
                  term warranty liability
              
              
              
              
              
              
              
              
              
              
              
              3,059,328




**NOTE
      12 - 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, 2006
            
            September
                30, 2005Customer
                advances on turbine and turbine parts sales
            
            $
            10,807,423
            
            
            --Deferred
                revenues - Turbine license fees
            
            
            4,445,826
            
            
            --Deferred
                revenues - Turbine maintenance and service advance
                billings
            
            
            4,524,026
            
            
            --Deferred
                revenues - Cable sales
            
            
            335,426
            
            
            71,748Deferred
                revenues - Consulting
            
            
            --
            
            $
            550,000Total,
                Deferred revenues and customer advances
            
            $
            20,112,701
            
            $
            621,748Balance
                included in current liabilities
            
            
            17,808,209
            
            $
            621,748Long
                term Deferred Revenues
            
            $
            2,304,492
            
            
            --





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





74


**NOTE
      13 - CONVERTIBLE DEBT**





As
      of
      September 30, 2006 we had $6,023,250 of principal remaining of our August,
      2004
      $15,000,000 Convertible Debentures due for maturity in August, 2007. Convertible
      debt outstanding or issued during the year ended September 30, 2006 consisted
      of:





A.
      August, 2004 Convertible Debentures:


On
      August
      17, 2004, CTC 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. We received $5,000,000
      upon
      closing and $10,000,000 was deposited into a Custodian Account to secure
      repayment of the Debentures. The Debentures will mature on August 17, 2007.
      The
      investors may convert the Debentures into our common stock for $1.67 per share,
      subject to adjustment (the "Conversion Price"). Shares issued for conversions
      are registered for resale under a Form S-1, as amended, which was originally
      declared effective in August, 2005.





On
      November 18, 2004, we obtained the release of the $10,000,000 from the custodial
      account by modifying the terms of the original August, 2004 agreement. In
      conjunction with the modification, we issued 1,083,592 warrants with an exercise
      price of $3.23 per warrant valued using the Black-Scholes option pricing model
      at $1.84 per warrant. We determined that this issuance did not affect the fair
      value of the beneficial conversion feature of the August, 2004 Debentures and
      we
      recorded $1,993,523 as additional debt discount that will be amortized over
      the
      remaining term of the Debentures. See also restatement footnote 2. Until
      bankruptcy filing, the discount had been amortized to interest expense over
      the
      expected duration of the Convertible Debentures which are scheduled for
      repayment in August, 2007. On May 5, 2005 pursuant to the requirements under
      Bankruptcy accounting (AICPA SOP 90-7) we adjusted the carrying value of our
      Debentures to their face value of $15,000,000. The adjustment resulted in a
      non-cash charge to earnings of $6,477,455 and reduced the prospective monthly
      amortization of the debt discount to $0.





Between
      August 19, 2005 and September 30, 2005 the holders of the convertible debentures
      converted a total of $4,139,558 of principal to 2,478,777 shares of Common
      Stock
      at a conversion price of $1.67 per share.





Between
      October 1, 2005 and September 30, 2006, the holders of the convertible
      debentures converted a total of $4,837,192 of principal as follows:




$4,157,001
      of principal was converted at $1.55 per share into 2,681,936 shares of common
      stock


$680,191
      of principal was converted at $1.67 per share into 407,300 shares of common
      stock.





On
      October 14, 2005, as a result of certain anti-dilutive provisions in the August,
      2004 Debenture agreements (as amended), the conversion price decreased from
      $1.67 per share to $1.55 per share. On October 13, 2005, the conversion price
      decrease resulted in an increase of the “if converted” of 471,945 shares. The
      Company recorded an additional debt discount of $788,148 calculated as the
      value
      of the additional shares issuable at the revised conversion price multiplied
      by
      the original $1.67 conversion price. Under bankruptcy accounting, the Company
      immediately recorded a carrying value adjustment of $788,148 to reduce the
      debt
      discount to $0.





Prior
      to
      May 5, 2005, we paid the Debenture holders interest at a rate of 6% per annum,
      payable quarterly in cash. Under our Bankruptcy Plan of Reorganization, interest
      accrued but unpaid as of the bankruptcy date in addition to interest payable
      since the bankruptcy is to be paid in common stock upon plan confirmation.
      As of
      September 30, 2005 we had accrued interest payable of $430,755. On November
      9,
      2005 we issued 259,790 shares of common stock in full payment of all interest
      accrued through September 30, 2005. On December 30, 2005, we paid all interest
      earned for the quarter ended December 31, 2005 in cash. We have paid all
      interest since December, 2005 in cash and we expect to continue to do so until
      the maturity or conversion of the debt.





B.
      October, 2005 Convertible Notes





On
      October 13, 2005, CTC closed a financing transaction in which it sold 6%
      convertible notes (the "October, 2005 Notes") to select institutional accredited
      investors, in order to raise a total of $6,000,000. The Notes bear interest
      at
      6% and mature on January 14, 2007. The Notes are redeemable by the Company
      for
      110% of the principal outstanding. The investors may convert the Notes into
      our
      common stock for $1.55 per share (the "Conversion Price") at any time prior
      to
      maturity or redemption by the Company. Shares issued under conversion are
      registered for resale pursuant to Bankruptcy code 1145.





Concurrent
      with the issuance of the notes, the investors also received warrants to purchase
      an aggregate of 1,161,290 shares of common stock, 50% of which are at an
      exercise price of $1.78 per share and the balance of which are at an exercise
      price of $1.94 per share. The combined value of the allocated conversion
      features of the Notes and the value allocated to the warrants issued was
      $1,834,092 which was recorded as paid in capital and as a discount to the
      Convertible Notes. Under bankruptcy accounting, the Company immediately recorded
      a carrying value adjustment of $1,834,092 to reduce the debt discount to $0.





75


In
      conjunction with this note issuance, on October 14, 2005, the Company issued
      232,258 shares of common stock for services valued at $360,000 to Lane Capital
      for services rendered to broker the convertible notes. Lane Capital also
      received warrants to purchase 96,774 shares of common stock at $1.78 per share
      valued at $0.9452 per warrant and warrants to purchase 96,774 shares of common
      stock at $1.94 per share valued at $0.9191 per warrant under the same terms
      as
      the warrants issued to the investors. The warrants were valued using the
      Black-Scholes-Merton option pricing model at an aggregate value of $180,416.
      The
      key assumptions to value the warrants were a volatility of 100%, a risk free
      rate of 3.97%, a market price of $1.55, a life of three years, and a 0% dividend
      yield.





On
      January 30, 2006 in exchange for the issuance of 1,308,140 shares of restricted
      common stock , valued at the market price of $1.72 per share or $2,250,000
      the
      holders of the October, 2005 Convertible notes converted the entire principal
      balance of $6,000,000 at $1.55 per share into 3,870,972 shares of Section 1145
      stock, and agreed to certain modifications in the Note Purchase Agreement and
      the related Warrant Agreements. The Company recorded a charge of $2,250,005
      into
      other expense - inducement of convertible debt as a result of this transaction.





Lane
      Capital Management provided services to facilitate this transaction and was
      paid
      $135,000 in 78,489 shares of restricted stock valued at the market price of
      $1.72 per share.





See
      also
      Note 14 regarding the impact to the anti-dilution as a result of the issuance
      of
      these notes in October, 2005.





C.
      March,
      2006 Bridge Financing





On
      March
      3, 2006, the Company closed a financing transaction in which we sold 14%
      convertible notes (the “March, 2006 Bridge Notes”) to select institutional
      accredited investors, in order to raise a total of $3,500,000. The Bridge Notes
      bear interest at 14% payable monthly in arrears and will mature on September
      3,
      2006. The investors may convert the Bridge Notes into our common stock for
      $1.55
      per share (the “Conversion Price”) at any time prior to maturity or redemption
      by the Company. The notes are redeemable by the Company for 110% of the
      principal outstanding if the underlying conversion shares are not registered
      for
      resale or at 100% of the principal outstanding if the underlying conversion
      shares have been declared registered for resale by an effective registration
      statement with the Security & Exchange Commission. The Form S-3 registration
      for shares underlying the bridge financing was effective as of September 13,
      2006.





Concurrent
      with the issuance of the Bridge Notes, the investors also received warrants
      to
      purchase in the aggregate of 2,750,001 shares of common stock, 750,001 of which
      are at an exercise price of $1.55 per share and 2,000,000 of which are at an
      exercise price of $2.00 per share. The combined value of the allocated
      conversion features of the Bridge Notes and the value allocated to the warrants
      issued was $1,956,526 which was recorded as paid in capital and as a discount
      to
      the Convertible Bridge Notes. In conjunction with this note issuance, the
      Company paid Lane Capital $180,000 for services rendered.





In
      September, 2006 $2,175,000 was repaid in cash and $1,325,000 of the principal
      was converted at $1.55 per share into 854,840 shares of common stock. As an
      inducement to convert the $1,325,000 principal and in exchange for the waiver
      of
      future anti-dilution of the note holders’ remaining warrants, we issued
      1,260,595 shares of common stock valued at $1,336,230 or $1.06 per share and
      recorded this as an other expense - inducement of debt conversion. To facilitate
      this transaction, 72,000 shares of unregistered stock were issued and the
      Company recorded a charge to legal, professional, and consulting expense of
      $76,320 for these services.





See
      also
      footnote 14 warrants section regarding the impact of the issuance of this stock
      on the anti-dilution provisions of warrants outstanding.





**NOTE
      14 - SHAREHOLDERS' EQUITY**





**PREFERRED
      STOCK**





In
      January 2004, the Company converted the 1,000 shares of Series B 10% preferred
      stock of its subsidiary Transmission Technology Corporation into 80,000 shares
      of unregistered, restricted common stock that were issued to one individual
      pursuant to a court order. In addition under the terms of the order, the Company
      was obliged to issue 27,631 shares of unregistered, restricted common stock
      in
      satisfaction of the unpaid preferred stock dividends and interest totaling
      $31,996.





We
      have
      5,000,000 shares of preferred stock authorized.




As
      of
      September 30, 2006 there was no preferred stock outstanding.





76


**COMMON
      STOCK**





**SERVICES
      RENDERED**





For
      the
      fiscal year ended September 30, 2004 the Company issued in aggregate 1,913,354
      shares of common stock for consulting services. The Company recorded expenses
      totaling $2,578,047 as follows:





During
      fiscal 2004, the Company issued in aggregate 1,213,354 shares of restricted,
      unregistered common stock in exchange for services valued at the fair value
      of
      serviced provided totaling $1,520,047 as follows: During January 2004 the
      Company issued 58,881 shares of restricted, unregistered common stock to two
      companies in compensation of professional construction services valued at the
      fair value of the services provided totaling $65,166. During March 2004 the
      Company issued 150,000 shares of restricted unregistered common stock in the
      name of one company in partial compensation of equipment purchased. During
      June,
      2004 it was agreed by the Company and the entity that the entity would not
      accept the shares in lieu of partial payment and the 150,000 shares were
      cancelled. In July 2004 the Company issued 790,000 shares of restricted,
      unregistered common stock to two individuals and 3 companies in remuneration
      for
      and payment of debts relating to research, product development, marketing,
      business development, and business strategy services valued at the fair value
      of
      services provided totaling $790,000. During August 2004, the Company issued
      364,373 shares of restricted, unregistered common stock to one officer and
      one
      consultant in remuneration for product development, intellectual property,
      marketing, and business advisory services performed in fiscal 2003 and valued
      at
      the fair market value of the stock issued which equaled the fair value of
      services provided of $664,881.





During
      fiscal 2004, the Company issued in aggregate 700,000 shares registered under
      an
      S-8 registration statement to two individuals for legal, product development,
      and intellectual property services valued at the fair market value of the stock
      issued which equaled the fair value of services provided of $1,058,000, the
      fair
      market value on the date of the share issuances.





During
      December 2003, the Company issued 140,160 shares of restricted, unregistered
      common stock to the Company's landlord in lieu of 2 month's rent on a commercial
      facility valued at $147,168, the market value of the rents.





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.





77


**CONVERSION
      OF CONVERTIBLE NOTES AND DEBENTURES**





There
      were no debt conversions for the fiscal year ended September 30, 2004. 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.
      During fiscal 2006, we had three series of debt subject to
      conversions:





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





During
      the year ending September 30, 2006, the Company issued 3,089,236 shares of
      common stock for the conversion of $4,837,192 of the August, 2004 Convertible
      Debentures as follows:


-
            $680,191
                of principal was converted at $1.67 per share into 407,300 shares
                of
                common stock


-
            $4,157,001
                of principal was converted at $1.55 per share into 2,681,936 shares
                of
                common stock.


Since
      the
      Company had previously recorded a carrying value adjustment on the $15 million
      debentures, no gain or loss was recorded on the conversions.





**B.
      October, 2005 $6 Million Debtor in Possession Convertible
      Notes:**


During
      the year ending September 30, 2006, in October, 2005 the Company raised
      $6,000,000 in convertible notes. The Company induced full conversion of these
      notes in January, 2006. The company issued 3,870,972 shares of common stock
      registered under Bankruptcy code section 1145 at a conversion price of $1.55
      per
      share for the conversion of the $6.0 million in notes. To facilitate the
      conversion and to settle other outstanding issues, the Company issued 1,308,142
      unregistered shares valued at the previous trading day’s closing market price of
      $1.72 per share. The company recorded a charge of $2,250,005 to other expense
      relating to inducement of convertible debt as a result of this transaction.





**C.
      March, 2006 Convertible Bridge Notes**


During
      the year ending September 30, 2006, in March, 2006 the Company issued $3,500,000
      in convertible notes due September, 2006 In September, 2006, $1,325,000 of
      the
      $3,500,000 in principal was converted at $1.55 per share into 854,840 shares
      of
      common stock and the remaining $2,175,000 in principal was repaid in cash.
      As an
      inducement to convert the principal and in exchange for the waiver of future
      antidilution of the note holders’ remaining warrants, we issued 1,260,595 shares
      of common stock valued at $1,336,230 or $1.06 per share, the market price on
      the
      date prior to issuance.





**LEGAL
      AND BANKRUPTCY SETTLEMENTS**





During
      the year ended September 30, 2004, 675,000 shares of common stock was issued,
      valued at $739,000 for legal settlements related to Gary Cope and Robert Nikoley
      V. Composite Technology Corporation, et. al litigation. See Form 10-K for fiscal
      2005 and form 10K-SB/A for fiscal 2004 for additional information and
      disclosure. The common stock issued was valued at the market closing price
      of
      the Company's common stock on the date of issue.





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 of which
      $14,153,522 had been accrued as of September 30, 2005, $354,000 was recorded
      as
      a prepaid expense in fiscal 2006, and $702,000 was recorded as a bankruptcy
      claims expense during fiscal 2006. 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. Issuances are summarized as follows:





Name
            
            Settlement
                type
            
            Date
                issued
            
            Shares
            
            Value
                per share
            
            Settlement
                Value
            
            Accounting
                treatmentAcquvest
            
            Litigation
            
            November,
                2005
            
            6,500,000
            
            $1.95
            
            $12,675,000
            
            Accrued,
                9/30/2005Ascendiant
            
            Litigation
            
            November,
                2005
            
            650,000
            
            $1.84
            
            $1,196,000
            
            Accrued,
                9/30/2005Shields
            
            Litigation
            
            November,
                2005
            
            25,000
            
            $1.82
            
            $45,500
            
            Accrued,
                9/30/2005Vendor
                claims
            
            BK
                Claim
            
            November,
                2005
            
            146,425
            
            $1.62
            
            $237,022
            
            Accrued,
                9/30/2005Vendor
                claim
            
            BK
                Claim
            
            November,
                2005
            
            200,000
            
            $1.77
            
            $354,000
            
            Prepaid
                Expense on issuance dateAugust,
                2004 Debenture holders
            
            BK
                Claim
            
            June,
                2006
            
            450,000
            
            $1.56
            
            $702,000
            
            Expensed
                during fiscal 2006Total
            
            
            
            
            
            7,971,425
            
            
            
            $15,209,522





Of
      the
      balance recorded during fiscal 2006 as a prepaid expense, $344,000 is included
      as of September 30, 2006 as a prepaid sales commission and $10,000 was recorded
      to expense during the year.





