UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549





FORM
10-K





(Mark
one)





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





For the
fiscal year ended September 30, 2009





 ̈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 of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes xNo  ̈
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes  ̈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, a non-accelerated filer, or a smaller reporting company. See
definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of
the Exchange Act:




Large
      accelerated filer  ̈
                          
                          Accelerated
      filer xNon-accelerated filer  ̈ (Do not check if a smaller reporting company)
                          
                          Smaller
      reporting company  ̈




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, 2009, the last business day of the registrant's
most recently completed second fiscal quarter was $50,414,923 (based on the
closing sales price of the registrant's common stock on that date). Shares of
the registrant's common stock held by each officer and director and each person
who owns more than 5% or more of the outstanding common stock of the registrant
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.





Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes xNo  ̈





As of
November 30, 2009 there were 288,108,370 shares of Common Stock issued and
outstanding.







COMPOSITE
  TECHNOLOGY CORPORATION





TABLE OF
CONTENTS




Part
      IItem
      1
                    Business
                    1Item
      1A
                    Risk
      Factors
                    11Item
      1B
                    Unresolved
      Staff Comments
                    18Item
      2
                    Properties
                    18Item
      3
                    Legal
      Proceedings
                    18Item
      4
                    Submission
      of Matters to a Vote of Security Holders
                    21Part
      IIItem
      5
                    Market
      for Registrant’s Common Equity, Related Shareholder Matters and Issuer
      Purchases of Equity Securities
                    21Item
      6
                    Selected
      Financial Data
                    23Item
      7
                    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
                    23Item
      7A
                    Quantitative
      and Qualitative Disclosures About Market Risk
                    35Item
      8
                    Financial
      Statements and Supplementary Data
                    35Item
      9
                    Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
                    71Item
      9A
                    Controls
      and Procedures
                    71Item
      9B
                    Other
      Information
                    73Part
      IIIItem
      10
                    Directors
      and Executive Officers of the Registrant
                    74Item
      11
                    Executive
      Compensation
                    74Item
      12
                    Security
      Ownership of Certain Beneficial Owners and Management and Related
      Shareholder Matters
                    74Item
      13
                    Certain
      Relationships and Related Transactions, and Director
      Independence
                    74Item
      14
                    Principal
      Accounting Fees and Services
                    74Part
      IVItem
      15
                    Index
      to Exhibits, Financial Statement Schedules
                    74Signatures
                    76Index
      to Exhibits
                    77




CAUTION
REGARDING FORWARD-LOOKING INFORMATION





In
addition to historical information, this Annual Report on Form 10-K contains
forward-looking statements that involve risks and uncertainties that could cause
our actual results to differ materially. Factors that might cause or contribute
to such differences include, but are not limited to, risks related to the
following: uncertain cash flows, the need to collect accounts receivable, our
need for additional capital, demand for our products, decrease in energy demand
and corresponding decrease in energy prices, costs related to restructuring our
corporate structure, competition, our need to protect and maintain intellectual
property, litigation, raw material costs and unavailability, changing government
regulations, the loss of significant customers or suppliers, the limited market
for our common stock, the volatility of our stock price, issues related to the
sale of DeWind and residual liabilities associated with DeWind and its
discontinued operations 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 filed by
us in our 2009 fiscal year, which ran from October 1, 2008 to September 30,
2009.





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





I.
Overview





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




During
fiscal 2009, the Company operated under two operating segments. (1) The cable
segment operated as CTC Cable and (2) the wind turbine segment operated as
DeWind.  Our primary products consist of ACCC®
conductor for electricity sold under the CTC Cable segment (“Cable”) and the
DeWind wind powered electricity-generating turbines sold under the DeWind
segment (“Wind”).  In September 2009, the Company sold substantially
all of its operating assets and liabilities of DeWind to Daewoo Shipbuilding and
Marine Engineering Co. Ltd. (DSME) for a gross amount of $49.5
million.  The operations of DeWind as well as residual assets and
liabilities of DeWind are being accounted for as discontinued
operations.





The CTC
Cable segment sells ACCC®
conductor, an advanced composite core overhead electrical transmission
conductor, and manufactures and sells ACCC® core,
the composite core component of the ACCC®
conductor, along with hardware connector accessories specifically designed for
ACCC®
applications.  We sell ACCC®
conductor and core directly to customers and through various distribution
agreements both internationally and in North America.  We also sell
ACCC®
conductor connecting hardware and assist with engineering design services. 
ACCC®
conductor has been available for commercial sale since June, 2005.  We have
marketed ACCC®
conductor as the most energy efficient, highest performance and overall cost
efficient alternative to traditional ACSR (Aluminum Conductor Steel Reinforced),
newer variant ACSS (Aluminum Conductor Support Steel), new technology ACCR
(Aluminum Conductor Composite Reinforced), AAAC (All Aluminum Alloy Conductor),
and AAC (All Aluminum Conductor).  Our revenues from our CTC cable products
for the 2009, 2008 and 2007 fiscal years were $19.6 million, $32.7 million, and
$16.0 million respectively.





The
DeWind segment produced wind turbines for electricity production and intended to
develop wind farms incorporating these turbines.  The DeWind segment
represents the successor operations of the EU Energy, Ltd., which was acquired
in July 2006.  In November, 2008 after the realization that the worldwide
economic and banking crises were severe and were resulting in a significant
delay or elimination of financing for our customers’ wind farms, the Company
made a decision to seek strategic investment partners or to divest its ownership
stake in DeWind.  In September, 2009 the Company sold substantially
all of DeWind’s assets and operating liabilities to DSME.   Under
the terms of the transaction, described in greater detail below, the Company is
prohibited from developing, marketing, or selling competing wind turbine
technology for five years except that the Company retained the rights to develop
and sell wind farm projects.





The
divestiture of DeWind was a decision driven by the worldwide banking and credit
crisis.  DeWind had focused its sales and marketing efforts into the
North American and South American markets to take advantage of its innovative
D8.2 technology.  Following the June 2008 cash investment by Credit
Suisse and the signing of turbine contracts in September and early October,
DeWind began to invest a significant amount of cash into its supply chain to
fulfill orders.  In October 2008, DeWind’s largest customer defaulted
on a progress payment, which was the result of that customer losing their
project financing, a consequence of the continuing worldwide banking and credit
crisis that began in late 2008.  Other customers that could have
absorbed the delivery of some or all of the turbines under order were similarly
unable to obtain project financing during the credit crisis.  By
November 2008, the Company’s management developed a contingency plan in case
wind project financing in North and South America continued to be unavailable
for our customers.  That plan was to engage RBS Securities to find a
strategic investor or to sell DeWind outright while reducing the investment in
the supply chain to a minimum, while still maintaining the viability of DeWind
to fulfill the remaining DeWind sales contracts.





II. Our
Strategy





Our
strategy is to penetrate the electrical utility markets with our more energy
efficient and economically advantageous products that provide solutions to
long-standing problems endemic in most electrical transmission and generation
systems.  We incorporate our composite materials technology knowledge
to invent products and improve existing energy products that provide novel
solutions in the energy industry.   We focus on development of
profitable products that, once adopted, will have substantial technical,
efficiency, and economic advantages over existing energy
products.


1


Our
approach:





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





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





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





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





·
            We seek to capitalize on the
      expected transmission grid enhancements including the “Smart Grid” as well
      as increased U.S. and other capital spending on mission critical
      electrical grid
improvements.





·
            We market our products as
      cost-effective solutions that promote energy efficiency and which reduce
      greenhouse gas emissions through reduced transmission power losses and
      related reduction in power generation from fossil-fuel power
      plants.





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





III. Industry
Background





The
transmission grid consists of multiple transmission lines that connect and
interconnect power produced at power plants that are transmitted via high
voltage transmission lines to substations near population centers where they are
stepped down in voltage and delivered through distribution systems to
customers.  Each transmission corridor contains at least one
transmission circuit consisting of three wires in standard three phase AC
transmission systems.  In the less common DC transmission systems
there are two wires per circuit.  Typically, a transmission corridor
from a very large production facility may have multiple circuits on the same
towers and each circuit may have “bundled” conductors of between 2-4 wires per
bundle per phase.   The industry term for three single
transmission conductors for a mile is a “circuit mile.”  The Company
converts circuit miles or circuit kilometers to linear miles or kilometers as
key metrics for production and sales results.





Bare
overhead transmission conductors have been in use since the beginning of the
electricity age and form the backbone of the electrical grid. Overhead
transmission conductors are the primary method used in the grid to connect power
generation plants to population centers, since generation plants are often many
miles away from the eventual consumers.





The
transmission of electricity from power production to the consumer can be thought
of as a grid of electrical “energy pipelines” in the sky.  In the
developed world, under the demand conditions contemplated decades earlier, the
grids were engineered to handle a relatively low level of power transmission and
therefore smaller “pipes” were engineered as compared to today’s
requirements.  For example, in the U.S. most of the transmission grid
was designed and erected in the 1950s, with expectations of a significantly
lower population and per capita electricity consumption. Existing electrical
transmission grids use bare overhead conductors as these “pipes”, which have
been in existence for over 100 years and predominantly use the industry standard
known as ACSR.  ACSR consists of a steel wire core stranded with
aluminum wire.   The steel serves as the strength component required
for the high tension between the support structures while the aluminum is the
primary electricity conducting material.





The use
of steel wire as a strength component has three primary
drawbacks:  steel is heavy, it is subject to corrosion over time,
limiting its life, and like all metals it exhibits thermal expansion, that
causes line sag as it heats. Under electrical power load the steel strength
component in standard ACSR conductor heats and stretches which results in the
ACSR drooping closer to the ground, called “sag” in the electrical transmission
industry.  Grid and safety regulations require minimum ground
clearances for conductors.  The worldwide transmission grids were
designed to overcome the weight and sag drawbacks by placing the conductor under
high tension thereby requiring expensive heavy duty tall tower structures spaced
close enough together in order to hang ACSR at such heights so as to allow for
the expected operational power loads. The heavy duty tower structures are
engineered for the combined weight of the ACSR steel core and the aluminum wire
it supports, while the close proximity of the towers allows a pre-engineered
amount of conductor sag to allow for high power load conditions.  In a
typical transmission grid project, the cost of siting, constructing and
maintaining tower structures can be as much as 80% of the total cost of the
project, depending on the size and strength of the towers and remoteness of the
tower sites, which often require helicopters to bring materials to the tower
site.





Total
Cost of Ownership:





Historically
the industry approach to the total cost of ownership for a transmission line
consisted of:


i.
            capital
      costs for the tower structures and the ACSR conductor;
  and


ii.
            routine
      maintenance for the conductor and tower
  structures.


2


With the
advent of products such as ACCC®
conductor this conventional wisdom is beginning to change.  Twenty
years ago, very little thought was given to the concept of power losses in the
lines, called “line losses” in the power industry.  There were no
commercial alternatives to ACSR and most of the transmission line infrastructure
had been engineered decades before the rapid increase in electricity consumption
over the past twenty years.  Line losses were an acceptable cost of
business for the electrical energy in the U.S.





Resistance
in transmission and distribution conductors, transformers, and other electrical
infrastructure cause line losses through heat losses.  According to
the U.S. Department of Energy (U.S. DOE) Office of Electricity Delivery &
Energy Reliability, the line losses from distribution and transmission increased
from 5% of generated power in 1970 to 9.5% in 2001 (http://sites.energetics.com/gridworks/grid.html
pg 2). On average, using 2001 data, a power plant generating 100 Megawatts of
power will deliver just over 90 megawatts to a consumer, with the rest of the
power lost through heat from the transmission and distribution conductors and
the transformers.





The
Company views the additional power generation required to offset line losses of
the transmission corridor to be a cost of ownership that was previously never
considered by the transmission line operator.  We believe that more
efficient conductors such as ACCC®
conductor will reduce the total cost of ownership by reducing the line losses if
compared to existing transmission conductor alternatives.





Line
losses cost consumers in two ways:





Economically,
the losses are passed through to the consumer through higher rates since it
requires the utility or power generating company to produce more power to
deliver the required megawatts.  The total retail value of grid losses
for 2008, based on U.S. DOE Information Administration data, are estimated at
over $30 billion.  According to the November 2003 U.S. Climate Change
Technology Program report, 60% of the losses are from transmission and
distribution lines resulting in an estimate of $18 billion in economic losses
due to U.S. transmission and distribution conductor line
losses.  Incremental to this cost would be the value, or cost, of the
monetization of the greenhouse gas emissions mentioned below.





Environmentally,
the line losses represent additional greenhouse gas emissions.  In
2007, based on U.S. DOE Information Administration data, over 2.5 billion metric
tons of CO2 was emitted in the U.S. from conventional power
plants.   Based on the information in the sources cited above,
approximately 5.7% or 142 million metric tons of pollution is caused by line
losses, the annual equivalent of approximately 26 million
automobiles.





Over the
past several years, an intense media focus on climate change has raised the
awareness of the need to reduce greenhouse gas emissions. Information is readily
available on the Internet for U.S. based studies by the U.S. Department of
Energy, the California Air Resources Board, and Stanford University’s Precourt
Institute for Energy Efficiency, and internationally by McKinsey & Company’s
landmark “Pathway to a Low Carbon Economy” study which focuses on cost-effective
methods towards global greenhouse gas reductions.  Both the Precourt
and McKinsey studies use an “abatement cost curve” or “marginal abatement curve”
which provides the cost effectiveness of different greenhouse gas solutions and
graphs the greenhouse gas reduction against the total cost of ownership.
Although none of these studies segregate transmission and distribution grid
improvements under a separate heading, each study has “other utility efficiency”
categories and each is considered to be a significantly cost-effective method of
greenhouse gas reductions, listed as a “negative cost” for CO2
remediation.





Recently,
much public attention has been given to the “Smart Grid”, which consists of a
system of monitoring sensors, and grid management tools to optimize the existing
grid.  CTC Cable sees this as beneficial since it highlights the need
for an improved transmission grid, however compared to reconductoring
constrained transmission lines, provides a much lower return on invested
capital.





IV. Our Solutions and
Competitive Advantages





The state
of the transmission grids around the world and the issues faced by grid managers
can be divided into two general categories:





·
            The
      existing grid is aged and capacity constrained due to the greater demand
      for electricity by consumers and a lack of historical investment in the
      grid.


·
            New
      markets in developing countries and new sources of renewable energy, such
      as solar or wind energy require investment in new transmission
      lines.





We
believe that our ACCC®
conductor solution provides a superior total economic return over all other
existing bare overhead transmission conductors.  The total cost of
ownership over the life cycle of either a new transmission line or for
replacement of existing transmission lines is significantly reduced as compared
to the total cost of ownership of ACSR or other conductor products after
factoring in the following costs and benefits:





Capital
Costs:


·
            Lower
      capital costs for tower structures due to fewer or lighter weight tower
      structures (approximately 80% of typical transmission project
      cost)


·
            Higher
      per foot (or meter) capital cost of the more energy efficient ACCC®
      conductor vs. ACSR (approximately 20% of typical transmission project
      cost)





Net
capital costs have been lower for most ACCC®
conductor installations to date.


3


Recurring
Benefits:





·
            Decreased
      power production costs resulting from decreased line losses of
      approximately 33% vs. ACSR, due to the higher aluminum content of
      ACCC®
      conductor, which has more
conductivity


·
            Increased
      transmission revenues at peak demand periods since ACCC®
      conductor can transmit more electricity capacity and operate at higher
      peak operating temperatures which provides utilities with better grid
      management capabilities


·
            Reduced
      “congestion costs”, defined in the industry as the requirement to purchase
      more expensive power due to transmission line constraints which prevent
      the delivery of less expensive, or possibly less pollutive power to the
      consumer


·
            Reduced
      system “brownouts” or “rolling blackouts”, which in turn cause
      unquantifiable general economic losses to utility
  customers


·
            Currently
      unquantifiable economic savings and significant environmental benefits due
      to avoided greenhouse gas emissions by otherwise greater required fossil
      fuel power generation to supply the lost
power.





Product
History:





Our
conductor product was conceived in response to the California energy crisis
during the early to mid 2000's and increased public awareness that the crisis
was not due to a shortage of power generation, which was the conventional wisdom
at the time, but rather due, in part, to constraints in certain
transmission corridors.  In 2001, the Company founders surmised that a more
efficient and effective transmission conductor solution would be to redesign the
transmission conductors themselves, by replacing the heavy steel wire strength
“core” used in traditional “bare overhead” conductors with a light weight
composite core using existing carbon and glass composite
technologies.   The idea was the creation of a conductor that has
a greater aluminum cross section for the same diameter conductor that would have
the same weight and would require fewer or smaller towers, thus reducing the
overall cost of installation.





In very
simple terms, analogous to the concept that a larger water pipe will deliver
more water at lower pressure, than a smaller water pipe; the aluminum on a
conductor functions as the “electricity pipe.”  Under identical
operating conditions, a conductor with a greater aluminum cross-section will
therefore conduct more electricity, at a lower temperature, at less resistance,
and with lower power losses through heat, than a conductor with a smaller
aluminum cross-section.





Cutaway of ACCC®conductor compared with a
traditional ACSR Conductor:









We have
replaced the steel core of traditional ACSR conductor with a lighter, stronger
composite core to create ACCC®
conductor.  By taking out the weight of the steel and using annealed
aluminum, for the same size diameter and weight conductor as ACSR we are able to
increase the conductive cross section allowing approximately 28% more
aluminum.  In effect, for the same weight and size, ACCC®
conductor functions as a larger “electricity pipe” which will allow for easy
replacement on existing tower structures or, for new construction provides for a
larger “electricity pipe” on smaller, fewer, and cheaper tower
structures.





The
source of the benefit is our proprietary ACCC®
composite core, which forms the strength component of ACCC®
conductor.   The ACCC® core
consists of aerospace grade carbon fiber and industrial glass fibers, infused
with a proprietary resin mixture, and pulled through a heated die in a
proprietary pultrusion process.  We manufacture our ACCC® core in
our ISO 9001:2008 certified plant in Irvine, California on internally designed
and constructed machinery that is easily duplicated and scalable into additional
locations.  The ACCC® core is
then shipped to an outsourced licensed contract manufacturer where it is
stranded with trapezoidal aluminum wire around the
core.




We sell
ACCC®
conductor either as a completed conductor ready for installation on the grid or
as ACCC® core to
licensed aluminum stranding manufacturers, which then strand the ACCC® core and
sell the finished ACCC®
conductor to their customers.   As part of our product offering, we
also design and manufacture the hardware required to connect ACCC®
conductor to the tower structures and for splicing lines together.  We
deliberately designed ACCC® hardware
to be installed in a manner consistent with ACSR.  While ACCC®
conductor does require attention to certain differences in handling than ACSR,
ACCC®
conductor installations do not require special tools and are installed in the
same amount of time on the same transmission tower structures.





Other
than as disclosed in our patents, patent applications, and marketing materials,
we consider our manufacturing process, the components used and material
mixtures, types of materials, and methodologies to be trade secrets and part of
our overall strategy to develop and protect our intellectual property rights to
maintain a competitive advantage against competing products.





The
intellectual property used in our ACCC®
conductor has been developed internally and is aggressively protected through
our intellectual property strategy, which has achieved several issued patents
and have filings in over 70 countries.  We continue to aggressively
defend our intellectual property rights, which we believe is a key competitive
advantage.


4


V. Conductor
Market





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





According
to the Department of Energy’s 2009 Annual Energy Outlook reference case, the
U.S. electricity demand is expected to grow 19% between 2009 and 2030 on a grid
that is already overloaded. The 2002 DOE National Transmission Grid Study
identifies 157,800 miles of transmission line and cites that “the U.S.
Electricity Transmission system is under stress and identified key transmission
bottlenecks.” The North American Electric Reliability Corporation (NERC) 2009
Long-Term Reliability Assessment indicates that approximately 260,000 megawatts
of new renewable capacity is projected to come on line by 2018 and that there
will need to be more than double the average number of transmission miles
constructed over the next five years than what was constructed over any previous
five year period since 1990, primarily for integration of renewable energy
resources, reliability, and congestion. It further cites that the number one
emerging issue is transmission siting of new transmission lines.





Factoring
in the push towards renewable energy and the increased focus on reducing
greenhouse gas emissions, the markets could expand beyond what this data
indicates.  The McKinsey study “Pathway to a Low Carbon Economy”
indicates that the global “business as usual” (BAU) analysis projects greenhouse
gas emissions from electricity production worldwide will increase 26% from 2005
to 2020 to 16.2 gigatons per year and projects an abatement potential of 3.4
gigatons of CO2, or 21% of the BAU level for the power industry by
2020.  The capital investment between 2011 and 2020 for such abatement
is estimated to be 148 billion Euros ($220 billion) (Source:  Pathway to a Low Carbon Economy,
pages 155-158, McKinsey & Co.).




Our
ACCC® products
serve both transmission and distribution markets.  Our analysis, based
on market figures provided by the International Energy Associations’ 2008 World
Energy Outlook indicates a worldwide market for transmission and distribution
conductors of $45 billion per year.  We see China as the largest
market with over 30% of the spending, followed by the United States at 11% and
Europe at 10%. With the exception of the United States, a regulatory body such
as a state grid entity or a state utility controls most individual country or
regional markets worldwide.  Technical approvals of the regulatory
body are required prior to obtaining the right to sell product within the
region.  Examples of this would be the state grids of China, Poland,
or Mexico.  In the United States, most independent utilities have
their own technical requirements, resulting in a much more fragmented market in
the United States.  In the U.S., we are currently tracking and
managing over 1,800 transmission projects with projected costs in excess of $185
billion of which we believe $20-25 billion could be for bare overhead
transmission conductor installed over the next 5-7 years.





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





“Green
field” – the term for construction of a new transmission corridor or the
addition of another circuit pathway to an existing corridor. ACCC®
conductor is an excellent solution for green field construction in most cases,
where both the increase in efficiency and the reduction in the number of towers
required is cost effective versus the use of a conventional
conductor.





“Retrofit”
– where additional capacity is required for an existing transmission line and
where such additional transmission capacity can be obtained by installing a
larger sized conductor.  When using a conventional conductor, this
usually requires upgrading the tower structures so that one can handle the
increased weight and tension required when using a larger conductor with greater
aluminum content.  One can usually install our ACCC®
conductor on the same tower system to provide the increased capacity as well as
greater efficiency; or in certain instances where peak demand is all that is
needed, by installing a same size conductor that has higher temperature, low sag
characteristics such as ACCC®
conductor.





“Replacement”
– occurs when a conductor has aged and requires replacement of the same type and
size conductor.  Due to the higher price per linear meter vs. ACSR,
ACCC®
conductor typically is not a solution for replacement installations, unless one
wanted increased energy efficiency or some of the aging towers would otherwise
require weight load de-rating.  We believe that ACCC®
conductor would provide a cost effective solution to expensive tower
upgrades.





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





VI.
Competition





The
competition for ACCC®
conductor depends somewhat on the application of the conductor.  In
general, we believe that ACSR is our primary competition.  Thus far in
this document, we have focused the description of our products and product
advantages by comparing ACCC®
conductor to ACSR conductor since it is the industry standard and represents the
greatest opportunity for market penetration.   ACSR is made using
100-year-old technology and is usually sold by weight as a commodity product by
a multitude of conductor manufacturers including General Cable, Southwire, and
Alcan Cable in the U.S.


5


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





·
            ACSS, or Aluminum Conductor
      Support Steel, is an annealed aluminum conductor using a similar design as
      ACSR but which uses a higher strength steel alloy as its
      core.  ACSS can operate at a higher temperature than ACSR and
      has similar weight to ACSR. ACCC®conductor is superior to ACSS
      both on the basis of reduced high temperature sag, as well as the
      efficiency of transmission.  Although ACSS is less expensive
      than ACCC®conductor on a price per linear
      meter, on most projects our ACCC®conductor is less expensive
      considering capital cost of the total project and in line loss savings due
      to the increased efficiency.





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





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





·
            AAAC, or All Aluminum Alloy
      Conductors, and AAC, or All Aluminum Conductors, are designed to eliminate
      the strength component and make the entire conductor from aluminum using
      alloying elements for AAAC to render the aluminum stronger and increase
      its operating temperature.  Both conductors are very soft and
      cannot be operated at the same temperatures as conventional ACSR since
      they have high levels of thermal sag which requires shorter spans between
      towers, resulting in a more expensive total system installation
      cost.  Both conductors have very limited maximum operating
      temperature ranges, which limits capacity significantly. AAAC and AAC
      conductors have gained commercial adoption in Europe, however, our
      ACCC®conductor of the same diameter
      has approximately the same conductivity and allows a much higher capacity
      and can be easily retrofitted on such
  systems.





·
            Superconductors
      and underground cables.  We do not consider superconductors or
      underground cables to be competitive products to ACCC®
      conductor.  Buried cables cost several times a comparable total
      installation cost and are typically not used for transmission lines due to
      the requirement for high voltage insulation, maintenance and cooling
      issues.  Superconductors are even more expensive to install, in
      the multiple millions of dollars per mile and consequently have had very
      limited government sponsored short trial installations of less than two
      miles in extremely congested city areas where there is a lack of conduit
      space underground.





We
believe ACCC®
conductor has two disadvantages compared to the competition. First, our
ACCC®
conductor is still a relatively new product that incorporates technology that,
while well proven in aerospace and other applications, still has limited
installations in the utility markets even though it has been in commercial
application for almost four years.  At present, over 8,500 kilometers
of ACCC®
conductor have been installed worldwide, which has definitely proven its
effectiveness in transmission and distribution systems. Nevertheless, the ACSR
product we typically replace has been in existence for 100 years, is familiar to
utility management and utility engineers and has been proven to work, and its
limitations are well understood in all types of installations.  Our
product deployment is increasing, even though it does not yet have this legacy
in the utility markets.  Second, our product is more expensive when
compared by the meter or foot than the ACSR conductor for the same diameter
sized conductor.  While we believe and have demonstrated that
installation of our product results in capital cost savings of the overall
project, since less tower construction or other upgrading costs should more than
offset the higher cost per meter or foot of conductor, the sale is still
challenging to convince traditional utility buyers, who are not accustomed to
analyzing costs of a total system when thinking about the actual cost of a unit
of conductor.   We also believe and have demonstrated that there are
additional yearly cost savings from the increased efficiency of electrical
transmission due to lower line losses.  However, it is also
challenging for the typical decision maker to incorporate that into their
analysis, since that falls in a different department and is usually considered a
normal line loss cost that is built into the rate base.





VII. ACCC®Conductor
Marketing





Marketing
Message:





Our
ACCC®
conductor marketing message consists of three primary benefits: 1) energy
efficiency seen through reduced line losses and decreased greenhouse gas
generation emissions, 2) increased power transmission capacity due to higher
operating temperature thresholds, and 3) return on investment through lower
capital costs, improved line losses, and once monetized, value in greenhouse gas
reductions.  This message fits the main issues facing a utility, which
include finding a solution for problems of a constrained existing transmission
grid, improving the energy efficiency to decrease line losses, and mitigating
the increasing risks of the increasingly pollution sensitive public
..  Our message further provides a comparison with other conductors to
illustrate these advantages as well as state the benefits of the total cost of
ownership over the life cycle of the transmission or distribution
line.


6


Marketing
Approach and Strategy:





Our
approach is to demonstrate to utilities the financial benefits of ACCC®
conductor through a lowest total cost of ownership approach while providing
assurances that the mission critical application of electricity transmission
through a product that provides as much, if not more, reliability as the
existing ACSR conductors.  We are also pushing the environmentally
friendly benefits of ACCC®
conductor due to lower line losses.