78





**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 who elected to convert their principal as
      described in note 13.








**CASH**





During
      November 2003, pursuant to a Private Placement Memoranda, we sold an aggregate
      of 89,360 restricted unregistered shares of common stock to 5 individuals at
      a
      price of $1.40 per share for gross proceeds of $125,104.





In
      December 2003, the Company issued 2,400,000 Units for cash proceeds of
      $2,790,000 net of offering costs of $210,000 ("December Offering"). The December
      Offering was subscribed by 5 investment funds. Each unit consisted of one share
      of the Company's unregistered restricted common stock and 0.5 warrant to
      purchase one share of the Company's unregistered restricted common stock at
      an
      exercise price of $2.04 per share. The warrants vest immediately and expire in
      December 2008. The Company has the right to call the warrants if the closing
      price of the Company's common stock is greater than 200% of the exercise price
      of the warrants for 20 consecutive trading days. The value of the December
      Offering warrants was determined using the Modified Black-Scholes-Merton option
      pricing model at a value of $1.877 per warrant and the value of $2,252,400
      was
      accounted for as Paid in Capital - December Offering Warrants.. In June 2004,
      the Company offered the warrant holders, for a limited period of time, the
      opportunity to exercise their warrants at a reduced strike price of $0.50.
      Pursuant to this offer, the Company issued 1,000,000 shares of the Company's
      unregistered, restricted common stock against receipt of $500,000. One holder
      of
      200,000 warrants did not take advantage of this right. In connection with this
      offering, one professional company was issued with an additional 120,000
      warrants on the same terms as the original offering. As a result of this
      transaction, we recorded additional Paid in Capital and Legal, Consulting,
      and
      Professional expenses of $1,433,880 resulting from the modification of the
      warrant terms. The 120,000 warrants issued to the professional services firm
      were valued using the Modified Black-Scholes-Merton option pricing model at
      $1.277 per warrant and $153,207 in additional Paid in Capital and Legal,
      Consulting, and Professional expenses were recorded.








**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 CTC on November 3, 2001, the TTC Plan
      was terminated, and the options were converted into options to purchase shares
      of CTC'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.





Cashless
      exercises: During fiscal 2004, the Company allowed for the cashless exercise
      of
      280,265 options at exercise prices of between $0.25 and $1.00 per share
      resulting in the issuance of 237,220 shares of common stock. Under the guidance
      issued by FASB Interpretation No. 44, Accounting for Certain Transactions
      involving Stock Compensation, a cashless exercise is considered to be a
      modification of option grant terms and requires that the intrinsic value of
      the
      settlement to be included as additional compensation expense. The cashless
      exercises in 2004 resulted in an additional $364,277 in compensation expense
      (see Footnote 2). The Company does not intend to allow for future cashless
      exercises of stock options.








79


The
      following table summarizes the Stock Plan stock option activity from the
      conversion of the Plan from September 30, 2003 through September 30, 2006.


Number
              of
                Shares
            
            Average
              Exercise
              Price


Outstanding,
                September 30, 2003
            
            
            8,147,740
            
            $
            0.36Granted
            
            
            969,904
            
            $
            1.00Exercised
            
            
            (497,220
            )
            $
            0.11Cancelled
            
            
            (1,425,088
            )
            $
            0.30Outstanding,
                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
            
            $
            0.83EXERCISABLE,
                September 30, 2006
            
            
            5,058,155
            
            $
            0.55




The
      weighted-average remaining contractual life of the options outstanding at
      September 30, 2006 was 5.2 years. The exercise prices of the options outstanding
      at September 30, 2006 ranged from $0.25 to $2.00, 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
            
            
            2,720,432
            
            
            2,520,432
            
            
            5.3
            
            $
            0.30
            
            $
            0.30$0.50-$0.99
            
            
            2,775,000
            
            
            1,951,666
            
            
            5.3
            
            $
            0.59
            
            $
            0.56$1.00-$1.49
            
            
            10,319,904
            
            
            436,057
            
            
            5.2
            
            $
            1.02
            
            $
            1.08$1.50-$1.99
            
            
            50,000
            
            
            50,000
            
            
            0.3
            
            $
            1.75
            
            $
            1.75$2.00-$2.99
            
            
            100,000
            
            
            100,000
            
            
            0.3
            
            $
            2.00
            
            $
            2.00Total
            
            
            15,965,336
            
            
            5,058,155








80


**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 issuances or as a discount for debt issuances. The
      Company values the warrants at fair value as calculated by using the Modified
      Black-Scholes-Merton option-pricing model. See Note 1 for the assumptions used
      to value warrants issued.





The
      following table summarizes all warrant activity from September 30, 2003 through
      September 30, 2006:





Number
              of
                Shares
            
            Weighted-AverageExercise
                PriceOutstanding,
                September 30, 2003
            
            
            17,398,457
            
            $
            0.55Granted
            
            
            7,059,446
            
            $
            1.58Exercised
            
            
            (6,735,222
            )
            $
            0.42Cancelled
            
            
            (4,501,000
            )
            $
            0.49Outstanding,
                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
            
            $
            1.58EXERCISABLE,
                September 30, 2006
            
            
            11,488,393
            
            $
            1.58





Cash
      exercises:





The
      following table summarizes the warrant exercises for cash for the year ended
      September 30, 2006. 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 share2002
                Numbered warrants
            
            
            1
            
            
            83,333
            
            $
            41,667
            
            $
            0.50Series
                S
            
            
            2
            
            
            300,000
            
            $
            300,000
            
            $
            1.00Debenture
                $1.75 series
            
            
            1
            
            
            230,263
            
            $
            356,908
            
            $
            1.55Total
            
            
            4
            
            
            613,596
            
            $
            698,575
            
            $
            1.14





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. There
      appears to be merit for his claim and to avoid legal action we have agreed
      to
      allow the exercise of the warrants for a note receivable due upon the successful
      registration of the shares in question, scheduled to “piggyback” on our next
      registration statement to be filed at a future date. The $378,000 subscription
      note receivable has been recorded as a reduction to paid in capital in the
      balance sheet. The shares are included in the Company’s issued and outstanding
      figure but are being held in trust by the Company pending payment of the
      receivable.





81


In
      October, 2005 we issued 1,354,838 warrants in conjunction with our October,
      2005
      $6.0 million Convertible Note offering including 193,548 warrants issued to
      Lane
      Capital as part of their financing fees and 1,161,290 warrants issued to the
      note holders. Under the terms of the financing, 50% of the warrants were issued
      at an exercise price of $1.78 and 50% at an exercise price of $1.94. We valued
      the warrants using the Black Scholes option pricing model with a volatility
      of
      100%, a risk free rate of 3.97%, a life of 3 years, a 0% dividend rate and
      a
      market price of $1.55 at $0.9452 and $0.9191 for the $1.78 and $1.94 warrants
      respectively. The fair value of the warrants issued to the note holders was
      used
      as part of the beneficial conversion feature allocation described in footnote
      13
      above. The 193,548 warrants issued to Lane Capital were valued at $180,416
      and
      were included in legal and professional expenses.





As
      a
      result of the financing, we triggered anti-dilution provisions existing in
      our
      $15 million August, 2004 Convertible Debentures and related warrants. The
      warrant exercise prices for the “$1.75 Debenture,” “1.82 Debenture” and “$3.23
      Debenture Amendment” warrants were adjusted from their original exercise prices
      of $1.75, $1.82, and $3.23 respectively. We accounted for the re-pricing by
      calculating the difference in the fair value of the warrants immediately before
      the re-pricing to the value of the warrants immediately after the re-pricing.
      We
      used the Black-Scholes option pricing model using the following
      assumptions:





Risk
                Free Rate
            3.97%Volatility
            100%Dividend
                yield
            0%Market
                price
            $1.55Useful
                life - $1.76 and $1.82 warrants
            2.9
                yearsUseful
                life - $3.23 Debenture amendment warrants
            3.1
                years




The
      re-pricing resulted in a warrant value difference per warrant of $0.0367,
      $0.0487, and $0.2226 for the $1.75, $1.82, and $3.23 warrants respectively
      resulting in a compensation charge of $388,692 recorded in fiscal 2006 into
      other expense related to modification of warrants.





In
      March,
      2006 we issued 2,750,001 warrants in conjunction with our March, 2006 $3.5
      million Bridge Notes offering. Of these warrants, 750,001 warrants are
      exercisable at $1.55 per share and 2,000,000 are exercisable at $2.00 per share.
      The warrants were valued using the Black Scholes model and were included in
      the
      calculation of the beneficial conversion feature of the Convertible Debt as
      described in Footnote 14.





In
      May,
      2006 we issued 150,000 $1.55 warrants under the same terms and conditions as
      the
      March, 2006 $1.55 warrants to Lane Capital for services performed in conjunction
      with the March, 2006 $3.5 million Bridge Notes offering. We valued the warrants
      using the Black Scholes Merton option pricing model with a volatility of 107%,
      a
      risk free rate of 4.36%, a life of 2.9 years, a 0% dividend rate and a market
      price of $1.15 at $0.694 per warrant. We recorded a compensation charge to
      legal, professional, and consulting expense of $104,100 as a result of this
      issuance.





In
      May,
      2006 we issued 191,466 $2.00 warrants under the same terms and conditions as
      the
      March, 2006 $2.00 warrants to our external legal counsel for litigation related
      and general counsel services. We valued the warrants using the Black Scholes
      Merton option pricing model with a volatility of 107%, a risk free rate of
      4.36%, a life of 3 years, a 0% dividend rate and a market price of $1.15 at
      $0.6574 per warrant. We recorded a compensation charge to legal, professional,
      and consulting expense of $125,870 as a result of this issuance.





In
      May,
      2006 we issued a total of 600,000 warrants to Media Relations under the terms
      of
      our December, 2005 media relations services contract with exercise prices of
      $2.00, $2.50, and $3.00 in equal 200,000 warrant amounts. The warrants expire
      on
      December 31, 2008. We valued the warrants using the Black Scholes Merton option
      pricing model with a volatility of 107%, a risk free rate of 4.5%, a life of
      2.6
      years, a 0% dividend rate and a market price of $1.15 at $0.6035, $0.5499,
      and
      $0.5061 per warrant. We recorded the value of these warrants as a prepaid
      expense of $331,900. We amortized $110,633 to general and administrative expense
      during the year ended September 30, 2006 and will amortize $36,878 to expense
      per quarter over the remaining life of the services contract.





82





In
      September, 2006 we issued stock at $1.06 per share as part of the inducement
      to
      convert the $1,325,000 of the $3,500,000 million Bridge Notes. This issuance
      triggered an anti-dilution provision in 466,072 of the then outstanding 900,000
      2006 Series A warrants previously exercisable for $1.55 per warrant and in
      the
      October, 2005 $1.78 and $1.94 Debtor in Possession warrants. The anti-dilution
      provision resulted in the issuance of 215,451 additional 2006 Series A warrants
      at a strike price of $1.06 per warrant, the reset of the strike price of 466,072
      Series A warrants from $1.55 to $1.06 per warrant, the reset of the 677,419
      $1.78 warrants from $1.78 to $1.22 per warrant, and the reset of the 677,419
      $1.94 warrants to $1.33 per warrant. The following summarizes the assumptions
      used for the calculation of the warrant price reset using the
      Black-Scholes-Merton option pricing model:





2006
                Series A $1.55
            
            October,
                2005 $1.78
            
            October,
                2005 $1.94Original
                exercise price
            
            $
            1.55
            
            $
            1.78
            
            $
            1.94Revised
                exercise price
            
            $
            1.06
            
            $
            1.22
            
            $
            1.33Market
                price on re-set
            
            $
            1.06
            
            $
            1.06
            
            $
            1.06Remaining
                life
            
            
            2.48
                years
            
            
            2.10
                years
            
            
            2.10
                yearsVolatility
            
            
            96
            %
            
            95
            %
            
            95
            %Risk
                free rate
            
            
            4.8
            %
            
            4.8
            %
            
            4.8
            %Dividend
                rate
            
            
            0
            %
            
            0
            %
            
            0
            %Fair
                value prior to reset
            
            $
            0.5204
            
            $
            0.4313
            
            $
            0.4091Fair
                value after reset
            
            $
            0.6115
            
            $
            0.5298
            
            $
            0.5072Fair
                value differential per warrant
            
            $
            0.0911
            
            $
            0.0985
            
            $
            0.0981Warrants
                re-set
            
            
            466,072
            
            
            677,419
            
            
            677,419Fair
                value differential - reset warrants
            
            $
            42,459
            
            $
            66,726
            
            $
            66,455





The
      fair
      value of the 215,451 additional Series A warrants was $0.6115 per warrant,
      the
      Black-Scholes-Merton fair value of the 2006 Series A $1.55 warrants after reset
      to the exercise price of $1.06 per warrant, or $131,748.





We
      have
      recorded $696,350, the aggregated total of the fair value differentials of
      the
      warrants subject to price reset and the fair value of the newly issued warrants
      as a compensation charge recorded in fiscal 2006 into other expense related
      to
      modification of warrants.





We
      determined that the issuance of the inducement stock, the additional warrants,
      and the re-pricing of the warrants had no impact to the conversion price of
      our
      remaining August, 2004 Convertible Debentures and their related warrants.





The
      following table summarizes the warrants issued, outstanding, and exercisable
      as
      of September 30, 2006:





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
            (5)Debenture
                $1.75
            Aug,
                2004
            $1.55
            (1)
            August,
                2008
            1,496,710
            2,319,901
            NoneDebenture
                $1.82
            Aug,
                2004
            $1.55
            (1)
            August,
                2008
            1,726,973
            2,676,808
            NoneSeries
                S
            Sept,
                2004
            $1.00
            
            July,
                2007
            1,127,000
            1,127,000
            (6)Series
                T
            Sept,
                2004
            $1.00
            
            July,
                2008
            160,000
            160,000
            NoneSeries
                U
            Sept,
                2004
            $1.83
            
            August,
                2008
            512,362
            937,622
            (7)Debenture
                Amend
            Nov,
                2004
            $1.55
            (1)
            November,
                2008
            1,083,592
            1,679,568
            NoneOctober,
                2005 $1.78
            Oct,
                2005
            $1.22
            (2)
            October,
                2008
            677,419
            826,451
            NoneOctober,
                2005 $1.94
            Oct,
                2005
            $1.33
            (3)
            October,
                2008
            677,419
            900,967
            None2006
                Series A1
            Mar,
                2006
            $1.55
            
            March,
                2009
            433,929
            672,590
            None2006
                Series A2
            Mar,
                2006
            $1.06
            (4)
            March,
                2009
            681,523
            722,415
            None2006
                Series B
            Various
                2006
            $2.00
            
            May,
                2009
            2,191,466
            4,382,932
            (8)2006
                Series C
            May,
                2006
            $2.00
            
            December,
                2008
            200,000
            400,000
            None2006
                Series D
            May,
                2006
            $2.50
            
            December,
                2008
            200,000
            500,000
            None2006
                Series E
            May,
                2006
            $3.00
            
            December,
                2008
            200,000
            600,000
            NoneTotal
            
            
            
            
            11,488,393
            $18,151,053








(1)
      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. Future equity or equity equivalent issuances below $1.55 per
      share may result in additional price resets.