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





Our total
cost of ownership message consists of four general concepts consisting of costs
and revenue benefits including:





a.
            Capital
      costs including towers, conductor, and
  installation


b.
            Recurring
      maintenance costs


c.
            Transmission
      Revenues and grid management
benefits


d.
            Line
      losses including greenhouse gas emission
  reductions





Capital
Costs:  Our capital costs are lower due to the lower number of towers
required, and that the required towers require less tension than ACSR towers
despite a higher per mile cost of ACCC® conductor
than ACSR.  The cost of new transmission corridors vary widely,
depending on terrain, land acquisition costs and permitting costs, but according
to the National Council on Electricity Policy publications (source data:
American Transmission Company, 10-Year Transmission Assessment, September, 2003)
is typically over $900,000 for a single circuit 345kV “Greenfield” line and can
exceed $1 million per mile for higher voltages.  New construction
often takes years to obtain the necessary permits and environmental studies
prior to breaking ground on a project.  By comparison, it is
considerably less expensive and takes a much shorter amount of time to replace
or “reconductor” existing transmission corridors.  The cost and time
to market to reconductor a transmission corridor is dependent on the number of
tower replacements or retrofits to existing towers but the same source cites a
2003 cost of $400,000 for a 69kV to 138kV upgrade cost using ACSR due to
materials costs, installation charges and tower upgrades.  By
comparison, assuming little or no tower upgrades ACCC®
conductor cost per corridor mile would typically be $150,000 - $200,000 per
circuit replaced, or about half the cost, assuming a minimum number of tower
enhancements or modifications.





Recurring
Maintenance:  We show that the lack of corrosive steel core, as
compared to ACSR, and the lower number of towers with lower tension will result
in an overall lower maintenance cost of ACCC®
conductor.





Transmission
Revenues:  ACCC®
conductor has a higher operating temperature than ACSR which allows for greater
capacity at peak demand times, therefore it can operate at times where an ACSR
line would be subject to “rolling blackouts” or brownouts.  For
developing countries and even developed countries, the reliability of the
transmission grid often causes power reductions or interruptions to industrial
and commercial businesses, which can cause significant decreases in economic
activity.  The higher peak demand ability, as shown by real world
customers of ACCC® in the
U.S, who routinely use their ACCC® line as
an emergency power shunt to reroute power to ensure better grid
reliability.  The temperature limitations of a similar ACSR line would
result in a reduction or elimination of this ability for the transmission
corridor.





Line
losses:  ACCC® shows
superior performance on line losses as compared to an identically sized ACSR
conductor and as described above.





Addressing Risk:  To
overcome the risk averse, conservative barriers to the adoption of a new
conductor by the market, we provide through a third-party insurance company a
three-year Original Equipment Manufacturer Warranty (parts and labor) on all
ACCC®
conductor products currently produced by CTC Cable, and all of its stranding
sources sold worldwide. 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
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 makes our products more attractive
because it reduces much of the risk and uncertainty of adopting the new
product.





We have
reviewed the top markets worldwide and during 2009 we focused on expanding our
market penetration worldwide.  We have penetrated seven worldwide
markets in the U.S., China, Mexico, Chile, South Africa, Indonesia, and several
European countries with commercial sales in each of these areas. In China, we
have operated with a multi-year distribution agreement that is ending at the
close of 2009.  A new form of agreement is being negotiated for 2010
and beyond.  In the U.S. market, we have spent the past five years
working through and completing the technical sales requirements necessary to
allow our conductor to be considered for larger scale
installations.  In addition, we now have nearly four years of
commercial installations and six years of trial installations.  In
Europe, we have made sales to Poland, Spain, Portugal and Belgium with
additional proposals and quotes outstanding in, France, Germany, the
Scandinavian countries, and the UK.  We are also beginning to
penetrate the Latin and South American markets with orders from Mexico and Chile
with quotes and tenders in Brazil and Argentina.  We are currently
qualified to sell and market conductor into the U.S. and China, parts of Europe,
as well as India, Indonesia, Mexico, Canada, Chile, South Africa, Saudi Arabia,
Bahrain, and the UAE.  We are technically certified to sell ACCC®
conductor in approximately 65% of the estimated worldwide transmission
markets.


7


VIII.
Sales





We have
made several important commercial sales in the United States, Europe, China,
South America, and South Africa.   Our U.S. sales are made both
as finished ACCC®
conductor sold directly to the customer and as ACCC® core
sales directly to our stranding source who in turn sells ACCC®
conductor to the end user customer.





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




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





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





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





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





As of
September 30, 2009, we had agreements with six stranding manufacturers: General
Cable in La Malbaie, Canada; Lamifil, NV in Belgium; Midal Cable in Bahrain; Far
East Composite Cable Co. in Jiangsu, China, PT KMI Wire and Cable Tbk and PT GT
Kabel Indonesia Tbk. We are currently negotiating for additional stranding
contractors to serve the South American, Australian, Asian, and North American
markets.





In
January, 2007 we announced a three year manufacturing and distribution agreement
with Far East Composite Cable Co., a subsidiary of Jiangsu New Far East Cable
Company, where they agreed to the purchase of a minimum of 600 kilometers of
ACCC®
conductor per quarter for year one with increases to 900 kilometers and 1,200
kilometers per quarter in years two and three.  Although they did
purchase the minimum amounts in the first years, to date in 2009, Jiangsu has
not purchased the minimum quantity of ACCC® core
required under the agreement. Far East Composite Cable Co. did qualify in
September 2007 to become certified to strand ACCC® core at
their plant in Jiangsu, China. This agreement will terminate in December
2009 but  are in the process of renegotiating our contract with Far East
Composite Cable Co.





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





Customers





Our
customers purchase stranded ACCC®
conductors and ACCC® hardware
and consist of electric utilities, engineering companies, our stranding
manufacturers and our distributors.  During the 2009 fiscal year, our
consolidated revenue was derived from a broadening mix of domestic and
international customers.  The breakout of revenue by geography for
2009 is as follows; China 53.6%, North America 27.6%, Middle East 7.4%, Latin
America 4.7%, Europe 4.5%, and other markets totaling 2.2%. For the year ended September 30, 2009,
53.6% and 16.8% of our CTC Cable revenue were derived from two customers, Far
East Composite Cable Co., and Allteck Line Contractors Inc., a Canadian
corporation, respectively.


Backlog:





We
believe our backlog of firm orders for 2009 is $9.2 million of which $0.2
million is with a customer in China.  Our backlog in 2008 was $11.8
million of which $5.4 million was with the customer in China.




IX.
Manufacturing





We
produce the composite core component of the ACCC®
conductor through CTC Cable Corporation in Irvine, for sale to conductor
manufacturers that strand and distribute the finished conductor in their
particular markets. The manufacture of the core uses a proprietary continuous
process, which allows numerous glass and carbon filaments to be pre-tensioned,
impregnated with high performance resin systems, and then rapidly cured as the
product emerges through a heated die. The proprietary resin formulations we use
are highly resistant to temperature, impact, tensile and bending stresses, as
well as to harsh environmental conditions encountered in the
field.  Primarily for quality control reasons, core manufacture is
carried out at our facilities in Irvine, California. The production facilities
in Irvine were certified under ISO 9001:2000 in November, 2006, and re-certified
in November 2007 and November 2008 per the annual audit.  In October
2009 the facilities were certified ISO 9001:2008. 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 2010 as presently
envisioned.


8


We
currently have 18 pultruder machines in production, capable of producing
approximately 18,000 km of ACCC® core per
year representing potential revenues of between $100 million and $250 million,
depending on the size of the ACCC®
conductor and whether the final product is ACCC® core or
the stranded higher value ACCC®
conductor.  We currently have sufficient capacity with our existing
machinery to handle our anticipated production needs for the next year, but we
have prepared plans to open additional ACCC® core
manufacturing plants outside of California to allow for additional expansion and
to mitigate the risk of overreliance on one plant.  We are also considering
vertical integration or entering into a strategic relationship to provide for an
uninterrupted supply of ACCC®
conductor through an investment in an aluminum stranding facility.  We also
produce parts for and license the production of the special connecting hardware
accessories required to install ACCC®
conductor and to ensure that the connecting hardware supply will match conductor
sales requirement.





The
principal raw materials in the production of the patented ACCC® core are
glass and aerospace grade carbon fibers, combined with specific polymer
resins.  Our conductor stranding manufacturers use similar aluminum
rod materials typical in the production of bare overhead
conductor.  Connecting hardware 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.





Over the
past year, due to the reduced demand by aerospace customers of our carbon fiber,
we have seen a per unit price reduction by our carbon vendors even with
consistent purchase volume.  However, should the aerospace industry
recover and begin to purchase additional quantities of this material, our costs
may increase.





X. DeWind Discontinued
Operations





The
DeWind segment sold wind turbines that produce electricity and intended to
develop wind farms incorporating these turbines.  The DeWind segment
represents the successor operations of the EU Energy, Ltd., acquisition
completed in July 2006.  DeWind sold wind turbines in the U.S.,
Europe, and South America directly to utilities and wind farm developers as a
turnkey wind turbine unit.





The
divestiture of DeWind was a decision driven by the worldwide banking and credit
crisis.  DeWind had focused its sales and marketing efforts into the
North American and South American markets to take advantage of its innovative
D8.2 technology.  Following the June 2008 cash investment by Credit
Suisse and the signing of turbine contracts in September and early October of
that year, DeWind began to invest a significant amount of cash into its supply
chain.





At the
beginning of the fiscal year, in October, 2008 DeWind had orders in excess of
$150 million from customers with established track records of success in wind
farm project completion and had received initial payments on the largest of
these orders, which included orders for 60 units of the new D8.2
turbine.  DeWind began to make advance payments for parts and to
increase its commitments for turbine parts in anticipation of the fulfillment of
these orders.  In October, 2008, this customer defaulted on scheduled
payments required under their turbine purchase agreement.  The payment
default was due to the loss of financing for their wind project caused by the
worldwide credit contraction. Further, with the collapse of several wind
industry financing institutions, notably Lehman Brothers which had previously
been heavily involved in the organization of “tax equity” funding in the U.S.,
it was apparent that there had been a fundamental change in the ability for
small and medium sized wind projects to be funded.





In
November 2008, after the realization that the worldwide economic and banking
crises were long lasting and were causing a significant delay or cancellation of
financing for wind farms, the Company determined that unless the business
environment reverted back to pre-credit crisis levels, the Company did not have
the financial resources to continue to fund DeWind without significant amounts
of additional capital.  Therefore the Company’s Board of Directors
approved a contingency plan to seek strategic investment partners or divest its
ownership stake in DeWind.  In December, 2008 the Company engaged the
services of RBS Securities, who had substantial industry knowledge of the wind
industry and who had assisted in other significant wind industry M&A
activities.  Between February 2009 and June 2009, the Company had
circulated investment memoranda and due diligence materials to over 150 separate
interested parties concluding with on site discussions and bids from multiple
parties.  In June 2009, the Company signed a Bridge Loan agreement for
$5 million in order to provide sufficient cash to continue its operations
through the conclusion of the DeWind asset sale.  In August, 2009 the
Company completed negotiations with the winning bidder, Daewoo Shipbuilding and
Marine Engineering (DSME), and signed an Asset Purchase Agreement on August 9,
2009 valued at $49.5 million in cash.  The transaction closed on
September 4, 2009 and the Company received approximately $32.3 million in cash
with $17.2 million in cash escrowed to cover certain contingent
liabilities.  Of the escrowed cash, $5.5 million is expected to be
released within one year after the achievement of certain milestones and $11.7
million expected to be released over longer time periods.





Under the
terms of the transaction disclosed on forms 8-K filed on August 14, 2009 and
September 11, 2009, DeWind sold substantially all of its operating assets
including all inventories, receivables, fixed assets, wind farm project assets
and intangible assets including all intellectual property and DSME assumed
substantially all operating liabilities of DeWind including supply chain and
operating expense account payables and accrued liabilities, warranty related
liabilities for U.S. turbine installations, and deferred
revenues.  All former DeWind employees were also transferred to DSME
employment.  DSME did not acquire any cash balances of DeWind;
acquired only the long-term assets of one of the European subsidiaries, leaving
all other assets and liabilities of that entity intact; and did not acquire
certain assets and liabilities of the US DeWind subsidiary tied to one turbine
supply contract.  As part of the transaction, the Company is
prohibited from developing, marketing, or selling competing wind turbine
technology for five years except that the Company retained the rights to develop
and sell wind farm projects.


9


The
divestiture of DeWind provided a significant amount of cash to the Company’s
balance sheet, and reduced cash spending for DeWind operating expenses and
working capital requirements.  However, the Company remains exposed to
and may need to continue to expend resources in order to defend its legal
positions including litigation previously filed, or expected to be filed by FKI
and claims made or assigned by the receiver of subsidiaries filed for insolvency
in 2008 as well as certain former suppliers of DeWind.





All of
the remaining assets and liabilities of the remaining portions of DeWind,
subsequently renamed Stribog, have been classified as net liabilities of
discontinued operations.  All operations of DeWind have been
classified as discontinued operations.





XI. Intellectual
Property





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





In
connection with our ACCC®
conductor business, CTC Cable Corporation currently has nine issued U.S. patents
and eight pending U.S. patent applications, three of which are
continuation-in-part applications, one of which is a pending U.S. application
claiming priority to a PCT international application. Of the nine issued U.S.
patents, two, U.S. Patent Numbers 7,368,162 and 7,211,319, are the subjects of
pending litigation and are currently undergoing reexamination procedures with
the U.S. Patent and Trademark Office. In addition, three PCT international
applications have entered the national phase and are currently pending in over
70 strategic countries world-wide. Of these pending applications, twenty-one
applications have been granted. These patent applications cover subjects
including composite materials as applied to electrical transmission conductors
and related structural apparatus and accessories, manufacturing processing
techniques, cross sectional composite core designs for electrical transmission
cables and methods and designs for splicing composite core reinforced cables.
CTC Cable Corporation plans to continue filing and supplementing these patent
applications with new information as it is developed. The issued, pending
patents, and provisional U.S. applications, if issued, have patent terms that
will end within the period of 2023 to 2029, depending on the filing dates of
each of the applications. Based on available information and after prior art
searches by our patent strategists, we believe that the pending and issued
patent applications provide the basis for us to, over time, be issued a number
of separate and distinct patents. If CTC Cable Corporation continues to be
successful in being granted patent protection consistent with the disclosures in
these applications, we anticipate that we could have a strong position in the
field of composite-based electrical conductors.




Our
business and competitive position are dependent upon our ability to protect our
proprietary technologies. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to obtain and use information that we regard as
proprietary.





There can
be no assurance that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
our proprietary information, that such information will not be disclosed or that
we can effectively protect our rights to unpatented trade secrets or other
proprietary information.





There can
be no assurance that others will not obtain patents or other legal rights that
would prevent us from commercializing our technologies in the United States or
other jurisdictions.




From time
to time, we may encounter disputes over rights and obligations concerning
intellectual property. For instance, we are currently engaged in a legal dispute
with Mercury Cable & Energy, LLC. in which Mercury has alleged that our
patents are not valid. Also, the efforts we have taken to protect our
proprietary rights may not be sufficient or effective. Any significant
impairment of our intellectual property rights could harm our business, our
reputation, or our ability to compete. Also, protecting our intellectual
property rights could be costly and time consuming.





XII. Research and
Development





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





We spent
$2,703,000, $4,519,000, and $4,187,000 on research and development activities in
fiscal years 2009, 2008 and 2007, respectively.





XIII. Governmental
Regulation





We are
not aware of any specific government regulations governing the design and
specifications of bare overhead conductors in the United States or in Europe
that restrict our ability to sell our products. We do not believe the
manufacture of ACCC®
conductor is subject to any specific government regulations other than those
regulations that traditionally apply to manufacturing activities such as the
Occupational Safety and Health Act of 1970 or similar occupational safety
regulations in our other manufacturing locations.





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


10


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





XIV.
Employees





As of
November 15, 2009, we had a total of 111 full time employees including 110
employees in the United States and 1 employee in Europe. We also used the
services of 5 consultants on a regular basis for a variety of tasks and
responsibilities. Additional consultants are employed as required for specific
tasks.  None of our US based employees are currently represented by a
labor organization. We believe that relations with our employees are
good.





XV.
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 2009 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.




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 $75 million in
ACCC® product
sales since inception. 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.





WE WILL
NEED ADDITIONAL DEBT AND EQUITY FINANCING FOR OUR COMPANY.  IF WE ARE
UNABLE TO RAISE A SUFFICIENT AMOUNT OF ADDITIONAL WORKING CAPITAL OR TO
RAISE IT IN A TIMELY MANNER IT COULD NEGATIVELY IMPACT OUR ABILITY TO FUND
OUR OPERATIONS, TO GENERATE REVENUES, AND TO OTHERWISE EXECUTE OUR BUSINESS
PLAN, LEADING TO THE REDUCTION OR SUSPENSION OF OUR OPERATIONS AND ULTIMATELY
LIQUIDATION OF OUR BUSINESS.





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





11




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


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





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 our
reorganization in 2001, we have had a limited operating history and are at an
early stage of commercialization of a new technology product to a market unused
to using new technologies. We made ACCC®
conductor available and entered into our first commercial agreement in
2003.





Our conductor
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
POTENTIAL CUSTOMERS DO NOT ACCEPT OUR CONDUCTOR PRODUCTS, IT IS UNLIKELY THAT WE
WILL EVER BECOME PROFITABLE.





The
electrical utility industry has historically used a variety of technologies,
which have been proven over time to be reliable. Compared to these conventional
technologies, our technology is relatively new, and 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. In order to be successful,
our products must meet the technical and cost requirements for electric
generation and transmission within the electric utility industry. Market
acceptance will depend on many factors, including:




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




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




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




(iv) 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.




WE ARE IN
THE PROCESS OF WINDING DOWN OUR REMAINING FORMER DEWIND
SUBSIDIARIES.  THESE SUBSIDIARIES HAVE RESIDUAL WARRANTY LIABILITIES
AND MAY HAVE UNRECOVERABLE ASSETS AND ADDITIONAL LIABILITIES.  TWO OF
OUR LEGACY DEWIND EUROPEAN SUBSIDIARIES HAS BEEN DECLARED
INSOLVENT.  THIS INSOLVENCY MAY CAUSE UNFORESEEN PROBLEMS AND MAY
REQUIRE CTC TO PROVIDE FUNDING TO SATISFY CERTAIN LIABILITIES OR WE MAY BE
REQUIRED TO INDEMNIFY THE PURCHASER OF THE DEWIND ASSETS FOR LOSSES INCURRED AS
A RESULT OF THIS WINDING DOWN PROCESS.





Our
remaining interest in our DeWind subsidiaries includes certain residual
liabilities for European turbines remaining under warranty and supply chain
related prepayments which may be recoverable in part, or not at
all.  We also still retain assets and liabilities in former DeWind
subsidiaries including disputed but recorded liabilities to subsidiaries that
have been declared insolvent.  The operations of the insolvent
subsidiary prior to its insolvency was limited to warranty related activities in
existence prior to our acquisition of the DeWind business.  While we
do not believe that the insolvency will cause operational issues to our existing
businesses, this subsidiary formerly owned intellectual property developed prior
to our acquisition of DeWind in 2006 which was subsequently included in the
intellectual property portfolio sold to DSME.  The insolvent
subsidiary is now under the control of a receiver in Germany who has assigned
certain potential claims for intellectual property rights to a party
related to FKI, who is in litigation against us. We believe that we have
purchased all pertinent intellectual property rights from these
subsidiaries prior to the declaration of insolvency under the terms and
conditions of contractual agreements in effect prior to our acquisition of the
DeWind business.  While we believe these transactions to be valid and
binding, under German law, for a subsidiary in insolvency, the receiver may look
back and attempt to void those intellectual property
acquisition contracts and agreements.  If these rights to this
technology are impaired or diminished, which we intend to vigorously defend, if
required, we may be required to indemnify DSME, the purchaser of the DeWind
assets under the terms of the Asset Purchase Agreement or to provide additional
consideration to the assignee of the claims. Such indemnification could include
all, part, or more than all of the cash escrowed under the terms and conditions
of the DSME Asset Purchase Agreement.


12




WE ARE
REQUIRED TO INDEMNIFY DSME UNDER THE TERMS AND CONDITIONS OF THE ASSET PURCHASE
AGREEMENT WITH DSME DATED SEPTEMBER 4, 2009 IN AN AMOUNT UP TO $35 MILLION UNDER
CERTAIN CONDITIONS.  INCLUDED IN OUR BALANCE SHEET FOR SEPTEMBER 30,
2009 IS $17.2 MILLION OF CASH THAT IS ESCROWED FOR POTENTIAL
INDEMNIFICATIONS.   WE MAY BE REQUIRED TO REFUND CASH FROM THE
PROCEEDS RECEIVED EITHER OUT OF THE ESCROWED FUNDS OR FROM OTHER
SOURCES.  WE MAY NOT RECOVER ALL OR PART OF THE ESCROWED CASH BALANCES
OR THE RECOVERY OF THE ESCROWED CASH MAY BE DELAYED LONGER THAN
ANTICIPATED.
 
 The
Company has placed $17.2 million in cash in escrow to indemnify DSME if claims
are made against DSME by third parties and those claims are determined to be
valid and enforceable.  The cash is to be released from escrow over
time with the final payment due as much as three years after September 4, 2009
or later under certain conditions, including if valid claims against the Company
or DSME are made.  Our intention is to vigorously defend DSME and the
Company against any such claims should they occur.  Defense of such
claims may result in additional costs and cash expenditure to maintain the
Company’s interest in the restricted cash or to limit potential
liability.  In the event that claims are successful, the balance
payable to DSME may include all, part, or cash amounts in excess of the $17.2
million escrowed including potentially an additional $17.7 million up to a total
of $34.9 million under certain conditions, which are not expected by the
Company.  If such claims are successfully made, this would result in
additional losses on the DSME transaction and could require a substantial refund
of the proceeds received.




WE HAVE
EXPOSURE TO FOREIGN CURRENCY RISK AND WE ARE NOT ADEQUATELY HEDGED AGAINST SUCH
FOREIGN CURRENCY EXPOSURE.





We retain
residual asset and liability balances in our former DeWind subsidiaries in Euro
and Sterling denominations.  We currently do not have a foreign
exchange hedging strategy in place and the recent depreciation of the dollar
against the Euro has caused additional foreign currency
losses.   If the local currency value depreciates against the
Euro or Pound Sterling, we may incur substantial foreign currency losses or
incur additional expenses.





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





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





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





Failure
to adequately protect our proprietary rights could enable third parties to use
our technology, or very similar technology, and could reduce our ability to
compete in the market, and any proprietary rights litigation could be time
consuming and expensive to prosecute and defend. Due to the importance of
proprietary technology in the electrical utility and wind energy industries,
establishment of patents and other proprietary rights is important to our
success and our competitive position. Performance in the electrical utility
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. As described in Item 3 below, we
have filed suit against the Mercury group for breach of contract, unfair
competition, fraud, intentional interference with contract, and injunctive
relief.  We believe our claims to be valid although the outcome is not
known and we may incur significant legal expenses related to this claim that we
may never recover.





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





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





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




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


13


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




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




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




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




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




Our
business could be seriously harmed if: (i) we cannot obtain suitable partners;
(ii) our cable partners fail to achieve significant sales of 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.





The
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, 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.




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





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





As of
November 30, 2009, Benton H Wilcoxon, our Chairman of the Board, and Credit
Suisse control 31% of the Company’s outstanding common stock. As a result, these
persons have significant influence in determining the outcome of any corporate
matters submitted to our shareholders for approval, including mergers,
consolidations and the sale of all or substantially all of our assets, election
of directors and other significant corporate actions. They could potentially
have the power to prevent a change in control. The interests of these
shareholders may differ from the interests of the other shareholders, and may
limit the ability of other shareholders to affect our management and
affairs.





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





For the
year ended September 30, 2009, three customers represented 77.8% of revenue (one
in China at 53.6%, one in Canada at 16.8% and one in the Middle East at
7.4%).  For the year ended September 30, 2008, two customers
represented 96.0% of revenue (one in China at 76.1% and one in Europe at
19.9%).  For the year ended September 30, 2007, two customers
represented 93.6% of revenue (one in China at 80.3% and one in Canada at
13.3%).





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.


14


OUR
BUSINESS MAY BE SUBJECT TO INTERNATIONAL RISKS.




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




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




(ii)
challenges in staffing and managing foreign operations;




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




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




(v)
political instability;




(vi)
changes in currency exchange rates;




(vii)
currency exchange controls; and




(viii)
potentially adverse tax consequences.




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





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





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




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





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





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




The
market in which we compete is competitive. Our conductor competitors include
makers of traditional bare overhead wire and other companies with
developmental-stage products that may be marketing or developing products that
compete with our products or would compete with them if developed. 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.


15


THE
COMPANY HAS HAD A HISTORY OF MATERIAL WEAKNESSES IN THE ACCOUNTING, FINANCIAL
AND BUSINESS INTERNAL CONTROL STRUCTURE.





The
Company has determined that the internal control structure of the consolidated
entity has material weaknesses that will require the investment of additional
resources to mitigate and resolve.   The Company may be required to
hire additional employees, consult with expert advisors, invest in Informational
Technology, provide for additional Board oversight and add an internal
audit function.  These remediation efforts may consume additional
financial resources resulting in additional expense to the Company.





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 fiscal months, the closing bid prices for our common
stock have fluctuated from a high of $.73 to a low of $0.16. Fluctuations in the
trading price or liquidity of our common stock may adversely affect our ability
to raise capital through future equity financings.





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




To the
extent we have earnings, we plan to use them to fund our operations. We have not
paid dividends on the common stock and do not anticipate paying such dividends
in the foreseeable future. We cannot guarantee that we will, at any time,
generate sufficient surplus cash that would be available for distribution as a
dividend to the holders of our common stock. Therefore, any return on your
investment would be derived 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.


16


THE
EXERCISE PRICE OR CONVERSION PRICE OF OUTSTANDING OPTIONS, WARRANTS AND
CONVERTIBLE NOTES MAY BE LESS THAN THE CURRENT MARKET PRICE FOR OUR COMMON
SHARES. IN THE EVENT OF THE EXERCISE OF THESE SECURITIES, A SHAREHOLDER COULD
SUFFER SUBSTANTIAL DILUTION OF HIS, HER OR ITS INVESTMENT IN TERMS OF THE
PERCENTAGE OWNERSHIP IN US AS WELL AS THE VALUE OF THE COMMON SHARES
HELD.





As of
December 2, 2009, 4,728,000 Common Shares are issuable upon exercise of all
outstanding options, warrants and conversion of convertible notes for less than
the market price of $0.33 per share. Full exercise and conversion of these below
market shares would result in us receiving cash proceeds of
$1,182,000.  We have a substantial number of additional options,
warrants, and shares issuable from convertible debt outstanding that are “out of
the money.”  The number of shares issuable with exercise price below
market prices is approximately 1.6% up to a price of $0.35 per share, but
increases significantly if a market price were to exceed recent market high
prices.  If the market price were to increase above the $0.35 and to
$1.00 market price points, both either close to or below recent market prices,
there could be significant additional dilution.  At December 2, 2009
the full exercise and conversion of options and warrants priced at $0.35 or
below would increase the cash proceeds to $10.0 million and result in an
additional 29.9 million shares, or 10.4% dilution.  At a $1.00 price
point, the full exercise of all options, warrants, and convertible debt which
have exercise or conversion prices below $1.00 per share would provide cash
proceeds of $14.0 million and would result in an additional 43.3 million shares
or an additional 15% dilution.





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





Our
quarterly revenue and operating results are difficult to predict and may
fluctuate significantly from quarter to quarter.  Our CTC Cable
business has a significant portion of its revenue sourced from one customer in
China and revenue recognition is determined by shipment of products to this
customer subject to their delivery schedules.   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;




(ii)
significant delays in sales that could adversely impact our cash flow relating
to 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.