(2)
      Subject to anti-dilution provisions. Price reset under a 115% of “new issue
      price” reset in September, 2006. Future warrant issuances below $1.06 per
      warrant will result in price re-set.





83


(3)
      Subject to anti-dilution provisions. Price reset under a 125% of “new issue
      price” reset in September, 2006. Future warrant issuances below $1.06 per
      warrant will result in price re-set.





(4)
      Subject to “full ratchet” anti-dilution provisions. Price reset in September.
      Certain future equity or equity equivalent issuances below $1.06 per share
      will
      result in a price reset of 100% of the new issue price and additional issuances
      of warrants.





(5)
      Callable if closing market price is 200% of strike price for 20 consecutive
      trading days





(6)
      Callable if closing market price is 200% of strike price for 5 consecutive
      trading days





(7)
      Callable if closing market price is 200% of strike price for one trading day





(8)
      Callable if trading price is greater than $2.50 for 10 consecutive
      days








**NOTE
      15 -  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,
      2006, 2005, and 2004 are as follows:





Fiscal
                year ending September 30
            
            Risk
                Free Rate
            
            Volatility2004
            
            
            3.33-4.27
            %
            
            66-80
            %2005
            
            
            3.66-4.13
            %
            
            73-106
            %2006
            
            
            4.36-4.95
            %
            
            98-107
            %


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








84


*Classification
      of Stock-Based Compensation Expense*





Employee
      stock-based compensation expense for the years ended September 30, 2006, 2005,
      and 2004 is as follows:





**Year
                ended**
            
            **Year
                ended**
            
            **Year
                ended****September
                30**
            
            **September
                30**
            
            **September
                30****2006**
            
            **2005**
            
            **2004**Officer
                Compensation
            
            $
            189,245
            
            $
            --
            
            $
            --Selling
                and marketing
            
            
            21,259
            
            
            --
            
            
            --Research
                and development
            
            
            92,512
            
            
            --
            
            
            --General
                and administrative
            
            
            435,087
            
            
            --
            
            
            --Totals
            
            $
            738,103
            
            $
            --
            
            $
            --





There
      was
      no employee stock based compensation expense for the years ended September
      30,
      2005 or 2004 since we accounted for our employee options under APB Opinion
      No.
      25.





Our
      stock
      options vest on an annual or a quarterly basis over a three to five year vesting
      schedule and as of September 30, 2006 all employee based options vest based
      on
      length of employee service. For fiscal 2007, based on current stock option
      grants, we expect stock based compensation expense related to employee stock
      options of approximately $1,550,000 before income taxes. Such amounts may change
      as a result of additional grants, forfeitures, modifications in assumptions
      and
      other factors. SFAS No. 123R provides that income tax effects of share-based
      payments are recognized in the financial statements for those awards which
      will
      normally result in tax deductions under existing tax law. Under current U.S.
      federal tax law, we 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. However, since we currently have a full
      valuation allowance for all of our deferred tax assets, any tax consequences
      for
      fiscal 2006 is expected to be negligible to the financial
      statements.





As
      of
      September 30, 2006, there was $5.0 million of total unrecognized compensation
      cost related to non-vested share-based compensation arrangements related to
      employee stock options. The costs are expected to be recognized over a
      weighted-average period of 3.3 years.





Non-employee
      stock based compensation expense consists of options granted to consultants
      and
      members of our Board of Directors.


In
      fiscal
      2002, the Company recorded deferred compensation related to options granted
      during the fiscal year ending September, 2002 and which vested through January,
      2006. The Company recorded compensation expense of $114,250, $248,675, and
      $298,820, during the years ended September 30, 2006, 2005, and 2004
      respectively, for the value of the research and development services rendered
      during those years pertaining to the 2002 options. As of September 30, 2006
      all
      of the 2002 deferred compensation had been recorded to expense. The Company
      did
      not issue any options to non-employees for fiscal years ending 2003, 2004 or
      2005. In fiscal 2006, the Company issued options to non-employees including
      consultants and members of our Board of Directors.





Non-employee
      stock based compensation for the years ended September 30, 2006, 2005, and
      2004
      is as follows:





**Year
                ended**
            
            **Year
                ended**
            
            **Year
                ended****September
                30**
            
            **September
                30**
            
            **September
                30****2006**
            
            **2005**
            
            **2004**Research
                and development
            
            $
            114,250
            
            $
            248,675
            
            $
            298,820General
                and administrative
            
            
            125,156
            
            
            --
            
            
            --Totals
            
            $
            239,406
            
            $
            248,675
            
            $
            298,820





As
      of
      September 30, 2006 we have unvested but granted options with an aggregate
      unrecognized compensation cost calculated at the fair value on the date of
      grant
      of $2.2 million issued to consultants and our Board of Directors. The vesting
      of
      these options is either by length of service, upon the completion of performance
      conditions set by the Board of Directors compensation committee, or both. We
      follow the guidance of EITF 96-18 and SFAS 123R regarding the recognition of
      option related expense and we record the expense when the options are considered
      to have their vesting conditions satisfied. We expect that in general, the
      options will vest over three years and that fiscal 2007 expense will be
      approximately $800,000. Such amounts may change as a result of additional
      grants, forfeitures, modification in assumptions including changes to the
      performance conditions, and the completion of the performance conditions.








85


*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 and 2004, the
      impact would have been as follows:




2005
            
            2004RestatedNet
                loss, as reported
            
            $
            (40,163,407
            )
            **$**
            (14,687,874
            )Deduct
                total stock based employee compensation expense determined under
                fair
                value method for all awards
            
            
            (1,500,568
            )
            
            (642,594
            )Net
                loss, pro forma
            
            $
            (41,663,975
            )
            $
            (15,330,468
            )Earnings
                per common shareBasic,
                as reported
            
            
            (0.35
            )
            
            (0.14
            )Basic,
                pro forma
            
            
            (0.36
            )
            
            (0.14
            )Diluted,
                as reported
            
            
            (0.35
            )
            
            (0.14
            )Diluted,
                pro forma
            
            
            (0.36
            )
            
            (0.14
            )





**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 30,2006
            
            2005
            
            2004Statutory
                regular federal tax rate
            
            $
            (9,741,000
            )
            
            34.0
            %
            $
            (13,656,000
            )
            
            34.0
            %
            $
            (4,994,000
            )
            
            34.0
            %Change
                in valuation allowance
            
            
            9,694,000
            
            
            (33.8
            %)
            
            16,585,000
            
            
            (41.3
            %)
            
            4,003,000
            
            
            (27.2
            %)State
                tax, net of federal benefit
            
            
            (1,690,000
            )
            
            5.9
            %
            
            (2,347,000
            )
            
            5.8
            %
            
            (421,000
            )
            
            2.8
            %Convertible
                note exchanges
            
            
            1,219,000
            
            
            (4.3
            %)
            
            0
            
            
            0.0
            %
            
            0
            
            
            0.0
            %Other
            
            
            518,000
            
            
            (1.8
            %)
            
            (582,000
            )
            
            1.5
            %
            
            1,412,000
            
            
            (9.6
            %)Total
            
            $
            0
            
            
            0
            %
            $
            0
            
            
            0
            %
            $
            0
            
            
            0
            %







86


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




2006
              
              2005Deferred
                  tax assetsNet
                  operating loss carry forwards and tax credits
              
              $
              31,608,000
              
              $
              16,565,000Accrued
                  legal settlements
              
              
              20,000
              
              
              6,188,000Warrants
                  issued for services
              
              
              6,312,000
              
              
              4,071,000Asset
                  reserves and provisions
              
              
              5,134,000
              
              
              1,174,000Fixed
                  assets
              
              
              (376,000
              )
              
              --Capitalized
                  intangible assets
              
              
              (7,342,000
              )
              
              --Other
              
              
              631,000
              
              
              467,000Less:
                  Valuation allowance
              
              
              (35,987,000
              )
              
              (28,463,000
              )Net
                  deferred tax assets
              
              $
              --
              
              $
              --


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, 2006, the Company had provided a full valuation allowance to
      reduce net deferred tax assets.





As
      of
      September 30, 2006, the Company had net operating loss carry forwards for
      federal, state and foreign income tax purposes of approximately $66,601,000,
      $58,894,000, and $12,000,000 respectively. The net operating loss carry forwards
      begin expiring in 2020 and 2010, respectively.





**NOTE
      17 - COMMITMENTS AND CONTINGENCIES**





**LEASES**





The
      company leases the following office and production space:





Monthly
                rent
            
            ExpiresIrvine,
                CA, headquarters
            
            $
            79,891
            
            
            December,
                2010Shanghai,
                China
            
            $
            1,500
            
            
            July,
                2008Office
                and production - Lubeck, Germany
            
            $
            10,635
            
            
            June,
                2008Service
                and storage - Lubeck, Germany
            
            $
            36,955
            
            
            September,
                2007





Monthly
      rents are listed in US Dollars at the September 30, 2006 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 16,905 per month.
      The vehicles leases expire through April, 2009.





Rent
      expense was $972,010, $1,082,945, and $687,649 for the years ended September
      30,
      2006, 2005, and 2004, respectively.





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





Year
                ending September 30,
            
            Operating
                Leases2007
            
            $
            1,795,7392008
            
            
            1,355,2252009
            
            
            1,190,3742010
            
            
            1,103,5072011
            
            
            277,918Thereafter
            
            $
            --








87


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,
      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 20% of the capitalized cost.
      The company recognized a gain in the amount of $59,045 from this transaction
      has
      deferred the gain and is amortizing the deferred gain to income over the period
      of the initial lease term.





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, 2006 were
      as follows:





2007
            
            $
            316,3892008
            
            
            114,5612009
            
            
            --2010
            
            
            --Thereafter
            
            
            --Total
                Payments
            
            
            430,950Less:
                Amounts representing interest
            
            
            (33,262
            )Fair
                Value of Capital Leases
            
            
            397,688Less
                Current Portion
            
            
            (286,650
            )Non
                Current Portion
            
            $
            111,038











Property
      and equipment under capital leases consisted of the following at September
      30,
      2006:





Machinery
                and Equipment
            
            $
            1,282,339Accumulated
                Depreciation
            
            
            (877,016
            )Net
                Property and Equipment
            
            $
            405,323





Depreciation
      expense recorded for assets recorded under capital leases was $399,579, $374,659
      and $102,778 for the fiscal years 2006, 2005 and 2004, respectively.





88


**PROFESSIONAL
      SERVICES AGREEMENTS**





The
      Company has entered into two consulting agreements for professional and product
      development services as follows:





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





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” division of the Company to provide legal and intellectual
                property services for that
                division.


·
            An
                agreement between TMG and EU Energy/DeWind, a wholly owned subsidiary
                operating as the “wind” division of the Company to provide legal and
                intellectual property services for that
                division.


·
            An
                agreement between TMA and the Company to provide management services
                related to the Company’stechnology
                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.




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.




89





**NOTE
      18 LITIGATION**





During
      the fiscal year ending 2006, all litigation in existence as of September 30,
      2005 was resolved. With the acquisition of EU Energy in July, 2006 we acquired
      the liabilities and legal disputes of EU Energy which are described in the
      DeWind/EU Energy Litigation section below.





**Composite
      Technology Corporation v. Acquvest (OCSC Case No. 03 CC 12640):**





On
      October 16, 2003, CTC filed suit against Acquvest, Inc., Paul Koch, Victoria
      Koch, Patricia Manolis, and Michael Tarbox in Orange County Superior Court.
      CTC
      alleges causes of action for declaratory relief, breach of contract, fraudulent
      inducement, rescission and economic duress arising out of certain subscription
      and related agreements among the Company and the defendants. In connection
      with
      such agreements, CTC issued to Acquvest, Inc. and Patricia Manolis, in April
      2003 and September 2003, a total of 150,000 units for a total purchase price
      of
      $375,000. Each unit consists of 10 shares of unregistered, restricted common
      stock and 10 Series I warrants to purchase one share of unregistered, restricted
      common stock. Each Series I warrant entitles the holder to purchase a share
      of
      common stock at $0.50 per share and expires on March 30, 2005. The agreements
      provide for the issuance of up to an additional 550,000 of such units for the
      same purchase price of $2.50 per unit, subject to certain conditions, and
      registration of share issuances under the Securities Act of 1933. The additional
      units have not been issued and the additional purchase consideration has not
      been paid. The parties disagree as to their respective rights and obligations
      with respect to the original issuances and such additional units. 10,000 units
      were also issued to Paul Koch for services in connection with such agreements,
      and a dispute has arisen as to his entitlement to those and additional units
      and
      warrants in connection with the agreements. CTC is seeking actual damages,
      punitive damages, statutory costs, attorneys' fees and injunctive relief against
      the defendants. CTC also seeks rescission of the pertinent agreements based
      on
      numerous grounds, including fraudulent inducement. By a letter to CTC's counsel
      dated September 8, 2004, Acquvest stated that it was waiving the contractual
      conditions to its purchase of an additional 400,000 units under its subscription
      agreement and was tendering $1,000,000, which was available on deposit, to
      CTC
      as payment for the units. Acquvest, Koch, and Manolis filed a Cross-Complaint
      on
      September 16, 2004, which they amended per stipulation on December 17, 2004.
      On
      April 14, 2005, CTC was served with notice that the Court granted defendants
      and
      cross-complainants' application for Writs of Attachment allowing for the
      attachment of CTC's assets totaling $2.55 million. The Court had denied two
      prior applications by defendants and cross-complainants for Writs of Attachment.
      CTC 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.
      Additionally, CTC is working to arrange to post the bond to stay attachment
      of
      the entire amount subject to the Writs of Attachment. CTC believes that the
      Court committed reversible error by granting the Writs of Attachment and intend
      to vigorously seek to reversal of the order. Trial date was set for May 9,
      2005,
      but was vacated as a result of the bankruptcy filing. The bankruptcy court
      has
      ordered that the trial be re-set in Orange County Superior Court. On October
      31,
      2005, CTC agreed to a complete settlement of the claims of Acquvest, Inc.,
      Paul
      R. Koch, Victoria Koch and Patricia Manolis (the "Acquvest Parties"). CTC agreed
      to transfer 6.5 million shares (the "Settlement Shares") to settle all of the
      Acquvest Parties claims. There is an existing dispute over one of the settlement
      terms. CTC contends that an additional term of the settlement was that the
      Acquvest Parties would be responsibility for settling any claims of Michael
      Tarbox against CTC. An evidentiary hearing on this issue is set for December
      22,
      2005 in the bankruptcy court. On November 18, 2005, CTC entered into a Mutual
      Release Agreement to settle claims made by Acquvest, Inc., Paul R. Koch,
      Victoria Koch and Patricia Manolis against CTC and Benton H. Wilcoxon, CTC's
      CEO, in consideration for the issuance of 6,500,000 shares of CTC's common
      stock. As part of this settlement, it was recorded that Acquvest, Inc., Paul
      R.
      Koch, Victoria Koch and Patricia Manolis would be responsible for resolving
      CTC's issues with Michael Tarbox (see "Tarbox v. Koch"). Acquvest, Inc., Paul
      R.
      Koch, Victoria Koch and Patricia Manolis now claim that no such agreement was
      reached. Resolution of this matter will have no effect on the main release
      of
      CTC in the Acquvest, Inc., Paul R. Koch, Victoria Koch and Patricia Manolis
      litigation. One half of the Settlement Shares were transferred to the Acquvest
      Parties on delivery of the Mutual Release Settlement with the remaining shares
      being released 45 days thereafter. As of September 30, 2005, the Company
      recorded an accrual under SFAS 5 for $12,675,000 representing the shares to
      be
      issued in the settlement valued at $1.95 per share, the market price on the
      date
      immediately prior to the settlement date. On November 18, 2005 the shares were
      issued and the matter was closed.