17


ITEM
1B.   UNRESOLVED STAFF COMMENTS





None.





ITEM
2 -   PROPERTIES





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





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.




ITEM
3 - LEGAL PROCEEDINGS





Below we
describe the legal proceedings we are currently involved in or resolved during
the fiscal year ended September 30, 2009 through the date we prepared this
report:




FKI
Engineering Ltd., FKI plc, and Brush Electrical Machines Ltd (collectively
“FKI”) v. the Company and certain of its wind segment subsidiaries (here
referred to as “DeWind”); DeWind v. FKI
 
 As of
October 1, 2008 there were adjudicated claims from 2007 between FKI and DeWind
whereby the court awarded FKI damages of 1,546,000 Euros (US $2,323,000 at
November 30, 2009 exchange rates) against DeWind Holdings Ltd., a United Kingdom
corporation, and 765,000 Euros (US $1,149,000 at November 30, 2009 exchange
rates) against DeWind GmbH, a German corporation, related to parent-level
guarantees that DeWind GmbH customers made against them.
 
 DeWind
GmbH and DeWind Holdings also had pending claims against FKI for failure to
replenish DeWind GmbH’s capital accounts in 2005.
 
 In
September, 2008, DeWind GmbH filed for insolvency proceedings in part due to the
impending costs and losses related to the litigation against FKI and in part due
to the negative operational cash flows and cash position of the
subsidiary.  Effective in October, 2008 the receiver for DeWind GmbH
appointed by the court in such insolvency proceedings assumed responsible for
pursuing the DeWind GmbH claim against FKI for its capital accounts
litigation.   In November, 2008 a winding up petition was filed
by FKI for DeWind Holdings, Ltd due to non-payment of a statutory demand for
1,545,596 Euros (US $2,322,000 at November 30, 2009 exchange rates) filed
in January, 2008 and included in the amounts listed above that were adjudicated
in December, 2007.  On November, 21 2008 FKI filed for and received
approval to dismiss the DeWind GmbH capital accounts claim on December 10, 2008
unless a total of 110,000 Euros (US $165,000 at November 30, 2009 exchange
rates) of court and legal costs are paid for by DeWind Holdings or guaranteed by
another entity.  Composite Technology Corporation is no longer
involved in the court proceedings between DeWind GmbH and the FKI parties and
neither Composite Technology Corporation nor its remaining subsidiaries has made
or guaranteed payment.  The Company is not aware whether the DeWind
GmbH receiver has made, or intends to make, any such payment or intends to
pursue the DeWind GmbH capital claim.  Upon filing for insolvency, the
DeWind GmbH receiver, at his sole direction, is responsible for the legal
activity surrounding the capital accounts claim.
 
 FKI has
attempted to enforce collection of the judgments due to FKI in the DeWind cases
from two of the Company’s subsidiaries, DeWind GmbH and its holding company,
DeWind Holdings, both of which are now in insolvency proceedings. DeWind
Holdings’ only asset is the share capital of DeWind GmbH.  DeWind
Holdings is in turn a wholly owned subsidiary of DeWind Turbines, Ltd. which is
in turn a wholly owned subsidiary of Composite Technology
Corporation.  There are no parent company guarantees provided by
DeWind Turbines, Ltd. or Composite Technology Corporation for either DeWind
Holdings or DeWind GmbH.   Prior to insolvency proceedings,
DeWind GmbH operated substantially for the purpose of servicing and managing the
warranty liabilities related to wind turbines sold up to June, 2005 while DeWind
was under FKI control.  The resolution of the capital reserve accounts
issues is not reasonably estimable at this time and no contingent asset has been
recorded to date for any future funds potentially receivable from FKI, if any,
to resolve the capital reserve account issues.
 
 Insolvency
of DeWind GmbH and DeWind Holdings
 
 DeWind
GmbH
 
 On August
29, 2008 in Lubeck Local Court – Bankruptcy Court, Lubeck Germany, DeWind GmbH,
an indirect subsidiary of the Company, filed for voluntary insolvency in lieu of
a required recapitalization under German statute  of approximately
5,000,000 Euros (US $7,512,000 at November 30, 2009 exchange rates) (Case No.
53a1E
8/08).  The DeWind GmbH subsidiary had limited operational
function for the DeWind segment, functioning solely to provide services on wind
turbines that remained under warranty and which warranties were entered into
prior to June, 2005 and in pursuit of the FKI capital claim described
above.   DeWind GmbH had incurred losses of $11.9 million and $8.7
million for fiscal 2007 and 2008 respectively, despite a significant reduction
in the number of turbines under warranty.   Concurrent with the
filing of the insolvency, unless assigned by the receiver or pursued by the
receiver, DeWind effectively relinquished its right to pursue the capital
claim against FKI to the control of the insolvency receiver.


18
 On
September 18, 2008 an insolvency receiver was appointed and set an initial
reporting date in December, 2008 and which was primarily procedural in
nature.  No formal reporting has been received since December,
2008.  During the year, the insolvency receiver has, or is in the
process of assigning all actual and potential claims of DeWind GmbH including
without limitation, potential claims of DeWind GmbH against the Company, DeWind
and other DeWind subsidiaries including potential claims against the Company’s
remaining operating subsidiary in the UK, DeWind Ltd.  On September 8,
2009, the insolvency receiver for DeWind GmbH and FKI entered into an Agreement
in regard to a Settlement of Claims in which the insolvency receiver assigned
any potential claim DeWind GmbH held against the Company, DeWind, Inc. and
related Company entities to FKI for undisclosed consideration. All liabilities
associated with these potential claims are recorded in liabilities from
discontinued operations.
 
 DeWind
Holdings Ltd.
 
 On
January 9, 2009 the Directors of DeWind Holdings, Ltd. filed for insolvency
proceedings in the Queen’s Bench Court.  On January 12, 2009 the court
dismissed the winding up petition filed by FKI as a result of DeWind
Holdings  filing for insolvency proceedings.
 
 Composite
Technology Corporation v. FKI PLC
 
 On
October 30, 2009 the Company filed an action for negative declaration in the
Court of Lubeck, Germany against FKI (Case No. 170256109) to set the value of
the intellectual property of Dewind GmbH that had been transferred to DeWind
Ltd. in August, 2008 at no more than 1,000,000 Euros ($1,502,000 at November 30,
2009 exchange rates) and to verify the propriety of the transfer.  The IP
had been transferred under the terms of a Dewind intercompany agreement for
500,000 Euros paid in cash ($751,000 at November 30, 2009 exchange rates) prior
to the Dewind GmbH insolvency filing.  FKI and the insolvency receiver
claim the value of the IP to be significantly higher and that the transfer was
improperly conducted.  The Company believes that the value of this IP is
substantially less than 1,000,000 Euros.  The Company has not recorded
a liability associated with the difference in the price paid and the amount
listed in the negative declaration, as it is uncertain that the court will
uphold the Company’s claim estimate.
 FKI
PLC and FKI Engineering Ltd v. Composite Technology Corporation
 
 On April
30, 2009, FKI PLC and FKI Engineering Ltd. (FKI) filed a petition with the
United States District Court, Central District of California, under 28 U.S.C.
§1782(a) (Case No. CV-09-5975-ABC(CFE)),
asking the Court to permit FKI to proceed with certain discovery in the United
States against the Company for use in the DeWind GmbH and DeWind Holdings
insolvency proceedings.  The Court granted the request and the Company
is currently in the process of responding to such requests.
 
 Composite
Technology Corporation and CTC Cable Corporation v. Mercury Cable & Energy,
LLC, Ronald Morris, Edward Skonezny, Wang Chen, and “Doe” Defendants 1-100
(“Mercury”)
 
 On August
15, 2008 the Company filed suit in the Superior Court of the State of
California, County of Orange, Central Justice Center (Case No. 30-2008 00110633)
against the Mercury parties including multiple unknown “Doe” defendants,
expected to be named in discovery proceedings, claiming Breach of Contract,
Unfair Competition, Fraud, Intentional Interference with Contract, and
Injunctive Relief.  Several of the Mercury parties had filed a claim
under the Company’s Chapter 11 bankruptcy proceedings which was settled during
the bankruptcy and which provided for certain payments for sales made to
China.  The settlement agreement included non-compete agreements and
stipulated the need to maintain confidentiality for the Company’s technology,
processes, and business practices.  The Company claims that the
Mercury parties have taken actions, which violate the Settlement Agreement and
the Bankruptcy Court Order, including the development of and attempting to
market similar conductor products and misusing confidential information and the
Company further claims that the Settlement Agreement was entered into with
fraudulent intent.  The Company claims that the Mercury parties
engaged in unlawful, unfair, and deceptive conduct and that these actions were
performed with malice and with intent to cause injury to the
Company.  The Company is asking for actual damages, punitive damages,
and attorney fees.  No estimate of such damages can be made at this
time and no accrual for such fees is included in the Company’s financial
statements at September 30, 2009.
 19
  On
December 5, 2008, Defendants filed a cross-complaint against CTC and some of the
company's officers. Defendants served the cross-complaint only on the company
(i.e., none of the individual cross-defendants have been served). The Company
filed several motions aimed at dismissing certain of the cross-claims, which
resulted in the Defendants filing several amended pleadings. On May 12, 2009 the
Court granted the Company’s motion directed to the sixth cause of action
contained in the second amended cross-complaint, and dismissed that claim with
prejudice.  The Defendants’ cross-complaint asserts claims for fraud
in inducing the settlement agreement, rescission of the settlement agreement,
breach of the settlement agreement, accounting, and declaratory
relief.
  On March
2, 2009, the Company’s subsidiary, CTC Cable Corporation ("CTC Cable"), filed a
lawsuit against Mercury Cable & Energy, LLC ("Mercury") in the United States
District Court for the Central District of California, Southern Division (Case
No. SA CV 09-261 DOC (MLGx)), seeking damages for infringement of CTC Cable's
United States Patent No. 7,368,162 (’162) and United States Patent No. 7,211,319
(‘319), and for infringement of a CTC Cable copyright
registration.  The Company is asking for actual damages, treble
damages, attorneys fees, interest, costs and injunctive relief.  No
estimate of such damages can be made at this time and no accrual for the
Company’s future fees and costs is included in the Company's financial
statements at September 30, 2009.
  In
response to this lawsuit, Mercury has requested the United States Patent and
Trademark Office reexamine the '162 and '319 patents and requested the Court to
stay the patent and copyright lawsuit pending the Patent Office's final
reexamination of CTC's patents.  The Court granted Mercury's request
to stay the lawsuit pending the Patent Office’s final decisions. CTC's copyright
infringement claim is also stayed pending the Patent Office’s
decisions.
  On
November 4, 2009, the Patent Office issued a first Office Action in the
re-examination of the '319 patent.  As is common practice, the Patent
Office has initially rejected most of the claims based on the prior art patents
submitted with Mercury's reexamination request pending response by CTC. However,
the Patent Office did confirm the validity of claim 17 of the patent. CTC is
currently preparing a full and complete response to this Office Action. On
November 23, 2009, Mercury issued a press release falsely stating that the
Patent Office “invalidated” 28 of 29 claims contained in the '319
patent.  Contrary to Mercury's latest press release, the Office Action
did not serve to invalidate any claims of the patent and all of the Company’s
patent claims being reexamined are in force during the pendency of the
reexamination.
  In
response to Mercury’s false press release, on November 25, 2009, the Company
filed an application with the Court requesting partial relief from the stay for
the purpose of amending the complaint against Mercury to include a trade libel
claim and to permit the Company to prosecute this claim against
Mercury.  The Company has also requested that a preliminary injunction
be issued to prohibit Mercury from making any further false or misleading
statements about the validity of the Company’s patents.  On December
1, 2009, Mercury filed its opposition with the Court.  The matter is
currently under submission.
  In
Re Composite Technology Corporation Derivative Litigation (Brad Thomas v. Benton
Wilcoxon, Michael Porter, Domonic J. Carney, Michael McIntosh, Stephen Bircher,
Rayna Limited, Keeley Services Limited, Ellsford Management Limited, Laikadog
Holdings Limited, James Carkulis, and Does 1 through 1000 (including D. Dean
McCormick, III, CPA as Doe 1, John P. Mitola, as Doe 2, and Michael K. Lee, as
Doe 3) and Nominal Defendant Composite Technology
Corporation)
 20




On June
26, 2009 Mr. Brad Thomas, alleged to be a shareholder of the Company, filed a
shareholder derivative complaint in the Superior Court of the State of
California, County of Orange (Case No. 30-2009-00125211) for damages and
equitable relief.  The complaint asserts claims for negligence, gross
negligence, breach of fiduciary duty, waste, mismanagement, gross mismanagement,
abuse of control, negligent misrepresentation, intentional misrepresentation,
fraudulent promise, constructive fraud, and violations of the California
Corporations Code, and seeks an accounting, rescission and/or
reformation.  The facts focus on the Company’s acquisition of its
DeWind subsidiary and also related self-interested transactions, accounting
deficiencies and misstatements.  Certain of the defendants are current
directors and/or officers or past officers of the Company.  Under the
Company’s articles of incorporation and bylaws, the Company is obligated to
provide for indemnification for director and officer liability.
 
 On
October 13, 2009, the Company and the individual defendants filed demurrers
(motions to strike) to the Complaint on the grounds that Plaintiff Thomas did
not make a written demand on the Company’s board of directors prior to filing
the Complaint as required under Nevada law and that any decisions made by the
individual director/office defendants in relation to the subject matter of the
Complaint are protected under the business judgment rule.  Prior to
the scheduled hearing on the demurrer, Plaintiff Thomas filed a First Amended
Complaint on or about November 11, 2009 naming three additional current board
members.  The deadline to respond to the First Amended Complaint is
January 4, 2010.  Several of the defendants named in the First Amended
Complaint have not been served.  The Company will be filing another
demurrer (motion to strike) to the First Amended Complaint on the same
grounds.  In addition, on October 20, 2009, the Company filed a Motion
to Stay Discovery in this matter on the grounds that Plaintiff Thomas should not
be permitted to conduct discovery until such time as the dispute over the
sufficiency of the First Amended Complaint is decided by the
Court.




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, 2009.




PART
  II





ITEM
5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER 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.


21


Quarterly Common Stock Price
Ranges


QUARTER ENDED
2008/2009





HIGH
                    
                    
                    LOWDecember
      31, 2008
                    
                    $
                    0.62
                    
                    
                    $
                    0.18March
      31, 2009
                    
                    $
                    0.35
                    
                    
                    $
                    0.16June
      30, 2009
                    
                    $
                    0.44
                    
                    
                    $
                    0.22September
      30, 2009
                    
                    $
                    0.73
                    
                    
                    $
                    0.22





QUARTER ENDED
2007/2008





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




These
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions. As of November 30, 2009,
there were approximately 500 shareholders of record of our common stock and no
shareholders 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.


22


ITEM
6 – 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, 2009,
which were derived from our audited consolidated financial statements. The
following data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our audited
consolidated financial statements and related notes included elsewhere in this
Annual Report.





(All figures are presented in thousands except pershare items)
                  
                  Year Ended September 302005
                  
                  
                  2006*
                  
                  
                  
                  2007*
                  
                  
                  2008*
                  
                  
                  2009Statement
      of Operations DataOperating
      Revenues
                  
                  $
                  1,009
                  
                  
                  $
                  3,554
                  
                  
                  $
                  16,008
                  
                  
                  $
                  32,715
                  
                  
                  $
                  19,602Loss
      from Continued Operations
                  
                  
                  (40,163
                  )
                  
                  
                  (23,691
                  )
                  
                  
                  (18,010
                  )
                  
                  
                  (10,083
                  )
                  
                  
                  (19,438
                  )Loss
      from Discontinued Operations (Note 2)
                  
                  
                  —
                  
                  
                  
                  (4,832
                  )
                  
                  
                  (26,474
                  )
                  
                  
                  (43,430
                  )
                  
                  
                  (54,313
                  )Net
      loss
                  
                  
                  (40,163
                  )
                  
                  
                  (28,523
                  )
                  
                  
                  (44,484
                  )
                  
                  
                  (53,513
                  )
                  
                  
                  (73,751
                  )Net
      Assets (Liabilities) of Discontinued Operations (Note 2)
                  
                  
                  —
                  
                  
                  
                  46,805
                  
                  
                  
                  36,069
                  
                  
                  
                  34,835
                  
                  
                  
                  (42,067
                  )Total
      Assets
                  
                  
                  5,771
                  
                  
                  
                  53,549
                  
                  
                  
                  66,323
                  
                  
                  
                  173,087
                  
                  
                  
                  54,839Total
      Long-Term Obligations
                  
                  
                  11,708
                  
                  
                  
                  111
                  
                  
                  
                  9,835
                  
                  
                  
                  9,061
                  
                  
                  
                  1,987Cash
      Dividends per Common Share
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Basic
      and fully diluted loss from continuing operations per common
      share
                  
                  $
                  (0.35
                  )
                  
                  $
                  (0.17
                  )
                  
                  $
                  (0.09
                  )
                  
                  $
                  (0.04
                  )
                  
                  $
                  (0.07
                  )Basic
      and fully diluted net loss per common share
                  
                  $
                  (0.35
                  )
                  
                  $
                  (0.20
                  )
                  
                  $
                  (0.23
                  )
                  
                  $
                  (0.22
                  )
                  
                  $
                  (0.26
                  )





*On July
3, 2006 the Company acquired its DeWind segment.  On September 4,
2009, the Company sold substantially all assets and liabilities of our DeWind
segment. All operations of DeWind have been reclassified to discontinued
operations (See Note 2
to the Consolidated Financial Statements).





ITEM
7 -   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





Composite
Technology Corporation (CTC) has conducted its operations in the following two
business segments: the CTC Cable division and the DeWind division.  In
September, 2009 we sold substantially all of the assets and liabilities of the
DeWind segment.  Accordingly, all operations of our former DeWind
segment have been reported as discontinued operations in the accompanying
consolidated financial statements and notes thereto.





The year
ended September 30, 2009 represented a period of significant shocks to the world
economies and worldwide financial markets, including a collapse of project and
commercial financing as well as risk capital financing.  This was
accompanied by the failure of multiple commercial and investment banking
institutions.   These events were countered by legislation and
other government economic stimulus packages and incentives, including
significant incentives for investment in electrical infrastructure and renewable
energy in the U.S. under the American Recovery and Reinvestment Act of 2009
(ARRA). The combination of these factors has been seen in the press through
significantly lowered economic forecasts and expectations in the short term,
with expectations of economic recovery after these incentive measures are
implemented.  The turmoil of these external forces has caused negative
impacts on both businesses of CTC in the short term, but has improved the
long-term outlook for both businesses, each of which is well positioned to take
advantage of the economic stimulus incentives of ARRA and similar initiatives
elsewhere in the world.





The CTC
Cable business growth was slowed as the economic downturn resulted in delays
with several anticipated sales, that had specified ACCC®
conductor, in new international markets and the United States. China continued
to recover from the negative impact of delays in sales orders caused by the
Beijing Olympics in previous quarters.  The impact of these delays and
the economic downturn felt by Chinese manufacturing has resulted in four
consecutive quarters of declining electricity consumption in
China.  This temporary lower consumption has eased the urgent need for
capacity expansion in certain areas.




23


A more
significant impact occurred to the DeWind business segment through product order
delays and most importantly through a significant restriction in available
financing for wind farm projects of customers.





DeWind Asset
Sale





The
divestiture of DeWind was a decision driven by the worldwide banking and credit
crisis.  DeWind had focused its sales and marketing efforts into the
North American and South American markets to take advantage of its innovative
D8.2 technology.  Following the June 2008 cash investment by Credit
Suisse and the signing of turbine contracts in September and early
October, 2008 DeWind began to invest a significant amount of cash into its
supply chain.





At the
beginning of the fiscal year, in October, 2008 DeWind had orders in excess of
$150 million from customers with established track records of success in wind
farm project completion and had received initial payments on the largest of
these orders which included orders for 60 units that utilized the new D8.2
platform.  DeWind began to make advance payments for parts and to
increase its commitments for turbine parts in anticipation of the fulfillment of
this order.  In October, 2008, this customer defaulted on scheduled
payments required under their turbine purchase agreement.  The payment
default was due to the loss of financing for the wind project caused by the
worldwide credit contraction. Further, with the collapse of several wind
industry financing institutions, notably Lehman Brothers which had previously
been heavily involved in the organization of “tax equity” funding in the US, it
was apparent that there had been a fundamental change in the ability for small
and medium sized wind projects to be funded.





In
November, 2008 after the realization that the worldwide economic and banking
crises were long lasting and were resulting in a significant delay or
elimination of financing for wind farms, the Company determined that unless the
business environment reverted back to pre-credit crisis levels, the Company did
not have the financial resources to continue to fund DeWind without significant
amounts of additional capital, and the Company’s Board of Directors approved a
contingency plan to seek strategic investment partners or divest its ownership
stake in DeWind.  In December, 2008 the Company engaged the services
of RBS Securities, who had substantial industry knowledge of the wind industry
and who had assisted in other significant wind industry M&A
activities.  Between February, 2009 and June, 2009 the Company had
circulated investment memoranda and due diligence materials to over 150 separate
interested parties concluding with on site discussions and bids from multiple
parties.  In June, 2009 the Company signed a Bridge Loan agreement for
$5 million in order to provide sufficient cash to continue its operations
through the conclusion of the DeWind asset sale.  In August, 2009 the
Company completed negotiations with the winning bidder, Daewoo Shipbuilding and
Marine Engineering (DSME), and signed an Asset Purchase Agreement on August 10,
2009 for $49.5 million in cash.





On
September 4, 2009, our DeWind subsidiary sold substantially all of its existing
operating assets including all inventories, receivables, fixed assets, wind farm
project assets and intangible assets including all intellectual property. DSME
also assumed substantially all operating liabilities of DeWind including supply
chain and operating expense accounts payables and accrued liabilities, warranty
related liabilities for US turbine installations, and deferred
revenues.  All former DeWind employees were also transferred to DSME
employment. DSME did not acquire any cash balances of DeWind; acquired only the
long term assets of one of the European subsidiaries, leaving all other assets
and liabilities of that entity intact; and did not acquire certain assets and
liabilities of the US DeWind subsidiary tied to one turbine supply contract. All
of the remaining assets and liabilities of DeWind have been classified as net
assets or liabilities of discontinued operations.  All operations of
our former DeWind segment have been reported as discontinued
operations.





The sale
of the DeWind net assets was for $49.5 million in cash.  The Company
received approximately $32.3 million in cash with $17.2 million in cash escrowed
to cover certain contingent liabilities.  Of the escrowed cash, $5.5
million is expected to be released within one year after the achievement of
certain milestones and $11.7 million is expected to be released over time
periods that may be as late as 2012 under certain conditions. The purchase price
is further subject to adjustment based on delivery of the value of the assets
transferred net of liabilities assumed.  The
Company has placed the $17.2 million in cash in escrow to indemnify the buyer if
claims are made against them by third parties and those claims are determined to
be valid and enforceable.  Our intention is to vigorously defend
against any such claims should they occur.  Defense of such claims may
result in additional costs to maintain the Company’s interest in the restricted
cash or to limit potential liability.  In the event that claims are
successful, the balance payable to the buyer may include all, part, or cash
amounts in excess of the $17.2 million escrowed, including potentially an
additional $17.7 million up to a total of $34.9 million under certain
conditions, which are not expected by the Company.  If such claims are
successfully made, this would result in additional losses on the DeWind sale
transaction and could require a substantial refund of the proceeds
received.  The Company believes the $17.2 million in escrow will be
released per the terms of the agreement.  Accordingly, at September
30, 2009, we have classified the $17.2 million held in escrow as restricted
cash, with $5.5 million as current and $11.7 million as long-term. See Note
2 to the
consolidated financial statements.





The
divestiture of DeWind provided a significant amount of cash to the Company’s
balance sheet, and reduced cash spending for DeWind operating expenses and
working capital requirements. As part of the transaction, the Company is
prohibited from developing, marketing, or selling competing wind turbine
technology for five years except that the Company retained the rights to develop
and sell wind farm projects.





The
remaining assets and liabilities of the discontinued operations consist of the
following:





(In Thousands)
                      
                      September 30, 2009ASSETSAccounts
      Receivable, net
                      
                      
                      2,461Prepaid
      Expenses and Other Current Assets
                      
                      
                      61TOTAL
      ASSETS
                      
                      $
                      2,522LIABILITIESAccounts
      Payable and Other Accrued Liabilities
                      
                      $
                      39,356Deferred
      Revenues and Customer Advances
                      
                      
                      2,869Warranty
      Provision
                      
                      
                      2,364Total
      Liabilities
                      
                      
                      44,589Net
      Liabilities of Discontinued Operations
                      
                      $
                      (42,067
                      )





24




Except
for the former intercompany loans, significantly all of the assets and
liabilities of the discontinued operations pertain to activities outside of the
United States, primarily for turbines sold and installed in Europe and South
America and technology licenses to Chinese customers. Included above in Accounts
Payable and Other Accrued Liabilities are net payables related to formerly
consolidated, now insolvent European subsidiaries of approximately $22million, substantially all of which has been assigned by the
insolvency receiver to FKI, a former owner of Dewind engaged in a lawsuit with
us over warranty guarantees.  At September 30, 2009, the
net payables to insolvent subsidiaries is comprised of assets in the
amount of $8 million and liabilities in the amount of $30 million. Currently, we
have not received any update from the insolvency receiver related to
the assets and liabilities for the insolvent
subsidiaries.





Economic Stimulus
Initiatives





The
February, 2009 American Recovery and Reinvestment Act of 2009 (ARRA) had over
$61 billion designated for energy related projects including:





·
            $11 billion funding for an
      electric smart grid


·
            $6.3 billion for state and local
      governments to make investments in energy
  efficiency


·
            $6 billion for renewable energy
      and electric transmission technologies loan
    guarantees


·
            $4.5 billion for the Office of
      Electricity and Energy Reliability to modernize the nation's electrical
      grid and smart grid


·
            $3.25 billion for the Western
      Area Power Administration for power transmission system
      upgrades


·
            $3.25 billion for the Bonneville
      Power Authority for power transmission system
    upgrades


·
            $2.5 billion for energy
      efficiency research


·
            $3.2 billion toward Energy
      Efficiency and Conservation Block
Grants





CTC Cable
has been working diligently with various Federal and State agencies and power
companies to include its ACCC® products
in the planning stages for projects set to receive stimulus
spending.





Other
countries, such as China, have also implemented economic stimulus initiatives to
provide for electrical generation and infrastructure spending.  To
date, neither CTC Cable nor DeWind has benefited from any of the economic
stimulus initiatives.  In the U.S. market, a very limited amount of
funds has been released as yet and for nearly all worldwide incentives,
including the U.S., these projects have extended lead times before ACCC® products
and wind turbines would be sold as these products are ordered and installed in
later stages of  most transmission and renewable energy
projects.




CTC Cable
Division





Located
in Irvine, California with sales operations in Irvine, California, Shanghai,
China, Europe, the Middle East, and Brazil, the CTC Cable Division produces and
sells ACCC®
conductor products and related ACCC® hardware
products. ACCC®
conductor production is a two step process. The Irvine operations produce the
high strength, light weight, composite ACCC® core,
which is then shipped to one of six conductor stranding licensees in Canada,
Belgium, China, Indonesia or Bahrain where the core is stranded with conductive
aluminum to become ACCC®
conductor. ACCC®
conductor and core are sold in Canada and the U.S. directly by CTC Cable to
utilities.  ACCC®
conductor and core are sold elsewhere in the world directly to utilities as well
as through license and distribution agreements with Lamifil in Belgium, Far East
Composite Cable Company in China, and Midal in Bahrain. ACCC®
conductor has been sold commercially since 2005 and is currently marketed
worldwide to electrical utilities, transmission companies and transmission
design and engineering firms.