90


**Ascendiant
      Capital Group, LLC v. Composite Technology Corporation (JAMS Arb. No. 1200034701
      and OCSC Case Nos. 03CC13314 & 03CC13531):**





On
      November 4, 2003, Ascendiant Capital Group LLC, Mark Bergendahl, and Bradley
      Wilhite ("Plaintiffs") filed suit in Orange County Superior Court alleging
      causes of action against CTC and its CEO, Benton Wilcoxon, personally
      ("Defendants") for breach of contract, specific performance, fraud and deceit,
      negligent misrepresentations, breach of covenant of good faith and fair dealing,
      and declaratory relief arising out of a business advisory and consulting
      agreement (the "Agreement") allegedly executed between CTC and Ascendiant.
      CTC
      denies the material allegations and, on November 10, 2003, CTC filed a case
      in
      Orange County Superior Court against Plaintiffs alleging causes of action for
      declaratory relief, breach of contract, fraudulent inducement, and economic
      coercion arising out of the Agreement as well as various unrelated business
      agreements between Plaintiffs and Wilcoxon. CTC is seeking actual damages,
      punitive damages, statutory costs, attorneys' fees and injunctive relief against
      Plaintiffs. The principal parties are Ascendiant, Bergendahl, Wilhite, CTC
      and
      Wilcoxon. On November 24, 2003, the court entered an order consolidating the
      cases. On January 15, 2004, the parties agreed to submit all claims and
      cross-claims arising out of the Agreement to binding arbitration before the
      Honorable Robert Thomas Ret. at JAMS - Orange County. The remaining claims
      and
      cross-claims not arising out of the Agreement are pending before the Honorable
      Kazuharu Makino of Orange County Superior Court. On May 28, 2004, CTC's
      demurrers to Plaintiffs' causes of action in the arbitration for specific
      performance, negligent misrepresentation and breach of covenant of good faith
      and fair dealing were sustained, with leave to amend, as well as CTC's motion
      to
      strike Plaintiff's claims for punitive damages. Plaintiffs subsequently filed
      an
      amended complaint. Judge Thomas has reserved ruling on Plaintiffs' demurrers
      and
      motion to strike in the arbitration pending the outcome of the ruling on
      Plaintiffs' demurrers and motions to strike filed with respect to CTC's
      cross-claim pending in the superior court. An order has issued in the Orange
      County Superior Court action exempting this case from various pre-trial
      deadlines and noting that he expects that the case will not proceed to trial
      within 24 months of the date of filing. On February 22, 2005, CTC and Wilcoxon
      filed a Demurrer to Plaintiffs' causes of action for breach of contract and
      alter ego liability. The court overruled the Demurrer on April 1, 2005 and
      set
      Trial in the State court action for November 7, 2005. The arbitration commenced
      on February 9, 2005. Prior to completion of the arbitration, a settlement was
      reached on or about August 10, 2005 to resolve all claims by the parties. CTC
      agreed to pay $200,000 and issue 650,000 shares of common stock as part of
      the
      settlement. The Motion to Approve the Ascendiant Settlement was granted by
      the
      bankruptcy court on October 10, 2005. The Company recorded an accrual as of
      September 30, 2005 of $1,396,000 representing the $200,000 cash and $1,196,000
      for the value of the stock, representing the market value of $1.84 per share
      on
      the date immediately prior to the settlement date. On November 18, 2005, both
      the cash payment and the 650,000 shares of stock were issued and the matter
      was
      closed.





**David
      S. Shields v. Composite Technology Corporation:**





On
      January 21, 2005, David S. Shields filed suit against CTC in Santa Clara
      Superior Court (Case No. 1-05-CV-034368) alleging CTC breached a subscription
      agreement by failing to issue the appropriate number of shares thereunder.
      CTC
      denies the claims and intends to vigorously defend against them. CTC filed
      an
      Answer and Cross-Complaint against Shields for Rescission and Declaratory Relief
      on April 18, 2005. The case has been removed to the U.S. Bankruptcy Court in
      the
      Central District of California. A status conference was set for January 10,
      2006. On or about September 2, 2005, the parties entered into a settlement
      agreement whereby CTC agreed to issue Shields an additional 25,000 shares of
      common stock in exchange for a complete release of all claims. The Motion to
      Approve the Settlement was granted by the bankruptcy court on October 4, 2005.
      The Company recorded an accrual of $45,500 as of September 30, 2005 representing
      the market value of the stock on the date prior to the settlement date. On
      November 18, 2005 the 25,000 shares of stock were issued and the matter was
      closed.





**Tarbox
      v. Koch (OCSC Case No. 04CC10345):**





On
      October 13, 2004, Michael Tarbox ("Tarbox") filed an action in Orange County
      Superior Court (Case No. 04-CC-10345) against Paul Koch, Acquvest, CTC and
      Doe
      Defendants. Tarbox alleges that Koch made fraudulent transfers to Acquvest
      and
      the Doe Defendants for the purpose of avoiding the debt owed to Tarbox. Tarbox
      alleges that CTC securities were intended to serve as security for a debt owed
      by Koch to Tarbox. Tarbox alleges that Koch was not a bona fide purchaser of
      the
      CTC securities since they received such securities for the benefit of Tarbox.
      Tarbox further alleges that CTC breached an agreement to pay him a finder's
      fee
      in connection with investments made by Koch, since the finder's fees was given
      to Koch for the benefit of Tarbox.. Tarbox alleges that CTC's breach has caused
      him to suffer damages in excess of $750,000. On November 14, 2004, CTC filed
      a
      demurrer to the Complaint, and the other defendants also filed a demurrer.
      The
      Court granted leave to amend, and Tarbox then filed an amended Complaint. A
      demurrer filed by the other Defendants was granted on February 22, 2005, and
      Tarbox was again granted leave to amend. Tarbox filed a Second Amended
      Complaint. CTC has answered to Second Amended Complaint. However, since CTC
      delivered to Koch the finder's fee which Tarbox might have otherwise been
      entitled to, on April 11, 2003, Tarbox executed a written release, whereby
      Tarbox released CTC of any obligation to pay him a finder's fee in connection
      with the introductions made to Paul Koch and Acquvest, Inc. This matter was
      settled with the cash settlement as described in Michael Tarbox V. Composite
      Technology Corporation, et al. below.





91


**MICHAEL
      TARBOX V. COMPOSITE TECHNOLOGY CORPORATION, ET AL.**





On
      October 13, 2004, Michael Tarbox ("Tarbox") filed an action in Orange County
      Superior Court (Case No. 04-CC-10345) against Paul Koch, Acquvest, CTC and
      Doe
      Defendants. Tarbox alleges that Koch made fraudulent transfers to Acquvest
      and
      the Doe Defendants for the purpose of avoiding the debt owed to Tarbox. Tarbox
      alleges that CTC securities were intended to serve as security for a debt owed
      by Koch to Tarbox. Tarbox alleges that Koch was not a bona fide purchaser of
      the
      CTC securities since they received such securities for the benefit of Tarbox.
      Tarbox further alleges that CTC breached an agreement to pay him a finder's
      fee
      in connection with investments made by Koch, since the finder's fees was given
      to Koch for the benefit of Tarbox.. Tarbox alleges that CTC's breach has caused
      him to suffer damages in excess of $750,000. On November 14, 2004, CTC filed
      a
      demurrer to the Complaint, and the other defendants also filed a demurrer.
      The
      Court granted leave to amend, and Tarbox then filed an amended Complaint. A
      demurrer filed by the other Defendants was granted on February 22, 2005, and
      Tarbox was again granted leave to amend. Tarbox filed a Second Amended
      Complaint. CTC has answered to Second Amended Complaint. However, since CTC
      delivered to Koch the finder's fee which Tarbox might have otherwise been
      entitled to, on April 11, 2003, Tarbox executed a written release, whereby
      Tarbox released CTC of any obligation to pay him a finder's fee in connection
      with the introductions made to Paul Koch and Acquvest, Inc. In April, 2006
      we
      agreed to a settlement with Tarbox in the amount of $100,000 payable in twelve
      monthly installments and we accrued this settlement as a litigation settlement
      in fiscal 2006. The
      balance remaining in accounts payable at September 30, 2006 was
      $50,000.





**BANKRUPTCY
      CLAIMS**





Under
      our
      Chapter 11 Bankruptcy filing dated May 5, 2005 the Bankruptcy Court established
      August 9, 2005 as the bar date for the filing of claims for liabilities or
      damages that existed prior to May 5, 2005. Substantially all claims filed had
      been resolved as of the end of November, 2005. During the year ended September
      30, 2006, we resolved all remaining claims relating to our Chapter 11 Bankruptcy
      filing as follows:





A
      claim
      was filed by Patricia vanMidde for 250,000 shares of the Company’s common stock.
      VanMidde, a former consultant to the Company, claimed that the Company did
      not
      issue 250,000 shares of common stock alleged to have been promised in 2004
      for
      services rendered. The Company represented that there was no promise of such
      a
      share issuance and believed the claim to be without merit. During the year
      ended
      June 30, 2006, Judge Ryan of the Bankruptcy Court agreed with the Company and
      rejected the claim for the shares of common stock.





A
      claim
      was filed by Zenith Insurance Company “Zenith” for $157,323 based on the results
      of a workers compensation inquiry for the time period of July, 2004 to January,
      2005 representing additional workers compensation premiums due Zenith by the
      Company. During the quarter ended June 30, 2006, in April, 2006 Zenith and
      the
      Company agreed to a settlement amount of $100,000 payable in ten equal monthly
      installments of $10,000. The Company had recorded a settlement accrual of
      $100,000 as of March 31, 2006 and has paid $50,000 during the year ended
      September 30, 2006. The balance remaining in Accounts payable and other accrued
      liabilities is $50,120.





During
      the bankruptcy proceedings, the holders of the $15 million August, 2004
      Debentures reserved their right to make a claim in the Bankruptcy against the
      Company for liquidated damages resulting from a delay in the registration of
      the
      common shares issuable in the event the Debentures and warrants were
      converted.  The claim, under the terms of the original Debenture agreement,
      would encompass damages of 2% per month of the remaining principal plus interest
      at 18% per annum covering the time period from July 1, 2005 to August 19, 2005.
      During the year ended September 30, 2006, the Debenture holders filed a claim
      for $860,994 and a hearing was set before the Bankruptcy Court. Prior to the
      hearing, the Company and the Debenture holders settled the claim for $702,000
      payable in 450,000 shares of Common stock registered under section 1145 of
      the
      Bankruptcy code. The shares were valued at the direction of the Bankruptcy
      Court
      and were priced at $1.56 per share. The settlement balance was included in
      bankruptcy settlements expense in the statement of operations during the year
      ended September 30, 2006.





As
      a
      result of the settlement of all remaining claims under the Bankruptcy, on June
      29, 2006, we applied for the issuance of a final decree with the Bankruptcy
      court. On August 2, 2006 the Bankruptcy court approved our final decree and
      we
      formally exited from Chapter 11 Bankruptcy protection.





92


**DeWind
      Litigation:**





**A.**  **FKI
      Engineering Ltd. and FKI plc. (the FKI Companies”) v. Dewind Holdings Ltd and
      Dewind GmbH; and DeWind GmbH v. FKI En-gi-nee-ring 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; and further 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 Draft Proceedings
      (of 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.





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.





The
      claims mentioned under letter “a.” above center around a Share Sale Agreement
      (SSA) dated July 4, 2005 by which FKI Engineering Ltd. agreed to sell to DeWind
      Holdings Ltd. the entire issued share capital of DeWind GmbH. FKI Engineering
      Ltd. argues that according to the SSA, DeWind Holdings Ltd. had agreed to fully
      indemnify FKI Engineering Ltd. against liabilities and expenses suffered or
      incurred by FKI Engineering Ltd. or any member of the Seller Group Company
      arising directly or indirectly in connection with any claim under Performance
      Bonds and Guarantees. Thus, FKI Engineering Ltd. is claiming reimbursement
      of
      sums paid by FKI plc to Deutsche Bank AG pursuant to a deed of guarantee. In
      respect of this claim the Company has accrued 100% of the FKI Engineering Ltd.
      claim for $1,662,900 or $2,092,900, net of the $430,000 counterclaim, against
      receipt of deferred purchase consideration of $2,537,300.





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, delivered
      as
“Draft Proceedings” in accordance with German law, that are now the subject of
      the above mentioned 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
      $72,525,350, 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 above, 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. There has been no oral court
      hearing so far. 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.




No
      decision has been made as of December 21,
      2006.





93


Except
      as
      noted above, we have not recorded a liability for any of these actions under
      SFAS 5 due to the uncertainty of the outcome.





2.
      DeWind GmbH v. FKI En-gi-nee-ring Ltd.





On
      July
      20 th 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 has time until January 2, 2007 to file its detailed statement of defense.
      There has been no oral court hearing so far. In respect of this claim, the
      court
      costs of $347,600 have been accrued as of September 30, 2006. We have not
      recorded a contingent asset for any of these actions as of September 30,
      2006.





**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 692,438.27 (approximately $1.3 million at September
      30, 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. An accrual of $871,555 has been included in the September 30, 2006
      balance sheet in accounts payable and other accrued liabilities.




**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. Further court
      orders have not been rendered yet. 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. We have incorporated the fair value of these assets
      as $0
      in our acquisition date balance sheet and to the extent that any of these funds
      are recovered, we intend to adjust the fair value of our assets and our goodwill
      acquired under the guidance of SFAS 141.








**NOTE
      19 - 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 2006
      as a
      result of this transaction. As of September 30, 2006, $58,320 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. The balance of $62,000 was outstanding as of September 30, 2006.
      . The
      balance was included in accrued expenses as of September 30, 2006.





94





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





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” division of the Company to provide legal and intellectual
                property services for that
                division.


·
            An
                agreement between TMG and EU Energy, a wholly owned subsidiary operating
                as the “wind” division of the Company to provide legal and intellectual
                property services for that
                division.


·
            An
                agreement between TMA and the Company to provide management services
                related to the Company’stechnology
                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, 2006 we recorded fees of $312,500, patent filing
      fees of $105,807 and incidental expenses of $2,935 for TMG and fees of $250,000
      and incidental expenses of $45,765 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, 2006 the Company had outstanding balances due to TMA and TMG
      of
      $147,631 and $202,138 respectively, included in accounts payable.




**NOTE
      20 - SEGMENT INFORMATION**




CTC
      conducts its operations in the following two business segments: CTC Cable
      Division and DeWind Turbine Division. The segments have been organized on the
      basis of products. All of each segment’s product revenues relate to external
      customers. See also the analysis in Item 7 Management Discussion and
      Analysis.




ACCC
      Cable Division


Located
      in Irvine, California with sales operations in Dallas, Atlanta, Lubeck, Germany,
      and Shanghai, China, the CTC Cable Division produces and sells ACCC electrical
      transmission cable and related ACCC hardware products. ACCC cable production
      is
      a two step process. The Irvine operations produce the high strength, light
      weight, low sag composite “core” (ACCC core) which is then shipped to one of
      three cable wrapping partners in Canada, Belgium, or Bahrain where the core
      is
      wrapped with conductive aluminum to become ACCC cable. ACCC cable and core
      is
      sold through a distribution agreement with General Cable in the US and ACCC
      cable is sold outside the US directly to utilities. ACCC cable has been sold
      commercially since 2005 and is currently marketed worldwide to electrical
      utilities and transmission companies. During fiscal 2005 and 2006, the CTC
      Cable
      Division had commercial sales of $1.0 million and $3.5 million respectively
      to
      locations in the United States and China. The CTC Cable division represented
      100% and 38% of consolidated revenues for fiscal 2005 and 2006
      respectively.




DeWind
      Turbine Division


The
      Wind
      division operates under the brand name DeWind. Located in Lubeck Germany with
      sales operations in Dallas, TX, the DeWind Division produces, services, and
      sells DeWind turbines in the 1.25 and 2.0 Megawatt range. Prior to the
      acquisition of EU Energy on July 3, 2006, the DeWind Division had been inactive
      with no fiscal 2005 operating activity. The fiscal 2006 operations include
      only
      the operations after the acquisition date for the period July 3, 2006 through
      September 30, 2006. The DeWind division had revenues of $6.6 million during
      this
      time period representing 62% of the consolidated revenues for fiscal 2006.
      Of
      this revenue, $3.1 million represents the sale of three DeWind D6 turbines
      out
      of the inventory acquired and which were required to be valued under SFAS 141
      Purchase accounting at their fair value on the acquisition date, which
      approximated the sales price to the customer. Sales by geography consisted
      of
      $3.1 million to China and $3.5 million to Europe.





95


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 Division. For consistency of presentation, corporate costs are included
      in
      the CTC Cable Division for the entire fiscal year for 2006.




Segment
      information for the years ended September 30, 2006, 2005, and 2004 is as
      follows:





**Cable**
            
            **Turbine****Division**
            
            **Division**
            
            **Total**2006:Revenues
            
            $
            3,554,436
            
            $
            6,580,878
            
            $
            10,135,314Operating
                loss
            
            
            (13,117,211
            )
            
            (4,861,377
            )
            
            (17,978,588
            )Total
                assets
            
            
            6,744,153
            
            
            89,508,671
            
            
            96,252,824Goodwill
            
            
            --
            
            
            25,469,000
            
            
            25,469,000Capital
                expenditures
            
            
            467,049
            
            
            60,317
            
            
            527,366Depreciation
                & 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
            
            
            --
            
            
            1,833,052Depreciation
                & amortization
            
            
            559,084
            
            
            --
            
            
            559,0842004:Revenues
            
            
            2,500,000
            
            
            --
            
            
            2,500,000Operating
                loss
            
            
            (13,563,350
            )
            
            --
            
            
            (13,563,350)
            )Total
                assets
            
            
            18,081,243
            
            
            --
            
            
            18,081,243Goodwill
            
            
            --
            
            
            --
            
            
            --Capital
                expenditures
            
            
            846,385
            
            
            --
            
            
            846,385Depreciation
                & amortization
            
            
            153,039
            
            
            --
            
            
            153,039





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**
            
            **Turbine****Division**
            
            **Division**
            
            **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







96


**NOTE
      21 - SUBSEQUENT EVENTS**





On
      October 1, 2006 the Company’s DeWind service and maintenance subsidiary, Eu
      Energy Service and Maintenance GmbH located in Lubeck, Germany assigned 50%
      of
      their previously wholly owned European based wind service subsidiary to Enertrag
      in exchange for the addition of all of the service and maintenance contracts
      and
      personnel then operated by Entertrag in addition to approximately $1,500,000
      in
      cash provided by Entertrag into the new entity. The combined company will
      operate under the name E Energy Service GmbH and is expected to be consolidated
      as a 50% owned and controlled entity.





On
      November 27, 2006 the Company signed a strategic agreement with
      TECO/Westinghouse Motor Company to work together in the areas of sub-contract
      manufacturing for wind turbine generator design, assembly, and R&D and for
      wind turbine service and repair for North America.








**NOTE
      22 - SUPPLEMENTAL FINANCIAL INFORMATION**





**Supplemental
      Quarterly Financial Information (unaudited)**








Fiscal
                year ended September 30, 2004
            
            December
                31
            
            March
                31
            
            June
                30
            
            September
                30Revenue
            
            $
            --
            
            
            --
            
            
            --
            
            
            2,500,000Gross
                profit
            
            
            --
            
            
            --
            
            
            --
            
            
            2,185,452Loss
                before income taxes
            
            $
            (1,777,766
            )
            
            (3,374,667
            )
            
            (3,505,184
            )
            
            (6,030,258
            )Net
                loss
            
            $
            (1,782,766
            )
            
            (3,374,667
            )
            
            (3,505,184
            )
            
            (6,025,258
            )Basic
                and diluted net loss per share
            
            $
            (0.02
            )
            $
            (0.03
            )
            $
            (0.03
            )
            $
            (0.06
            )











Fiscal
                year ended September 30, 2005
            
            December
                31
            
            March
                31
            
            June
                30
            
            September
                30Revenue
            
            $
            46,485
            
            
            --
            
            
            --
            
            
            962,485Gross
                profit
            
            $
            15,591
            
            
            --
            
            
            --
            
            
            342,816Loss
                before income taxes
            
            $
            (5,677,750
            )
            
            (4,439,709
            )
            
            (11,872,623
            )
            
            (18,173,325
            )Net
                loss
            
            $
            (5,677,750
            )
            
            (4,439,709
            )
            
            (11,872,623
            )
            
            (18,173,325
            )Basic
                and diluted net loss per share
            
            $
            (0.05
            )
            $
            (0.04
            )
            $
            (0.10
            )
            $
            (0.16
            )











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
            )








97


Correction
      of an error:


Subsequent
      to the date of the original 10KSB filing on December 23, 2004, it was determined
      that $364,277 in additional compensation expense should have been recorded
      into
      fiscal 2004 due to modifications of employee stock option exercises pursuant
      to
      cashless exercises. The following table reconciles the amounts listed above
      to
      the original filing





Fiscal
                year ending September 30, 2004
            
            December
                31, 2003
            
            March
                31, 2004
            
            June
                30, 2004
            
            September
                30, 2004Correction
                of an error
            
            $
            --
            
            $
            (282,945
            )
            $
            (64,573
            )
            $
            (16,759
            )Net
                loss, as originally reported
            
            $
            (1,782,766
            )
            $
            (3,091,722
            )
            $
            (3,440,611
            )
            $
            (6,008,498
            )Net
                income (loss) as revised
            
            $
            (1,782,766
            )
            $
            (3,374,667
            )
            $
            (3,505,184
            )
            $
            (6,025,257
            )Effect
                to basic and diluted net loss per share
            
            $
            (0.00
            )
            $
            (0.00
            )
            $
            (0.00
            )
            $
            (0.00
            )








Analysis
      of financial reserves:


Balance
                at beginning of year
            
            Reserves
                Acquired
            
            Additions
                charged to costs and expenses
            
            Payment
                or utilization
            
            Balance
                at end of year**FY2006**Allowance
                for doubtful accounts (current)
            
            $
            2,500,000
            
            $
            494,063
            
            $
            -
            
            $
            (2,500,000
            )
            $
            494,063Allowance
                for doubtful accounts (long term)
            
            
            -
            
            
            3,612,364
            
            
            -
            
            
            -
            
            
            3,612,364Inventory
                reserve
            
            
            234,673
            
            
            5,934,180
            
            
            23,705
            
            
            -
            
            
            6,192,558Warranty
                reserve
            
            
            -
            
            
            11,594,876
            
            
            -
            
            
            -
            
            
            11,594,876**FY2005**Allowance
                for doubtful accounts (current)
            
            $
            -
            
            $
            -
            
            $
            2,500,000
            
            $
            -
            
            $
            2,500,000Allowance
                for doubtful accounts (long term)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Inventory
                reserve
            
            
            -
            
            
            -
            
            
            234,673
            
            
            -
            
            
            234,673Warranty
                reserve
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -**FY2004
                (restated)**Allowance
                for doubtful accounts (current)
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Allowance
                for doubtful accounts (long term)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Inventory
                reserve
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Warranty
                reserve
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -








98


**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. 2), 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
      2004 Restatement**





As
      of
      September 30, 2004, the Company did not maintain effective controls over the
      application of generally accepted accounting principles related to the financial
      reporting process for complex, non-routine transactions. Our internal accounting
      personnel did not have sufficient depth, skills and experience in accounting
      for
      complex, non-routine transactions in the financial reporting process and there
      was a lack of review by internal accounting personnel or accounting contractors
      with appropriate financial reporting expertise of complex, non-routine
      transactions to ensure they are accounted for in accordance with generally
      accepted accounting principles. Additionally we did not consistently use outside
      technical accounting contractors to supplement our internal accounting
      personnel, and we had insufficient formalized procedures to assure that complex,
      non-routine transactions received adequate review by internal accounting
      personnel or outside contractors with technical accounting expertise.





This
      control deficiency resulted in the adjustments of our financial statements
      described in Note 2. During fiscal 2004 the Company improperly recorded
      transactions with employees and settlements of former employee non-qualifying
      stock options that were exercised on a "cashless" basis. For these transactions,
      both the exercise price and any payroll taxes owed by the employee or former
      employees were allowed to be paid for in shares of the stock exercised. Under
      FIN 44, such changes are considered to be modifications of the option grant
      and
      the transactions are required to be accounted for at the fair value of the
      stock
      issued on the date of the cashless exercise. These errors were first discovered
      and brought to the attention of management in May, 2005. The Company restated
      its consolidated financial statements for the year ended September 30, 2004
      in
      by filing a Form 10-KSB/A on August 8, 2005.





The
      ineffective control over the application of generally accepted accounting
      principles in relation to complex, non-routine transactions in the financial
      reporting process could result in a material misstatement to the annual or
      interim financial statements that would not be prevented or detected. As a
      result, management has determined that this control deficiency constituted
      a
      material weakness as of September 30, 2004. Because of the material weakness
      described above, management has concluded that the Company did not maintain
      effective internal control over financial reporting as of September 30, 2004,
      based on criteria in Internal Control -- Integrated Framework issued by the
      COSO. Management communicated its conclusions to the Company's Board of
      Directors.





99


**Management's
      Consideration of the Restatement**





With
      respect to the restatement adjustment related to the stock option modification
      disclosed in Note 2 to the consolidated financial statement related to our
      incorrect accounting for equity compensation expense in 2004, management has
      concluded that the restatement for this item does not constitute a material
      weakness over the accounting for equity compensation expense as of September
      30,
      2005. In the preparation of the Annual Report on Form 10-KSB/A for the year
      ended September 30, 2004, filed on August 8, 2005, and the Annual Reports on
      Form 10-K for the years ended September 30, 2005 and 2006 in light of the
      discovery of the error discovered during a review of the 10-KSB, and as
      discussed in the Explanatory Note and in Note 2 to the consolidated financial
      statements, the Company undertook a review of all of its equity accounting
      transactions. We also conducted a review of additional significant, complex,
      non-routine transactions recorded from September, 2001 through the period ended
      March 31, 2005. The accounts reviewed as part of this remediation process were
      in addition to those reviewed in connection with the Company's preparation
      of
      its Form 10-KSB/A for the year ended September 30, 2004 filed on August 8,
      2005.
      The Company utilized individuals with technical accounting expertise to
      supplement its internal review. The Company believes that these corrective
      actions, taken as a whole, have mitigated the control deficiencies with respect
      to our preparation of the 2004 Annual Report on Form 10-KSB/A and 2005 Annual
      Report on Form 10-K and that these measures have been effective to ensure that
      information required to be disclosed in this 2006 Annual Report on Form 10-K
      have been recorded, processed, summarized and reported correctly. In particular,
      the Company's management believes that the measures implemented to date provided
      reasonable assurance that the Company's audited financial statements included
      in
      this 2006 Annual Report on Form 10-K are prepared in accordance with generally
      accepted accounting principles.





Management
      previously concluded that the Company did maintain effective internal control
      over financial reporting as of September 30, 2004. In connection with the
      restatement of the Company's consolidated financial statements relating to
      the
      Stock option modification adjustment described in Note 2 to the consolidated
      financial statements in this Annual Report on Form 10-KSB/A, management has
      determined that the material weakness described above resulted in the errors
      requiring this restatement. Accordingly, this restatement does affect the
      previous conclusion stated in this report on internal control over financial
      reporting.





**Fiscal
      2006 Assessment.**





We
      have
      excluded the internal control structure of our acquired subsidiary DeWind,
      Ltd.
      from the scope of our fiscal 2006 assessment since the acquisition was made
      on
      July 3, 2006, less than 90 days prior to our fiscal year end.





During
      management's review of our internal control structure under Sarbanes-Oxley
      section 404, for the fiscal year ending September 30, 2006, we determined the
      following to be material weaknesses:





Entity
      level Processes and weaknesses. As of September 30, 2006, 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. Until December, 2005 we only had a two person non-independent Board of
      Directors and from January, 2006 through November, 2006 we had one independent
      director and two non-independent directors comprising our Board of Directors.





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.
      ITGCs 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, 2006, a
      material weakness existed relating to our information technology general
      controls, including ineffective controls relating to:





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





Inventory
      Processes. As of September 30, 2006, the following material weaknesses existed
      related to ineffective controls over our inventory processes:





o
      Perpetual Inventory records: Ineffective controls to (a) accurately record
      the
      raw materials inventory moved out of inventory stores and into manufacturing
      production and later into finished goods and, (b) accurately record
      manufacturing variances.


Procure
        to Pay process. During our fiscal 2006 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
                  year
 v)
              There
                  was a lack of sufficient purchasing reports for management
                  review.





100


**Fiscal
      2005 Assessment.**





During
      management's review of our internal control structure under Sarbanes Oxley
      section 404, for the fiscal year ending September 30, 2005, we determined the
      following to be material weaknesses:





Entity
      level Processes and weaknesses . As of September 30, 2005, 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 did not have an Audit Committee, a Compensation Committee, and did
      not
      designate a financial expert on the Board of Directors since we only had a
      two
      person non-independent Board of Directors during the year.





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.
      ITGCs 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, 2005, a
      material weakness existed relating to our information technology general
      controls, including ineffective controls relating to:





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





Inventory
      Processes. As of September 30, 2005, the following material weaknesses existed
      related to ineffective controls over our inventory processes:





o
      Perpetual Inventory records: Ineffective controls to (a) accurately record
      the
      raw materials inventory moved out of inventory stores and into manufacturing
      production and later into finished goods, (b) accurately record manufacturing
      variances, (c) accurately track inventory movement and manage inventory held
      in
      offsite locations.





As
      a
      result of these material weaknesses, management recorded material adjustments
      to
      the inventory, Cost of Sales, and expensed materials accounts during the fiscal
      year ended September 30, 2005.





**Changes
      in Internal Control Over Financial Reporting**





Throughout
      fiscal 2006, we have implemented additional processes and procedures and have
      also effected a reorganization of our accounting and finance department, to
      assure adequate review of complex, non-routine transactions. These measures
      included the implementation of requirements for more stringent and complete
      documentation of the review, analysis and conclusions regarding complex,
      non-routine transactions and the review of the documentation regarding the
      analysis of such transaction and the proposed accounting treatment by senior
      accounting personnel and the principal accounting officer. We have also
      implemented policies and procedures to assure adequate and timely involvement
      of
      outside accounting contractors, as needed, to obtain guidance as to the
      application of generally accepted accounting principles to complex, non-routine
      transactions.