RECENT
DEVELOPMENTS





The CTC
Cable business saw continued expansion into new markets and greater traction of
our new efficiency message in our U.S. market but CTC Cable also saw delays in
several anticipated sales in new markets and was still negatively impacted from
the delay in sales orders in previous quarters caused by a slowdown in China.


25


The Cable
division’s focus during the year ended September 30, 2009 was sales, marketing,
and operations with a goal to position CTC Cable for rapid revenue growth and
expansion beyond the volatile market in China. Our goals include the expansion
of our customer base outside of the Chinese market by penetrating other markets
including the U.S. Our sales pipeline continues to improve and we currently are
working on nearly $800 million of sales opportunities, most of which are outside
of China. We believe, however that the impact of the U.S. and International
stimulus funds may not result in increased revenues until calendar year 2010. We
are also optimistic that the proposed infrastructure and grid efficiency
directives included in the ARRA stimulus package will result in an increased
focus by utilities in the U.S. to acknowledge the efficiency benefits of our
ACCC®
products.




To this
extent, the order to Sierra Pacific Power Company, an electric utility servicing
portions of Nevada, is our largest order to a U.S. customer to date and is
important since the decision to purchase ACCC®
conductor by this customer was primarily due to the cost savings associated with
using ACCC®
conductor, including the improved efficiency of ACCC®
conductor over existing transmission conductor products. Prior U.S. sales were
lines that took advantage of the reduced sag or high temperature capabilities of
ACCC®
conductor. We believe this win is significant because it represents a
significant change in the perception of the use of ACCC®
conductor with U.S. utilities away from a “niche” product chosen when there was
no other alternative available to solve a problem, to a product with performance
and economic advantages that could be rolled out to replace a substantial amount
of the transmission conductor within a given utility’s grid. We believe that
this is the first of many such efficiency and economic benefit related sales for
U.S. utility sales opportunities.





Within
our China market, we reached an important milestone by obtaining approval to
have ACCC®
conductor installed in a 500KV installation and we are working with our Chinese
licensee and the local grid to secure a trial line at 1,000KV. The significance
for this approval is that a substantial portion of the electrical transmission
infrastructure spending in China is at 500KV or higher, including much of the
projected Chinese stimulus bill spending. To reach that milestone, a discount
was granted to our customer, Far East Composite Cable Company (“Far East”), as a
strategic decision to position ACCC®
conductor at State Grid in China for projects at 500KV and above.  New
large scale transmission projects in China are all moving to voltages at or
above 500KV and we wanted to be designed into and installed in projects at this
voltage immediately. As a result, we granted a special discount to induce State
Grid to place the order with Far East, but demanded better cash flow from them
in return.  We were designed into the project at 500KV as planned, but the
project is on hold in China pending assignment to a new transmission
corridor.  The original line was subsequently upgraded to 1000KV and is
still in the re-design phase. Despite
these efforts, during 2009 we saw a substantial drop off in orders from our
China distributor.  We are in the process of renegotiating our
contract with our current Chinese distributor in addition to evaluating other
commercial opportunities in the China market.





Outside
of China, our international efforts continue to expand and we are gaining
traction on our strategy to diversify away from China.  We closed a
significant order with a new customer in South Africa representing 217 km of
ACCC®
conductor.  In Europe, we have received certifications in the UK with
certifications expected shortly in Germany and
Portugal.    We continue to see significant opportunity in
the Latin American markets and have seen repeat orders for Chile and
Mexico.  We expect initial orders soon in other South American
countries.  We have certified the stranding capabilities for Midal for
one size of conductor and we plan to review several additional sizes prior to
their certification.  We expect that the certification will allow for
closing near term sales that were delayed pending certification in the Middle
East and Africa. We are also certifying two stranding sources in
Indonesia.  Progress also continues in identifying local stranding
sources in South and Latin America.




Our
progress in market expansion can be seen in the following table.  The
sales wins in new markets include revenues to Indonesia, the Middle East and
Latin America along with promising expansion into North America as our sales
efforts begin to bear fruit. Our focus in fiscal 2010 will be to continue to
penetrate these new markets while focusing on expanding our reach into the China
and North American markets.
 
 (In
      Thousands)
                                  
                                  For the Years Ended September30,2009
                                  
                                  
                                  2008
                                  
                                  
                                  2007Europe
                                  
                                  $
                                  873
                                  
                                  
                                  $
                                  6,896
                                  
                                  
                                  $
                                  50Middle
      East
                                  
                                  
                                  1,445
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —China
                                  
                                  
                                  10,499
                                  
                                  
                                  
                                  24,900
                                  
                                  
                                  
                                  12,857Other
      Asia
                                  
                                  
                                  422
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —North
      America
                                  
                                  
                                  5,409
                                  
                                  
                                  
                                  851
                                  
                                  
                                  
                                  3,101South
      America
                                  
                                  
                                  26
                                  
                                  
                                  
                                  68
                                  
                                  
                                  
                                  —Latin
      America
                                  
                                  
                                  928
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Total
      Revenue
                                  
                                  $
                                  19,602
                                  
                                  
                                  $
                                  32,715
                                  
                                  
                                  $
                                  16,008Kilometers
      shipped
                                  
                                  
                                  2,800
                                  
                                  
                                  
                                  3,700
                                  
                                  
                                  
                                  1,100Revenue
      per kilometer
                                  
                                  $
                                  5,570
                                  
                                  
                                  $
                                  8,110
                                  
                                  
                                  $
                                  12,980
  26


The sales
and marketing initiatives begun in the latter half of fiscal 2008 were continued
with multiple areas of the sales and marketing infrastructure
completed.  These initiatives focused on developing a sales
organization necessary to penetrate and support order solicitations, bid
tenders, and to evangelize the efficiency message of the ACCC®
conductor product line.  CTC Cable filled out complete coverage of the
U.S. and Canadian markets through its consortium of 19 sales agent
representatives.  The sales organization also completed new sales
collateral and sales tools to help automate bid and information requests
including a new CTC Cable website in May, 2009.





The focus
of our cable operations during the year ending September 30, 2009 has been to
increase production to manage the large influx of orders from our new markets.
We now have eighteen pultrusion machines in operation with each of the new
production machines able to produce up to 3.5 km per day per
machine.  With eighteen machines in operation with a projected annual
capacity in excess of 18,000 km per year we have sufficient capacity to provide
in excess of $100 million in ACCC® core
revenue per year.




Looking
forward into 2010, we expect to continue our focus on penetrating new markets,
monetizing existing markets through follow-on orders, and restarting our
currently lagging Chinese market.  To assist us in these endeavors, on
December 14, 2009 the Company announced the hiring of John P. Brewster as Chief
Commercial Officer of Composite Technology Corporation and President of CTC
Cable Corporation.  Mr. Brewster brings over thirty years of U.S.
Utility Sales and Operations experience in a senior management capacity
including employment with NRG Energy Inc. as Executive VP of Operations
including management experience with both domestic and international
activities.  Most recently, he served as Executive Vice President and
Chief Operating Officer of Calera Corporation, a startup company dedicated to
reversing global warming by capturing and storing greenhouse gases and where he
will continue as a senior advisor.  The Company believes that Mr.
Brewster will be instrumental in our domestic and international sales expansion
strategy.




We
believe that we have lined up sufficient raw materials supplies for our
ACCC® core to
produce our expected ACCC® product
sales worldwide for the next twelve months.  The recent economic
downturn has resulted in a decreased demand for aerospace grade carbon fiber,
that we use to produce our composite core, resulting in increased availability
of such materials for ACCC® core and
lower material prices. We will continue to work to expand our ACCC®
conductor production capacity through stranding and manufacturing agreements
with targeted manufacturers worldwide. As we open new markets and we begin to
sell ACCC®
conductor locally, we will look to sign additional agreements with local
stranding sources.  Discussions with new stranding partners are
underway at multiple locations worldwide.




We
believe that our ACCC® product
margins have upside potential in 2010 as compared to 2009 due to two
factors.  The first is that we have seen a decrease in the cost of our
raw materials, including the aerospace grade carbon we use in our ACCC®
conductor core.  The second is that for 2009 our plant utilization was
only 25% of capacity.  This resulted in operational inefficiencies
including higher than expected per unit labor and overhead
charges.  Our labor and overhead costs carry a large fixed component
so lower utilization requires a higher cost per unit of
production.    We expect to see per unit cost savings as our
plant utilization improves with additional expected sales.





DeWind
Division





The
DeWind segment operated under the brand name DeWind, which has designed and sold
wind turbines since 1995 from Lubeck, Germany. DeWind is operated from the
Company’s Irvine, California offices with sales operations in Irvine, California
and Lubeck, Germany along with Engineering and R&D operations in both
Irvine, California and Lubeck, Germany. The DeWind segment designs, produces,
sells and services DeWind turbines in the 1.25 and 2.0 megawatt range worldwide.
We acquired DeWind during the EU Energy acquisition on July 3, 2006.
Accordingly, we have incorporated DeWind’s operations into our financial results
since that date.  The operations of DeWind have been reported as
discontinued operations as of September 4, 2009 due to the sale to DSME as
described above.


27


RESULTS
OF OPERATIONS





The
following table presents a comparative analysis of Revenue, Cost of Revenues,
and Gross Margins for continuing operations:





For the Years Ended September
      30,(In
      Thousands)
                
                2009
                
                
                2008
                
                
                2007Product
      Revenue
                
                $
                19,602
                
                
                $
                32,715
                
                
                $
                16,008Cost
      of Revenue
                
                $
                14,285
                
                
                $
                21,129
                
                
                $
                11,425Gross
      Margin
                
                $
                5,317
                
                
                $
                11,586
                
                
                $
                4,583Gross
      Margin %
                
                
                27.1
                %
                
                
                35.4
                %
                
                
                28.6
                %





PRODUCT
REVENUE:  Product revenues decreased $13.1 million, or 40%, from $32.7
million in 2008 to $19.6 million in 2009, and increased $16.7 million, or 104%,
from $16.0 million in 2007 to $32.7 million in 2008.





The
fiscal 2009 decrease was primarily related to a significant decline in shipments
of 664 km of ACCC® products
to China and Poland.





The
fiscal 2008 increase was primarily due to increased shipments to China and a
large sale to Poland.





COST OF
REVENUE: Cost of revenue represent materials, labor, freight, and allocated
overhead costs to produce ACCC®
conductor, ACCC® core,
and related hardware.  Cost of revenue decreased $6.8 million, or 32%,
from $21.1 million in 2008 to $14.3 million in 2009, and increased $9.7 million,
or 85%, from $11.4 million in 2007 to $21.1 million in 2008.





Cost of
revenue and resultant gross margin.  The fiscal 2009 gross margin
percentage decreased primarily due to strategic discounts given to Jiangsu New
Far East Cable Company in China. Excluding non-cash charges of $0.7 million
for depreciation and share-based compensation charges, fiscal 2009 gross
margin would have been $6.0 million or 30.7% of revenue. The fiscal 2008
gross margin percentage increased due to the improved revenue mix from higher
margin ACCC®
conductor core in 2008 as compared to more ACCC®
conductor in 2007.





The
following table presents a comparative analysis of operating expenses for
continuing operations:





For the Year Ended September 30,
      2009(In
      Thousands)
                    
                    Corporate
                    
                    
                    Cable
                    
                    
                    TotalOfficer
      Compensation
                    
                    $
                    3,225
                    
                    
                    $
                    —
                    
                    
                    $
                    3,225General
      and Administrative
                    
                    
                    5,815
                    
                    
                    
                    4,098
                    
                    
                    
                    9,913Research
      and Development
                    
                    
                    —
                    
                    
                    
                    2,703
                    
                    
                    
                    2,703Sales
      and Marketing
                    
                    
                    —
                    
                    
                    
                    5,598
                    
                    
                    
                    5,598Depreciation
      and Amortization
                    
                    
                    —
                    
                    
                    
                    368
                    
                    
                    
                    368Total
      Operating Expenses
                    
                    $
                    9,040
                    
                    
                    $
                    12,767
                    
                    
                    $
                    21,807




For the Year Ended September 30,
      2008(In
      Thousands)
                    
                    Corporate
                    
                    
                    Cable
                    
                    
                    TotalOfficer
      Compensation
                    
                    $
                    2,129
                    
                    
                    $
                    —
                    
                    
                    $
                    2,129General
      and Administrative
                    
                    
                    5,289
                    
                    
                    
                    1,852
                    
                    
                    
                    7,141Research
      and Development
                    
                    
                    —
                    
                    
                    
                    4,519
                    
                    
                    
                    4,519Sales
      and Marketing
                    
                    
                    —
                    
                    
                    
                    3,485
                    
                    
                    
                    3,485Depreciation
      and Amortization
                    
                    
                    —
                    
                    
                    
                    339
                    
                    
                    
                    339Total
      Operating Expenses
                    
                    $
                    7,418
                    
                    
                    $
                    10,195
                    
                    
                    $
                    17,613





For the Year Ended September 30,
      2007(In
      Thousands)
                    
                    Corporate
                    
                    
                    Cable
                    
                    
                    TotalOfficer
      Compensation
                    
                    $
                    1,864
                    
                    
                    $
                    —
                    
                    
                    $
                    1,864General
      and Administrative
                    
                    
                    4,428
                    
                    
                    
                    1,941
                    
                    
                    
                    6,369Research
      and Development
                    
                    
                    —
                    
                    
                    
                    4,187
                    
                    
                    
                    4,187Sales
      and Marketing
                    
                    
                    —
                    
                    
                    
                    2,544
                    
                    
                    
                    2,544Depreciation
      and Amortization
                    
                    
                    —
                    
                    
                    
                    272
                    
                    
                    
                    272Total
      Operating Expenses
                    
                    $
                    6,292
                    
                    
                    $
                    8,944
                    
                    
                    $
                    15,236





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 $1.1 million, or 51%, to $3.2 million in fiscal 2009 from $2.1 million
in fiscal 2008 and $1.9 million in fiscal 2007.  The increase from
2008 to 2009 was due to higher fair value share-based compensation expense for
vested stock options. The increase from 2007 to 2008 was due to higher fair
value share-based compensation expense for vested stock
options.