Notwithstanding
      the exclusion of our Dewind acquisition subsidiary being excluded in scope
      for
      fiscal year 2006, subsequent to the acquisition of EU Energy, in September,
      2006
      we engaged the services 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 expect to continue the
      evaluation of the Dewind controls into fiscal 2007 and we expect to incur
      substantial expense to properly document, evaluate, and remediate the DeWind
      control structure.





101


Except
      as
      noted for the Dewind acquisition, the Company has tested our internal control
      structure and has identified several controls, including those controls listed
      above as material weaknesses that require further remediation. The Company
      will
      continue the implementation of policies, processes and procedures regarding
      the
      review of complex, non-routine transactions and the hiring of additional
      accounting personnel.





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 2006 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;





(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 2007.





(7)
      Continue the evaluation of the DeWind accounting and financial systems including
      documentation and implementation of accounting policies and procedures.





The
      Company began to execute the remediation plans identified above in the first
      fiscal quarter of 2007.





Except
      for the acquisition of EU Energy as described above, there was no change in
      our
      internal control over financial reporting during the year ended September 30,
      2006 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 & Goldstein LLP, our independent registered public
      accounting firm, has audited management's assessment of the effectiveness of
      the
      Company's internal control over financial reporting as of September 30, 2005
      and
      2006 as stated in their report which appears in 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/acting Chief Financial Officer and our Vice President of
      Finance, 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 acting Chief Financial Officer concluded that our
      disclosure controls and procedures were ineffective as of September 30, 2005
      and
      2006 because of the material weaknesses identified above.





**ITEM
      9B - OTHER INFORMATION**





None.





102


**PART
      III**





**ITEM
      10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**





The
      following table sets forth the names, ages, and positions of our directors
      and
      officers.








Name
            
            Age
            
            Position
                Held
            
            Officer
                since
            
            Director
                sinceBenton
                H Wilcoxon
            
            
            57
            
            
            Chief
                Executive Officer, Chairman, Acting Chief Financial
                Officer
            
            
            2001
            
            
            2002Michael
                D. McIntosh
            
            
            59
            
            
            Director
            
            
            N/A
            
            
            2006D.
                Dean McCormick III
            
            
            53
            
            
            Director
            
            
            N/A
            
            
            2006Michael
                Porter
            
            
            66
            
            
            President
            
            
            2006
            
            
            N/ADominic
                J. Majendie
            
            
            44
            
            
            Corporate
                Secretary Vice President Legal, & Business Development
            
            
            2004
            
            
            N/A








The
      three
      directors named above will serve until the next annual meeting of our
      stockholders or until their successors are duly elected and have qualified.
      Directors will be elected for one-year terms at the annual stockholders meeting.
      Officers will hold their positions at the pleasure of the board of directors,
      absent any employment agreement. As part of the acquisition, it was agreed
      that
      Michael Porter, the Chairman and CEO of EU Energy, would be appointed as
      President of the Company, and this was done on July 3, 2006. The terms of this
      appointment guarantee that Mr. Porter shall remain as the President of the
      Company until either, (i) his employment agreement terminates on July 2, 2007
      and is not automatically renewed by the Company giving 30 days prior notice
      of
      termination, in advance of any July 2 anniversary, or (ii) termination is
      demanded by the Company for cause; or (iii) death, resignation or incapacity.
      Termination for cause can be effected in the event of one of the following:
      (i)
      Mr. Porter shall materially breach any provision of his agreement; (ii) shall
      be
      indicted, convicted or plead “no contest” to a felony, or any other conduct of a
      criminal nature (other than traffic violations); (iii) shall engage in fraud,
      embezzlement or any other illegal or wrongful conduct materially detrimental
      to
      the Company or the Company’s reputation, regardless of whether such conduct is
      designed to defraud the Company or others; (iv) shall take action (or fails
      to
      take action) that Mr. Porter knows or should have reasonably known was likely
      to
      materially damage the Company; (v) shall be grossly negligent in the performance
      of, or willfully disregard, his obligations under his employment agreement;
      (vi)
      shall intentionally impart material Proprietary Information to competitors
      or
      other third parties other than in the course of carrying out his duties as
      the
      President; or (vii) shall refuse to obey the reasonable and lawful orders of
      the
      Chief Executive Officer or Board of Directors of the Company. There is no other
      arrangement or understanding between any of our other directors or officers
      and
      any other person pursuant to which any director or officer was or is to be
      selected as a director or officer, and there is no arrangement, plan or
      understanding as to whether non-management stockholders will exercise their
      voting rights to continue to elect the current board of directors. There are
      also no arrangements, agreements or understandings between non-management
      stockholders that may directly or indirectly participate in or influence the
      management of our affairs.





There
      are
      no family relationships among the foregoing directors and executive officers.
      Except as disclosed herein in the section on the Company’s bankruptcy filing,
      none of the directors or executive officers has, during the past five years:
      (a)
      Had any bankruptcy petition filed by or against any business of which such
      person was a general partner or executive officer either at the time of the
      bankruptcy or within two years prior to that time; (b) Been convicted in a
      criminal proceeding or subject to a pending criminal proceeding; (c) Been
      subject to any order, judgment, or decree, not subsequently reversed, suspended
      or vacated, of any court of competent jurisdiction, permanently or temporarily
      enjoining, barring, suspending or otherwise limiting his involvement in any
      type
      of business, securities, futures, commodities or banking activities; and (d)
      Been found by a court of competent jurisdiction (in a civil action), the
      Securities and Exchange Commission or the Commodity Futures Trading Commission
      to have violated a Federal or state securities or commodities law, and the
      judgment has not been reversed, suspended, or vacated.





103


**Biographical
      Information**





BENTON
      H
      WILCOXON has been our Chief Executive Officer since November 3, 2001 and
      Chairman of the Board of Directors since February 2002. Currently, he is also
      the acting Chief Financial Officer of CTC. He also is Chairman and Chief
      Executive Officer of the following subsidiaries 100% owned by the Company:
      TTC,
      CCC, DeWind Inc. and TPC. From 1998 to 2001, he was a consultant for Magnesium
      Alloy Corporation, a Canadian company involved in the development of magnesium
      salt deposits and served as a Director from 1998 until December 2003. Between
      1998 and 2000 he was a consultant to Macallan & Callanish Ltd., regarding
      business in Russia and Ukraine. Mr. Wilcoxon held senior positions with Ashurst
      Technology Ltd., a Bermuda corporation, from 1991 to 1997, culminating as
      Chairman, Chief Executive Officer and President. Ashurst Technology Ltd.
      commercialized advanced materials technologies, primarily from the Ukraine.





MICHAEL
      D. MCINTOSH, a Director, is currently president of Technology Management
      Advisors LLC, a business consulting firm specializing in the strategy of
      intellectual property creation, protection and transfer. Mr. McIntosh is also
      currently president of The McIntosh Group, an intellectual property law firm.
      Both firms provide services to CTC. Mr. McIntosh is currently a member of the
      board of PhosphoSolutions, LLC a producer of specialty pharmaceutical reagents.
      Mr. McIntosh is also a member of the board of Tribal Technologies, LLC a
      technology developer in the field of wireless entertainment. Mr. McIntosh
      previously co-founded Superior MocroPowders LLC, Peak Sensor Systems LLC and
      MEMX, Inc. and was instrumental in the organization and start-up of these
      companies. Mr. McIntosh served each of these companies as a member of the Board
      of Directors and interim CEO. He is the former President and Managing Director
      of the law firm of Sheridan, Ross & McIntosh. Mr. McIntosh has a degree in
      chemical engineering from the Colorado School of Mines and a degree in law
      from
      the University of Denver.





D.DEAN
      MCCORMICK III, a Director, is a certified public accountant and been president
      of McCormick Consulting, Inc. since July 1993. He has been a member of Insight
      Consulting Partners, LLC since October 2004. He has been a member of the Board
      of Directors of NetGuru, Inc. and Chairman of its Audit Committee since April
      2003. He has been on the Audit and Budget Committee for the Catholic Diocese
      of
      Orange since February 2004. Mr. McCormick has been a member of the Forum for
      Corporate Directors since June 2003 and an advisor to the Orange County Business
      Forum at the University of Southern California since September 2003. He served
      as president of the Orange County Chapter of the Association for Corporate
      Growth from 1995 to 1996. Mr. McCormick holds a B.A. degree in Economics from
      the University of Redlands and an M.B.A. from the University of Southern
      California.





MICHAEL
      PORTER was appointed as President of the Company on July 3, 2006. From 1993
      to
      July 2002 he acted
      as
      a consultant, and in some cases director for various investment companies
      and medium sized business groups in the establishing their
      European and Middle East banking, manufacturing and/or sales
      operations. The main clients for these companies were Skywin Investment Group,
      Pelletier Investors Group, Howe and Partners and Murphy Oil and Gas
      exploration.  From September 2002 to October 2003, Porter assisted CTC
      as a consultant in business in Europe, in particular in connection with its
      development of composite towers.  Michael Porter founded the EU Energy
      Group of companies in October 2003.  In July 2005 EU Energy plc
      purchased DeWind GmbH, the designer and manufacturer of the DeWind range of
      wind
      turbines. Since the inception of EU Energy, Porter has held the position of
      Chairman and Chief Executive Officer .





DOMINIC
      J. MAJENDIE was appointed as Corporate Secretary in August 2004. He joined
      the
      Company as the Director of Operations for EMEA (Europe, Middle East and Africa)
      in October 2002. In March 2006, he was appointed Vice President of Legal and
      Business Development. From October 2001 to September 2002, Mr. Majendie was
      the
      General Manager of Middle East Telecommunications Company FZ-LLC, Dubai UAE,
      with the responsibility for operations including VoIP telecommunications
      operations and tendering for telecommunications network construction. From
      April
      1999 to October 2001, Mr. Majendie served as the Chairman of the Supervisory
      Board of ZAT 'Telesystems of Ukraine,' where he was responsible for the
      reorganization of the business and the company as well as guiding strategic,
      marketing and business planning, and negotiations with investors, equipment
      suppliers and partners for the launch of a mobile and local access
      telecommunications network. Mr. Majendie has held a variety of positions in
      senior management over 15 years, including Chairman, President and Chief
      Operating Officer in public and private companies in the fields of the
      commercialization of new materials and new technology, real estate development,
      IT and telecommunications in North America, Europe, Ukraine, and the Middle
      East. He has a law degree from Geneva University, Switzerland.




**Involvement
      in Certain Legal Proceedings**





Mr.
      Benton Wilcoxon and Mr. William Arrington were our executive officers during
      the
      two years before we filed our voluntary reorganization plan under Title 11.





104


**Audit
      Committee Financial Expert**





Mr
      Dean
      McCormick III qualifies as an "audit committee financial expert," as defined
      by
      the Sarbanes-Oxley Act of 2002 and the regulations promulgated under the
      Securities Act of 1933 and the Securities Exchange Act of 1934. In forming
      our
      Board of Directors, we sought out individuals who would be able to guide our
      operations based on their business experience, both past and present, or their
      education. Our business model is not complex and our accounting issues are
      straightforward. Responsibility for our operations is centralized within
      management. We rely on the assistance of others, such as independent contractor
      accountants, to help us with the preparation of our financial statements. Our
      entire board of directors is acting as our audit committee with Mr McCormick
      as
      the chairman.





**Procedures
      For Nominating Directors**





There
      have been no material changes to the procedures by which our stockholders may
      recommend nominees to our board of directors during the fiscal year ended
      September 30, 2006 or since the last time we responded to Item 7(d)(2)(ii)(G)
      of
      Schedule 14A.





**Section
      16(a)****Beneficial Ownership Reporting
      Compliance**





Section
      16(a) of the Securities Exchange Act of 1934 (the "Exchange Act") requires
      our
      directors and executive officers, and persons who beneficially own more than
      ten
      percent of a registered class of our equity securities, to file with the
      Securities and Exchange Commission (the "Commission") initial reports of
      beneficial ownership and reports of changes in beneficial ownership of our
      Common Stock. The rules promulgated by the Commission under Section 16(a) of
      the
      Exchange Act require those persons to furnish us with copies of all reports
      filed with the Commission pursuant to Section 16(a). The information in this
      section is based solely upon a review of Forms 3, Forms 4, and Forms 5 received
      by us.





Messrs.
      McCormick and McIntosh filed their Form 3's in a timely manner , Mr. Porter
      filed his Form 3 one day late. None of Mr. Wilcoxon, Mr. McCormick, Mr.
      McIntosh, Mr. Porter and Mr. Majendie had changes to their beneficial
      ownership in fiscal 2006. Form 5s were not required to be filed under Rule
      16a-3(f)(2) because all transactions otherwise required to be reported on Form
      5
      were reported before the due date of the Form 5.





**Code
      of Ethics**





We
      have
      adopted a code of ethics that applies to our principal executive officer,
      principal financial officer, principal accounting officer or controller, or
      persons performing similar functions. Such code of ethics will be provided
      to
      any person without charge, by sending a request to our principal executive
      office. You may request a copy of this code of ethics to be sent as a PDF file
      to an e-mail address or by regular mail.





105


**ITEM
      11 - EXECUTIVE COMPENSATION**





**Summary
      Compensation Table**





The
      following executive compensation disclosure reflects all compensation awarded
      to, earned by or paid to the executive officers below, for the fiscal years
      ended September 30, 2006, 2005 and 2004. None of our executive officers received
      compensation in excess of $150,000 for the fiscal year ended September 30,
      2006,
      and no officer received compensation in excess of $150,000 for the fiscal year
      ending 2005 or in excess of $130,000 for the fiscal year ending 2004. The
      following table summarizes all compensation received by our Chief Executive
      Officer, President, Chief Operating Officer/President (former), and our four
      mostly highly paid executive officers who received in excess of $100,000 for
      the
      fiscal year ended September 30, 2006.







Annual
                CompensationName
                and Principal Position
            
            Fiscal
                Year
            
            Salary
                ($)
            
            Bonus
                ($)
            
            Other
                Annual Compensation ($)Benton
                H Wilcoxon
            
            
            2006
            
            $
            120,000
            
            
            --
            
            
            --Chief
                Executive Officer
            
            
            2005
            
            $
            120,000
            
            
            --
            
            
            --2004
            
            $
            120,000
            
            
            --
            
            
            --Michael
                Porter
            
            
            2006
            
            $
            100,000
            
            
            --
            
            
            --President
            
            
            2005
            
            $
            --
            
            
            --
            
            
            --2004
            
            $
            --
            
            
            --
            
            
            --Dominic
                J Majendie
            
            
            2006
            
            $
            120,000
            
            
            --
            
            $
            20,827
            
            
            (4)Vice-President,
                Legal &
            
            
            2005
            
            $
            120,000
            
            
            --
            
            $
            27,000
            
            
            (4)Business
                Development
            
            
            2004
            
            $
            120,000
            
            
            --
            
            $
            10,000
            
            
            (4)C.
                William Arrington
            
            
            2006
            
            $
            --
            
            
            --
            
            
            --Chief
                Operating
            
            
            2005
            
            $
            120,000
            
            
            --
            
            
            --Officer
                and President (former)
            
            
            2004
            
            $
            120,000
            
            
            --
            
            
            --





106





Long
                Term CompensationName
                and Principal Position
            
            
            Fiscal
                Year
            
            
            Stock
                Awards
            
            
            Underlying
                Options/SAR's
            
            
            LTIP
                Payouts ($
            )
            
            All
                Other CompensationBenton
                H Wilcoxon(1)
            
            
            2006
            
            
            --
            
            
            2,000,000
            
            
            --
            
            
            --Chief
                Executive Officer
            
            
            2005
            
            
            --
            
            
            --
            
            
            --
            
            
            --2004
            
            
            --
            
            
            --
            
            
            --
            
            
            --Michael
                Porter
            
            
            2006
            
            
            --
            
            
            1,500,000
            
            
            --
            
            
            --President
            
            
            2005
            
            
            --
            
            
            --
            
            
            --
            
            
            --2004
            
            
            --
            
            
            --
            
            
            --
            
            
            --Dominic
                J Majendie(2)
            
            
            2006
            
            
            --
            
            
            --
            
            
            --
            
            
            --Vice-President,
                Legal &
            
            
            2005
            
            
            --
            
            
            --
            
            
            --
            
            
            --Business
                Development
            
            
            2004
            
            $
            410,000
            
            
            --
            
            
            --
            
            
            --C.
                William Arrington (3)
            
            
            2006
            
            
            --
            
            
            --
            
            
            --
            
            
            --Chief
                Operating
            
            
            2005
            
            
            --
            
            
            --
            
            
            --
            
            
            --Officer
                and President (former)
            
            
            2004
            
            
            --
            
            
            --
            
            
            --
            
            
            --




(1)
      Benton H Wilcoxon was originally awarded 2 million options by decision of the
      Board of Directors dated August 13, 2003. This grant was annulled in favor
      of a
      new grant of 2 million options awarded on September 29, 2006. These options
      were
      issued at a strike price of $1.00 and will vest in 3 equal portions on the
      anniversary of the grant date.





(2)
      In
      August 2004, Dominic J. Majendie was awarded 250,000 shares of restricted stock
      in consideration for consulting services rendered during the fiscal year ended
      2003. Compensation recorded in the financial statements for this stock issuance
      for the year ended September 30, 2003 was $0. The fair market value of the
      stock
      granted in 2004 on the date of issuance was $410,000 which is included in the
      statement of operations as officer compensation in the fiscal year ending
      September 30, 2004. As of September 30, 2006, the value of these shares was
      $220,000 based on a closing price of $0.88 per share of our common stock, as
      quoted on the OTC Bulletin Board. These shares are not subject to vesting.





(3)
      C.
      William Arrington was originally awarded 2 million options by decision of the
      Board of Directors dated August 13, 2003 subject to confirmation of the Board
      Compensation Committee which was never confirmed. This grant was annulled on
      September 29, 2006.




(4)
      The
      amount listed represents temporary living expenses and relocation expenses.





Options
      were granted to the Company's two most senior executive officers during fiscal
      years ending September 30, 2006. By decision of the Board of Directors made
      on
      September 29, 2006, Benton H Wilcoxon, Chairman and CEO received a grant of
      2
      million options and Michael Porter received a grant of 1.5 million options
      to
      acquire the Company’s common stock at a price of $1.00 per share. These options
      will vest in three equal portions on the anniversary of the grant date. The
      options expire on December 31, 2011. No options were granted to the company’s
      executive officers during fiscal years ending September 30, 2006, 2005 or,
      2004.
      By decision of the Board of Directors dated August 13, 2003, Benton H Wilcoxon
      and C. William Arrington were each awarded an option to purchase 2 million
      options subject to the approval by an independent committee to be established
      by
      the Board of Directors to consider compensation. These August 13, 2003 pending
      grants were cancelled on September 29, 2006.





107


Aggregated
      Option Exercises In Last Fiscal Year Ended September 30, 2006 and FY-End Option
      Values





The
      following table provides information on option exercises for our Chief Executive
      Officer and our other most highly compensated executive officers in the year
      ended September 30, 2006 and their option holdings as of September 30, 2006.The
      value of an in-the-money stock option represents the difference between the
      aggregate estimated fair market value of the underlying stock and the aggregate
      exercise price of the stock option. We have used the quoted closing price of
      $0.88 per share on the OTC Bulletin Board on September 30, 2006 as the estimated
      fair market value of our common stock in determining the value of unexercised
      options.








Name
            
            Shares
                acquired upon Exercise
            
            Number
                of Securities Underlying Unexercised Options at Fiscal Year-End #
                Exercisable/Unexercisable
            
            Value
                of Unexercised In-the-Money Options at Fiscal Year-End ($)
                Exercisable/UnexercisableBenton
                H Wilcoxon
            
            --
            
            635,216/2,000,000
            
            $336,665/$0Michael
                Porter
            
            --
            
            --/1,500,000
            
            $0/$0Dominic
                J. Majendie
            
            --
            
            1,000,000/0
            
            $350,000/$0C.
                William Arrington
            
            --
            
            635,216/0
            
            $336,665/$0








**Compensation
      of Directors**





Mr.
      Wilcoxon does not receive compensation for his services as a director.  Mr
      McCormick and Mr McIntosh receive $4,000 per month as Directors and Mr.
      McCormick receives an additional $1,500 per month as chair of the audit and
      compensation committees in addition to out of pocket expenses incurred in
      attending board meetings.   We paid Mr McCormick $20,350 in board fees
      and Mr. McIntosh $4,200 in fiscal 2006 for their services.





In
      addition, as part of their compensation package, both Mr McIntosh and Mr
      McCormick were granted 2 separate blocks of options to acquire the Company’s
      common shares during fiscal 2006.  On January 9, 2006 each was granted
      375,000 options and on each was granted a further 175,000 options.  The
      January 2006 options were priced at $1.04, the September 2006 options were
      priced at $1.00.  All of these options will vest in 3 equal installments in
      on the anniversary of the grant date.  The options expire on December 31,
      2011.





Employment
      Agreements, Termination of Employment and Change-In-Control Arrangements





Except
      for the Employment Agreements with Mr. Dominic Majendie, dated October 1, 2003
      and Mr Porter dated July 3, 2006, we currently have no employment agreements
      with any of our executive officers, nor any compensatory plans or arrangements
      resulting from the resignation, retirement or any other termination of any
      of
      our executive officers, from a change-in-control, or from a change in any
      executive officer's responsibilities following a change-in-control.





Mr.
      Dominic Majendie was originally employed in October 2002 as Director of
      Operations, EMEA (Europe, Middle East, and Africa) of CTC. This
      arrangement was replaced by an employment agreement dated October 1,
      2003, which expires on September 30, 2008. He now occupies the position of
      Vice
      President, Legal
      and
      Business Development. The essential terms of his employment
      agreement are as follows:





o
      Mr.
      Majendie's annual base compensation, which was initially $120,000, increases
      at
      a minimum of 10% per year.





o
      Mr.
      Majendie is eligible for annual bonuses and bonuses based on revenue from
      specific projects and sales he brings us.





o
      Mr.
      Majendie received an initial option to purchase up to 1,000,000 shares of common
      stock, vesting with respect to 85,000 shares each quarter, issued as of August
      11, 2003.





o
      CTC
      reimburses Mr. Majendie for all reasonable business expenses, and provides
      him
      with a $150 per month telephone allowance and a company car or car allowance.





o
      Mr.
      Majendie is entitled to 18 months salary in the event that CTC merges, sells
      a
      controlling interest, or sells a majority of its assets.





o
      In the
      event that Mr. Majendie's employment is terminated due to his death, his
      beneficiaries are entitled to his then current Base Salary through 60 days
      after
      his death.





108


o
      In the
      event the agreement is terminated prior to its expiration for any other reason,
      Mr. Majendie will be entitled to receive his then current base salary and all
      accrued, earned but unpaid bonuses or benefits.





o
      Mr.
      Majendie is required to maintain the confidentiality of CTC proprietary
      information.





Mr.
      Majendie was paid compensation of $120,000 per year for fiscal 2006.





Mr.
      Michael Porter was appointed President of the Company and his relationship
      with
      the Company is governed by an employment agreement dated July 3, 2006, which
      expires on July 2, 2007. The agreement will be automatically renewed unless
      the
      Company gives Mr Porter not less than 30 days advance notice of its intention
      not to continue the employment. The essential terms of his employment agreement
      are as follows:





o
      Mr.
      Porter’s base salary is $400,000 per year; which may increase at the sole
      discretion of the board.





o
      Mr.
      Porter is eligible to earn an annual bonus based upon the achievement, as
      determined by the Company in its sole discretion.





o
      Mr.
      Porter’s term of employment is one year, automatically renewable unless the
      Company provides 30 days written notice.





o
      Mr.
      Porter is eligible to participate in and shall be covered by any and all
      medical, disability, life and other insurance plans, stock option incentive
      programs, 401K plans and other benefits generally available to other employees
      of the Company in similar employment positions. If medical insurance benefits
      cannot be arranged for Mr. Porter and his wife, the Company agrees to pay his
      medical expenses.





o
      Mr.
      Porter is eligible for four weeks of vacation per year.





o
      In the
      event of termination for cause, resignation or termination due to death or
      disability, Mr. Porter is entitled to receive the Base Salary then in effect
      and
      the benefits set forth above through the effective date of the termination
      or
      resignation. No other payments or compensation of any kind.





o
      In the
      event of termination without cause or non-renewal by the company Mr. Porter
      is
      entitled to receive the Base Salary then in effect and the benefits set forth
      above through the effective date of the termination or resignation, payments
      at
      the Base Salary for a period of six months and no other payments or compensation
      of any kind.





o
      Mr.
      Porter is required to maintain the confidentiality of CTC proprietary
      information.





o
      Mr.
      Porter is required to assign inventions, made or conceived or reduced to
      practice during his employment with CTC.





o
      For a
      period of two years after employment, Mr. Porter is subject to non-solicitation
      of employees, agents or representatives of the company and customers and clients
      of the company.





o
      Additionally, for a period of two years after employment, Mr. Porter is required
      not to interfere in any way that would have an adverse effect on the business,
      assets or financial condition of the Company.





o
      During
      the term of employment, Mr. Porter is required not to directly or indirectly
      be
      involved with any person or entity competitive with the company.





o
      Mr.
      Porter was paid compensation of $100,000 for fiscal 2006.





**Compensation
      Committee Interlocks and Insider Participation**





Our
      board
      of directors acted as our compensation committee during our 2006 fiscal year.
      We
      have three Directors, Benton H. Wilcoxon, Michael D. McIntosh and D. Dean
      McCormick. Our director Benton H. Wilcoxon is also a Company employee and
      officer. Our director Michael D. McIntosh is also retained as a consultant
      to
      advise on intellectual property issues, a position that he has held since March,
      2002. Other than stock option grants, or as mentioned above pursuant to the
      employment agreements of Messrs Porter or Majendie, there are no executive
      or
      officer incentive compensation programs in either cash, stock, or equity
      derivatives.





109





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





**Equity
      Compensation Plan Information**





The
      following table sets forth certain information, as of September 30, 2006,
      concerning shares of common stock authorized for issuance under all of our
      equity compensation plans:








Plan
                Category
            
            Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights
            
            Weighted-average
                exercise price of outstanding options, warrants and
                rights.
            
            Number
                of securities remaining available for future issuance under equity
                compensation plans (Excluding securitiesreflected in
                Column(A))(A)
            
            (B)
            
            (C)Equity
                Compensation Plans approved by security holders
            
            15,965,336
            
            $0.83
            
            6,457,481(1)Equity
                Compensation Plans not approved by security holders
            
            1,799,362(2)
            
            $1.24
            
            0TOTAL
            
            17,764,698
            
            $0.87
            
            6,457,481










(1)
      This
      number of securities represents 6,457,481 shares available for issuance under
      the 2002 Non-Qualified Stock Compensation Plan.





(2)
      Securities represent common shares issuable upon the exercise of Series' S,
      T,
      and U warrant series issued for services rendered prior to September 30, 2006.
      For a description of the material features of these equity compensation
      arrangements, see our financial statements, Note 14, under the caption
      "Shareholders Equity, Warrants."





The
      following table sets forth certain information regarding beneficial ownership
      of
      our common stock as of December 11, 2006 determined in accordance with Rule
      13d-3 and 13d-5 of the Exchange Act by:





(i)
      each
      person who is known by CTC to own beneficially more than five percent (5%)
      of
      the outstanding shares of our voting securities,





(ii)
      each
      director and executive officer of CTC, and





(iii)
      all
      directors and executive officers of CTC as a group.





110


Unless
      otherwise indicated below, to the knowledge of CTC, all persons listed below
      have sole voting and investing power with respect to their shares of common
      stock, except to the extent authority is shared by spouses under applicable
      community property laws.





Title
                of Class
            
            Name
                and Address of Beneficial Owner
            
            Amount
                and Nature of Beneficial Ownership
            
            Percent
                of ClassCommon
            
            Benton
                H Wilcoxon
              2026
                McGaw Avenue
              Irvine,
                CA 92614
            
            22,102,528(1)
            
            12.37%Common
            
            Michael
                Porter
              2026
                McGaw Avenue
              Irvine,
                CA 92614
            
            18,936,631
                (2)
            
            10.60%Common
            
            Dominic
                J. Majendie
              2026
                McGaw Avenue
              Irvine,
                CA 92614
            
            1,250,000(3)
            
            Less
                than 1%Common
            
            Michael.
                  McIntosh
              2026
                McGaw Avenue
              Irvine,
                CA 92614
            
            108,333(4)
            
            Less
                than 1%Common
            
            Dean
                    McCormick
              2026
                McGaw Avenue
              Irvine,
                CA 92614
            
            108,333(4)
            
            Less
                than 1%All
                Officers and directors as a group
            
            
            
            42,289,156
            
            23.67%








(1)
      Includes 19,477,312 shares of common stock, 625,216 options to purchase shares
      of common stock that are exercisable as at September 30, 2006 and 2 million
      options granted on September 29, 2006 that are unvested and unexercisable as
      at
      September 30, 2006.





(2)
      Includes the beneficial ownership of 17,436,631 shares of common stock owned
      indirectly through one or more holding companies and 1.5 million options to
      purchase shares of common stock granted on September 29, 2006 that are unvested
      and unexercisable as at September 30, 2006.





(3)
      Includes 250,000 shares of common stock, and 1,000,000 options exercisable
      at
      September 30, 2006.




(4)
      Includes 108,333 shares of common stock
      underlying options to purchase common stock at $1.04 per share that
      are exercisable within 60 days of December 18, 2006.




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





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 2006
      as a
      result of this transaction. As of September 30, 2006, $58,320 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. The balance of $62,000 was outstanding as of September 30, 2006 and
      was repaid to Mr. Wilcoxon subsequent to year end. The balance was included
      in
      accrued expenses as of September 30, 2006.





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





111


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” division of the Company to provide legal and intellectual
                property services for that
                division.


·
            An
                agreement between TMG and EU Energy, a wholly owned subsidiary operating
                as the “wind” division of the Company to provide legal and intellectual
                property services for that
                division.


·
            An
                agreement between TMA and the Company to provide management services
                related to the Company’stechnology
                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, 2006 we recorded fees of $312,500, patent filing
      fees of $105,807 and incidental expenses of $2,935 for TMG and fees of $250,000
      and incidental expenses of $45,765 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, 2006 the Company had outstanding balances due to TMA and TMG
      of
      $147,631 and $202,138 respectively, included in accounts payable.








**ITEM
      14 - PRINCIPAL ACCOUNTING FEES AND SERVICES**





**Audit
      Fees**





The
      aggregate fees billed for each of Fiscal Year 2005 and Fiscal Year 2006 for
      professional services rendered by our principal accountants for the audit of
      our
      annual financial statements, review of financial statements included in our
      Form
      10-Qs and other services provided by the accountant in connection with statutory
      and regulatory filings are as follows:





Fiscal
      Year 2005: $198,600.73;


Fiscal
      Year 2006: $352,704.64.





**Audit-Related
      Fees**





The
      aggregate fees billed for each of Fiscal Year 2005 and Fiscal Year 2006 for
      assurance and related services by our principal accountant that are reasonably
      related to the performance of the audit or review of our financials statements
      are as follows:





Fiscal
      Year 2005: $0.00;


Fiscal
      Year 2006: $0.00.





**Tax
      Fees**





The
      aggregate fees billed during Fiscal Year 2005 and Fiscal Year 2006 for
      professional services rendered by our principal accountants for tax compliance,
      tax advice and tax planning are as follows:





Fiscal
      Year 2005: $0.00;


Fiscal
      Year 2006: $20,897.42.





**All
      Other Accountant Fees**





The
      aggregate fees billed for each of Fiscal Year 2005 and Fiscal Year 2006 for
      other professional services rendered by our principal accountants are as
      follows:





Fiscal
      Year 2005: $0.00;


Fiscal
      Year 2006: $0.00.





**Audit
      Committee Pre-Approval Policies And Procedures**





The
      Company’s audit committee consists of one financial expert and the remaining two
      board members. The audit committee does not have any formal pre-approval
      policies or procedures.





112


**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.








113





**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 22, 2006*








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,*
              *Acting
                Chief Financial Officer and*
              *Chairman*
              
              *Dated:
                December 22, 2006*
              
              */s/
                D. Dean McCormick III*
              
              *D.
                Dean McCormick III*
              *Director*
              
              *Dated:
                December 22, 2006*
              
              */s/
                Michael D. McIntosh*
              
              *Michael
                D. McIntosh*
              *Director*
              
              *Dated:
                December 22, 2006*











114





**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.3.2(22)
            Bylaws
                of Composite Technology Corporation, as modified January 6,
                200610.1(1)
            2001
                Transmission Technology Corporation Incentive Compensation Stock
                Option
                Plan.






115




10.2(5)
            Technology
                License Agreement by and between W.B.G., Inc. and Transmission Technology
                Corporation dated May 7, 2001.10.3(6)
            Composite
                Technology Corporation 2002 Non-Qualified Stock Compensation
                Plan.10.4(7)
            Consulting
                Agreement by and between Composite Products Development, Inc., George
                Korzeniowski and Composite Technology Corporation, dated March 1,
                2002.10.5(7)
            License
                Agreement between Composite Technology Corporation and W. Brandt
                Goldsworthy & Associates, Inc., dated February 6,
                2003.10.6(7)
            Firm
                Fixed Price Billable Services Agreement Terms and Conditions between
                EPRI
                Solutions, Inc. and Composite Technology Corporation, dated February
                2003.10.7(7)
            Consulting
                Agreement between David C. Bryant and Composite Technology Corporation,
                dated February 21, 2003.10.8(7)
            Consulting
                Agreement by and between Composite Technology Corporation, CTC Cable
                Corporation and Global American Energy Inc., dated March 31,
                2003.10.9(7)
            Research
                Agreement between University of Southern California and Composite
                Technology Corporation, dated June 23, 2003.10.10(8)
            Composite
                Technology Corporation Option Agreement - Dominic J. Majendie dated
                August
                11, 2003.10.11(9)
            Composite
                Technology Corporation Option Agreement - Benton Wilcoxon dated August
                13,
                2003.10.12(9)
            Composite
                Technology Corporation Option Agreement - William Arrington dated
                August
                13, 2003.10.13(8)
            Employment
                Agreement between Composite Technology Corporation and Dominic J.
                Majendie, dated October 1, 2003.10.14(7)
            Joint
                Development Agreement between FCI SA and Composite Technology Corporation,
                dated November 5, 2003.10.15(9)
            Lease
                Agreement between Composite Technology Corporation and CNH, LLC dated
                November 7, 2003.10.16(8)
            Letter
                Agreement between the Registrant and the City of Kingman, Kansas,
                dated
                November 11, 2003.10.17(11)
            Form
                of Securities Purchase Agreement, Registration Rights Agreement and
                Common
                Stock Purchase Warrants, dated as of December 16, 2003.10.18(8)
            Form
                of Securities Purchase Agreement including form of the Debenture
                attached
                as Exhibit A, form of the Registration Rights Agreement attached
                as
                Exhibit B thereto, form of the Common Stock Purchase Warrant attached
                as
                Exhibit C thereto, form of legal opinion attached as Exhibit D, form
                of
                Custodial and Security Agreement attached as Exhibit E, dated August
                17,
                2004.10.19(12)
            Manufacturing
                Agreement between Composite Technology Corporation and General Cable
                Corp
                dated October 2, 2004.10.20(12)
            Distribution
                Agreement between Composite Technology Corporation and General Cable
                Corp
                dated October 2, 2004.10.21(13)
            Letter
                Agreement between Composite Technology Corporation and Feldman Weinstein
                LLP, dated November 23, 2004.






116




10.22(14)
            Engagement
                Agreement between Composite Technology Corporation and Brian Brittsan,
                dated December 18, 2004.10.23(7)
            Letter
                Agreement between Composite Technology Corporation and Midsummer
                Investment, Ltd., Bristol Investment Fund, Ltd., Islandia, L.P. and
                Omicron Trust dated January 21, 2005.10.24(7)
            Employee
                Confidentiality and Assignment Agreement between David C. Bryant
                and
                Composite Technology Corporation, dated February 21, 2005.10.25(15)
            Exclusive
                Brokerage and Risk Management Agreement by and between Brakke Snafnitz
                Insurance Brokers, Inc. and Composite Technology Corporation dated
                June
                29, 2005.10.26(16)
            Securities
                Purchase Agreement including form of the Convertible Note, Registration
                Rights Agreement and the Common Stock Purchase Warrant, dated September
                23, 2005.10.27(3)
            Settlement
                Agreement entered into by and between Composite Technology Corporation
                and
                Ronald Morris and American China Technology Systems, LLC.10.28(3)
            Settlement
                and Mutual Release Agreement entered into by and between Composite
                Technology Corporation and Ascendiant Capital Group.10.29(3)
            Settlement
                Agreement entered into by and between Composite Technology Corporation
                and
                City of Kingman, Kansas.10.30(3)
            Settlement
                and Mutual Release Agreement entered into by and between Composite
                Technology Corporation and David S. Shields, M.D.10.31(3)
            Settlement
                Agreement entered into by and between Composite Technology Corporation
                and
                Richard. O. Weed.10.32(3)
            Settlement
                Agreement entered into by and between Composite Technology Corporation
                and
                Frank Bishop.10.33(3)
            Settlement
                Agreement entered into by and between Composite Technology Corporation
                and
                G.S. Schwartz & Co.10.34(3)
            Settlement
                Agreement entered into by and between Composite Technology Corporation
                and
                Clem Hiel and Composite Support Solutions, Inc.10.35(3)
            Settlement
                Agreement entered into by and between Composite Technology Corporation
                and
                John Nunley.10.36(3)
            Mutual
                Release Agreement entered into by and between Composite Technology
                Corporation and Acquvest, Inc., Paul R. Koch, Victoria Koch, and
                Patricia
                Manolis.10.37(3)
            Confidential
                Information and Invention Assignment Agreement entered into by and
                between
                Composite Technology Corporation and Dominic J.G.G.
                Majendie.10.38(17)
            Second
                Amendement to securities Purchase Agreement dated October 7,
                2005.10.39(18)
            Agreement
                between City of Kingman, Kansas and Composite Technology, dated as
                of
                september 23, 2005.10.40(19)
            Amendement
                to Securities Purchase Agreement, dated October 3, 2005.10.41(19)
            Form
                of Senior Convertible Note.10.42(20)
            Agreement
                between CTC Wind Systems Corporation and EU Energy, Incorporated,
                dated as
                of December 15, 2005.10.43(21)
            Public
                and Media Relations Strategy and Services Consulting
                Agreement.10.44(22)
            Letter
                Agreement with Michael D. McIntosh10.45(22)
            Letter
                Agreement with D. Dean McCormick III10.46(22)
            Confidential
                Information and Invention Assignment Agreement with Benton H
                Wilcoxon10.47(22)
            Confidential
                Information and Invention Assignment Agreement with Michael D.
                McIntosh10.48(22)
            Confidential
                Information and Invention Assignment Agreement with D. Dean McCormick
                III10.49(22)
            Option
                Agreement with Michael D. McIntosh10.50(22)
            Option
                Agreement with D. Dean McCormick III10.51(22)
            Legal
                Services Agreement with The McIntosh Group10.52(22)
            Consulting
                Agreement with Technology Management Advisors, LLC10.53(23)
            First
                Amendment to Convertible Notes and Warrant10.54(23)
            Settlement
                Agreement with Bushido Capital Master Fund10.55(23)
            Settlement
                Agreement with Enable Growth Partners and Enable Opportunity
                Partners10.56(23)
            Settlement
                Agreement with Gamma Opportunity Capital Partners Class A and Class
                C10.57(23)
            Settlement
                Agreement with SRG Capital LLC10.58(23)
            Settlement
                Agreement with Midsummer Investment Ltd.10.59(23)
            Securities
                Purchase Agreement, dated as of March 2, 200610.60(23)
            Warrant
                B-1 to purchase common stock.10.61(23)
            Warrant
                B-2 to purchase common stock.10.62(23)
            Registration
                Rights Agreement, dated as of March 2, 2006.10.63(23)
            CEO
                Share Pledge Agreement, dated as of March 2, 2006.10.64(23)
            Side
                Letter Agreement from Benton H Wilcoxon to certain investors, dated
                March
                3, 2006.10.65(24)
            Form
                of Senior Secured Convertible Note.10.66(25)
            MRSI
                Warrants dated May 25, 2006.10.67(25)
            Lane
                Capital Markets Warrants.10.68(25)
            Richardson
                and Patel LLP Warrant dated May 25, 200610.69(26)
            Share
                Exchange Agreement dated as of June 2, 2006 by and among the Registrant,
                certain shareholders of EU Energy plc. (now called EU Energy Ltd.),
                and
                Michael Porter.10.70(27)
            EU
                Energy Principals' Agreement dated as of July 3, 2006 by and among
                the
                Registrant, certain shareholders of EU Energy Ltd.10.71(27)
            Executive
                Employment Agreement dated as of July 3, 2006 by and between the
                Registrant and Michael Porter.10.72(27)
            Letter
                Agreement dated as of July 3, 2006 by and between the Registrant
                and The
                McIntosh Group.10.73(27)
            Letter
                Agreement dated as of July 3, 2006 by and between EU Energy and The
                McIntosh Group.10.74(27)
            Consulting
                Agreement dated as of July 3, 2006 by and between the Registrant
                and
                Technology Management Advisors, LLC.10.75(28)
            Form
                of Conversion Agreement dated as of September 6, 2006 by and among
                the
                Registrant and certain holders of the Registrant’s senior secured
                notes.10.76(29)
            Agreement
                by and among Enertrag AG and EU Energy Ltd. dated as of September
                27,
                2006.10.77(30)
            Agreement
                by and among EU Energy Inc., GE Infrastructure Technology, LLC and
                GE
                Infrastructure Technology International Inc. dated as of October
                6,
                2006.10.78(31)
            Strategic
                Alliance Agreement by and between the Registrant and TECO-Westinghouse
                Motor Company dated as of November 27, 2006.14(33)
            Code
                of Ethics.21(32)
            Subsidiaries
                of the Registrant.23.1(32)
            Consent
                of Independent Registered Public Accounting Firm.31.1(32)
            Rule
                13a-14(a) / 15d-14(a)(4) Certification32.1(32)
            Section
                1350 Certification








(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 18, 2005.





(5)
      Incorporated herein by reference to Form 8-K filed with the U. S. Securities
      and
      Exchange Commission on January 11, 2002.





(6)
      Incorporated herein by reference to Definitive Schedule 14C filed with the
      U.S.
      Securities and Exchange Commission on January 27, 2003.





(7)
      Incorporated herein by reference to Form 10-KSB, as amended, filed with the
      U.S.
      Securities and Exchange Commission on August 8, 2005.





(8)
      Incorporated herein by reference to Form SB-2/A (File No. 333-118991) filed
      with
      the U.S. Securities and Exchange Commission on October 29, 2004.





(9)
      Incorporated herein by reference to Form 10-KSB filed with the U.S. Securities
      and Exchange Commission on February 4, 2004.





(10)
      Incorporated herein by reference to Form SB-2 filed with the U.S. Securities
      and
      Exchange Commission on January 25, 2005.





117


(11)
      Incorporated herein by reference to Form 8-K filed with the U.S. Securities
      and
      Exchange Commission on December 19, 2003.





(12)
      Incorporated herein by reference to Form 8-K filed with the U.S. Securities
      and
      Exchange Commission on October 7, 2004.





(13)
      Incorporated herein by reference to Form 8-K filed with the U.S. Securities
      and
      Exchange Commission on November 24, 2004.





(14)
      Incorporated herein by reference to Form 8-K filed with the U.S. Securities
      and
      Exchange Commission on January 11, 2005.





(15)
      Incorporated herein by reference to Form 8-K filed with the U.S Securities
      and
      Exchange Commission on July 11, 2005.





(16)
      Incorporated herein by reference to Form 8-K filed with the U.S. Securities
      and
      Exchange Commission on September 26, 2005.





(17)
      Incorporated herein by reference to Form 8-K filed with the U.S. Securities
      and
      Exchange Commission on October 13, 2005.





(18)
      Incorporated herein by reference to Form 8-K filed with the U.S. Securities
      and
      Exchange Commission on October 5, 2005.





(19)
      Incorporated herein by reference to Form 8-K filed with the U.S. Securities
      and
      Exchange Commission on October 4, 2005.





(20)
      Incorporated herein by reference to Form 8-K filed with the U.S. Securities
      and
      Exchange Commission on December 22, 2005.





(21)
      Incorporated herein by reference to Form 8-K filed with the U.S. Securities
      and
      Exchange Commission on January 5, 2006.





(22)
      Incorporated herein by reference to Form 8-K filed with the U.S. Securities
      and
      Exchange Commission on January 12, 2006.





(23)
      Incorporated herein by reference to Form 8-K filed with the U.S. Securities
      and
      Exchange Commission on January 30, 2006.




(24)
      Incorporated herein by reference to Form 8-K filed with the U.S. Securities
      and
      Exchange Commission on March 6, 2006.





(25)
      Incorporated herein by reference to Form 8-K filed with the U.S. Securities
      and
      Exchange Commission on May 31, 2006.





(26)
      Incorporated herein by reference to Form 8-K filed with the U.S. Securities
      and
      Exchange Commission on June 8, 2006.





(27)
      Incorporated herein by reference to Form 8-K filed with the U.S. Securities
      and
      Exchange Commission on July 10, 2006.





(28)
      Incorporated herein by reference to Form 8-K filed with the U.S. Securities
      and
      Exchange Commission on September 6, 2006.





(29)
      Incorporated herein by reference to Form 8-K filed with the U.S. Securities
      and
      Exchange Commission on September 27, 2006.





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





(31)
      Incorporated herein by reference to Form 8-K filed with the U.S. Securities
      and
      Exchange Commission on November 30, 2006.





(32)
      Filed herewith.





(33)
      Incorporated herein by reference to Form 10-K filed with the U.S. Securities
      and
      Exchange Commission on December 13, 2005.





118