28


GENERAL
AND ADMINISTRATIVE: General and administrative expense consists primarily of
salaries and employee benefits for administrative personnel, professional fees,
facilities costs, insurance, travel, share-based compensation charges and any
expenses related to reserves for uncollectible receivables. G&A expense
increased $2.8 million, or 39%, from $7.1 million in 2008 to $9.9 million in
2009, and increased $0.8 million ̧ or 12%, from $6.4 million in fiscal 2007 to
$7.1 million in fiscal 2008.





The
increase of $2.8 million in 2009 was due to a $0.5 million increase from
corporate and $2.3 million increase from Cable.  The corporate
related G&A increase is derived from increased headcount costs, insurance,
board of director fees, recruiting costs and higher share-based compensation
charges, offset by a reduction in professional service fees.  The $2.3
million increase in Cable related G&A primarily related to $1.5 million in
legal fees, $0.4 million in headcount costs and $0.4 million in facilities
costs, partially offset by a reduction in insurance expense.





The
increase of $0.8 million in 2008 was due to a $0.9 million increase from
corporate related and a $0.1 million decrease from Cable. The net increase
primarily related to $0.3 million of higher share-based compensation charges,
$0.3 million in costs associated with debt and equity financings and $0.7
million in increased headcount costs, offset by $0.6 million in reduced
professional fees.





RESEARCH
AND DEVELOPMENT:  Research and development expenses consist primarily
of salaries, consulting fees, materials, tools, and related expenses for work
performed in designing and development of manufacturing processes for the
Company's products. Research and Development expenses decreased $1.8 million, or
40%, from $4.5 million in 2008 to $2.7 million in 2009, and increased $0.3
million, or 8%, from $4.2 million in 2007 to $4.5 million in 2008.





The
decrease of $1.8 million in 2009 was primarily related a shift of employees who
formerly functioned in a research capacity but who now are classified as sales
support personnel, partially offset by increased share-based compensation
charges.





The
increase of $0.3 million in 2008 was due to headcount related increases to
support of our product growth including increased product quality and
testing.





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 $2.1 million, or 60%, from $3.5 million in 2008 to $5.6
million in 2009, and increased $0.9 million, or 37%, from $2.5 million in 2007
to $3.5 million in 2008.





The
increase of $2.1 million in 2009 was primarily related to a $1.1 million
increase comprised of additional headcount and customer support costs, a $0.7
million increase in advertising related expenses and a $0.3 million increase in
share-based compensation charges, partially offset by decreases in commission
and professional fee expenses.





The
increase of $0.9 million in 2008 was primarily the result of increased
headcounts and commissions on higher sales.





DEPRECIATION
AND AMORTIZATION: Depreciation and amortization expense consists of depreciation
related to the depreciation and amortization of the Company's capitalized assets
used in operations, excluding product cost depreciation (refer to cost of
revenue discussion above). Depreciation expense increased $29,000, or 9%,
from $339,000 in 2008 to $368,000 in 2009, and increased $67,000, or 25%, from
$272,000 in fiscal 2007 to $339,000 in 2008. The annual increases were due
to minor increases in the fixed asset base.





INTEREST
EXPENSE: Interest expense consists of the cash interest payable on the Company’s
Debentures and Notes and the amortization of the Convertible Note discount
recorded for the value of the warrants and conversion features issued in
conjunction with the Convertible Notes.





The
decrease of $0.9 million in 2009, or 23%, was primarily due to reduced
accelerated amortization of the discount due to no conversions in
2009.





The
decrease of $3.4 million in 2008, or 47%, was due to lower debt balances
resulting in lower cash interest and reduced amortization of the discount caused
by less acceleration of the discount for conversions for 2008 as compared to
2007.





As of
September 30, 2009 our debt balance consisted of approximately $9.0 million
principal at 8% interest, less unamortized debt discounts, for a net debt
balance of $8.7 million.





INTEREST
INCOME: The interest changes from year to year were due to changes in the
underlying cash balances. The cash level at September 30, 2009 increased in
September 2009 as a result of the DeWind sale.





EXPENSE
RELATED TO MODIFICATION OF WARRANTS DUE TO ANTI-DILUTIVE
EVENTS:  Expenses related to the modification of warrants due to
anti-dilutive events decreased 99% to $7,000 in fiscal 2009 and increased 48% to
$553,000 in fiscal 2008.


29


The 2009
expense resulted from the events related to the anti-dilution caused by the
issuance of additional warrants in connection with a short-term senior secured
bridge note issued in June, 2009, as described in Note 9
to the Financial Statements. The 2008 expense resulted from the events related
to the anti-dilution caused by the issuance of shares related to our Credit
Suisse equity offering in June 2008. The expense represents the combination of
the fair value of the issuance of any new warrants and the difference in the
fair value of the respective warrants immediately before and immediately after
price resets in warrant exercise prices and as described in the equity footnote
to the financial statements in Item 8.




INCOME
TAXES:  We made provisions for income taxes of $5,000, $3,000, and
$3,000 for the years ending September 30, 2009, 2008 and 2007,
respectively. We have determined that due to our continuing operating losses as
well as the uncertainty of the timing of profitability in future periods, we
should fully reserve our deferred tax assets. As of September 30, 2009, 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.





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 a decrease in demand for composite quality carbon materials
worldwide in particular in the aerospace and defense industries and despite a
restricted supply of high quality carbon due to a limited number of suppliers,
the Company experienced a price decline in unit costs of such
carbon.  However, the Company may be exposed to raw material price
increases or carbon material shortfalls should demand increase with the
worldwide economic recovery and if additional suppliers or supplies do not
become available. We cannot quantify any such price or material impacts at this
time.





EFFECTS
OF EXCHANGE RATE CHANGES: We are subject to price risks arising from exchange
rate fluctuations in the functional currency of our European subsidiaries,
primarily the Euro and the UK Sterling.  We currently do not hedge the
exchange rate risk related to our assets and liabilities and do not hedge the
exchange rate risk related to expected future operating
expenses.





The
following tables present a reconciliation of consolidated non-GAAP EBITDAS
or Earnings before Interest, Taxes, Depreciation & Amortization, and
Share-based Compensation charges for continuing operations for the years ended
September 30, 2009, 2008 and 2007:





The
Company has provided non-GAAP measures such as EBITDAS in the following
management discussion and analysis. The Company uses the non-GAAP information
internally as one of several measures used to evaluate its operating performance
and believes these non-GAAP measures are useful to, and have been requested by,
investors as they provide additional insight into the underlying operating
results viewed in conjunction with US GAAP operating results.  For the
non-GAAP EBITDAS measure, a significant portion of non-cash expenses is
excluded, primarily for interest, depreciation and for share-based compensation
charges that are valued based on the share price and volatility at the date of
grant and then expensed as earned, typically upon vesting of service over
time.  The material limitation of non-GAAP EBITDAS compared with Net
Income is that significant non-cash expenses are excluded.  Management
compensates for such limitation by utilizing EBITDAS only for particular
purposes and that it evaluates EBITDAS in the context of other metrics such as
Net Income when evaluating the Company’s performance and financial condition.
Non-GAAP measures are not stated in accordance with, should not be considered in
isolation from, and are not a substitute for, US GAAP measures. A reconciliation
of US GAAP to non-GAAP results has been provided in the financial tables
below.  We will include asset impairments and warrant
modification expense in our reconciliation as well.





For the Year Ended September 30,
      2009(In
      Thousands)
                    
                    Corporate
                    
                    
                    Cable
                    
                    
                    TotalEBITDAS:Net
      loss from continuing operations
                    
                    $
                    (11,983
                    )
                    
                    $
                    (7,455
                    )
                    
                    $
                    (19,438
                    )Depreciation
      & Amortization
                    
                    
                    —
                    
                    
                    
                    1,011
                    
                    
                    
                    1,011Employee
      share-based compensation
                    
                    
                    3,108
                    
                    
                    
                    1,599
                    
                    
                    
                    4,707Warrant
      modification expense
                    
                    
                    7
                    
                    
                    
                    —
                    
                    
                    
                    7Interest
      expense, net
                    
                    
                    2,929
                    
                    
                    
                    6
                    
                    
                    
                    2,935Income
      tax expense
                    
                    
                    5
                    
                    
                    
                    —
                    
                    
                    
                    5EBITDAS
      Income/(Loss)
                    
                    $
                    (5,934
                    )
                    
                    $
                    (4,839
                    )
                    
                    $
                    (10,773
                    )





For the Year Ended September 30,
      2008(In
      Thousands)
                    
                    Corporate
                    
                    
                    Cable
                    
                    
                    TotalEBITDAS:Net
      income/(loss) from continuing operations
                    
                    $
                    (11,547
                    )
                    
                    $
                    1,464
                    
                    
                    $
                    (10,083
                    )Depreciation
      & Amortization
                    
                    
                    —
                    
                    
                    
                    776
                    
                    
                    
                    776Employee
      share-based compensation
                    
                    
                    1,683
                    
                    
                    
                    972
                    
                    
                    
                    2,655Warrant
      modification expense
                    
                    
                    553
                    
                    
                    
                    —
                    
                    
                    
                    553Interest
      expense, net
                    
                    
                    3,573
                    
                    
                    
                    1
                    
                    
                    
                    3,574Income
      tax expense
                    
                    
                    3
                    
                    
                    
                    —
                    
                    
                    
                    3EBITDAS
      Income/(Loss)
                    
                    $
                    (5,735
                    )
                    
                    $
                    3,213
                    
                    
                    $
                    (2,522
                    )




30




For the Year Ended September 30,
      2007(In
      Thousands)
                    
                    Corporate
                    
                    
                    Cable
                    
                    
                    TotalEBITDAS:Net
      loss from continuing operations
                    
                    $
                    (13,648
                    )
                    
                    $
                    (4,362
                    )
                    
                    $
                    (18,010
                    )Depreciation
      & Amortization
                    
                    
                    —
                    
                    
                    
                    799
                    
                    
                    
                    799Employee
      share-based compensation
                    
                    
                    1,469
                    
                    
                    
                    873
                    
                    
                    
                    2,342Warrant
      modification expense
                    
                    
                    374
                    
                    
                    
                    —
                    
                    
                    
                    374Interest
      expense, net
                    
                    
                    6,984
                    
                    
                    
                    —
                    
                    
                    
                    6,984Income
      tax expense
                    
                    
                    3
                    
                    
                    
                    —
                    
                    
                    
                    3EBITDAS
      (Loss)
                    
                    $
                    (4,818
                    )
                    
                    $
                    (2,690
                    )
                    
                    $
                    (7,508
                    )





Consolidated
EBITDAS Loss for fiscal 2009 increased by $8.3 million as compared to fiscal
2008 from our Cable operations primarily due to the lower revenues out of China,
along with corresponding margin reductions, and increases in general and
administrative and sales and marketing expenses.





Consolidated
EBITDAS Loss for fiscal 2008 decreased by $5.0 million as compared to fiscal
2007 from Cable income increasing $5.9 million due to a gross margin improvement
of $7.0 million offset by higher cash basis operating expenses and from the
Corporate loss increasing $0.9 million due to higher cash basis
expenses.





NET
LOSS





The
following table presents the components of our total net loss:




For the Years Ended September 30,(In Thousands)
                      
                      2009
                      
                      
                      2008
                      
                      
                      2007Net
      Loss from Continuing Operations
                      
                      $
                      (19,438
                      )
                      
                      $
                      (10,083
                      )
                      
                      $
                      (18,010
                      )Loss
      from Discontinued Operations (Note 2)
                      
                      
                      (54,313
                      )
                      
                      
                      (43,430
                      )
                      
                      
                      (26,474
                      )Net
      Loss
                      
                      $
                      (73,751
                      )
                      
                      $
                      (53,513
                      )
                      
                      $
                      (44,484
                      )




Our
current period net loss increased by $20.3 million to $73.8 million in fiscal
2009 from $53.5 million in fiscal 2008. This net loss increase is due
to:





·
            A decrease in Gross Margin from
      continuing operations of $6.3 million from 2008 to
      2009.





·
            An increase in Total Operating
      Expense from continuing operations of $4.2 million from 2008 to
      2009.





·
            A decrease in Total Other Expense
      from continuing operations of $1.1 million from 2008 to
      2009.





·
            An increase in Loss from
      Discontinued Operations of $10.9million from 2008 to
      2009.





Gross
Margin: As discussed above, the gross margin decrease of $6.3 million is
primarily due to strategic discounts given to Jiangsu New Far East Cable Company
in China during 2009 and lower revenue levels.





Total
Operating Expense: As detailed above, the total increase in operating expense is
driven by significant increases in general and administrative expenses of $2.8
million, sales and marketing expenses of $2.1 million and officer compensation
of $1.1 million, offset by a decrease in research and development expenses of
$1.8 million.





Total
Other Expense: As discussed above, the total other expenses decrease is
primarily due to a $0.9 million reduction in interest expense caused primarily
from reduced accelerated amortization of the debt discount due to no conversions
in 2009.





Loss from
Discontinued Operations: As discussed above and detailed in Note 2
to the financial statements, the increase in the loss from discontinued
operations of $10.9
million is completely derived from the September, 2009 DeWind asset sale and
related discontinuation of the DeWind business segment.





LIQUIDITY
AND CAPITAL RESOURCES





Comparison
of Years Ended September 30, 2009, 2008 and 2007.




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




Cash used
by operations during the year ended September 30, 2009 of $30.3 million was
primarily the result of operating losses of $73.8 million, offset by noncash
charges of $62.5 million including losses from discontinued operations of $54.3
million, depreciation and amortization of $1.0 million, stock related charges of
$5.1 million, inventory charges of $0.2 million, non-cash interest expense of
$1.8 million, a change of net assets/liabilities from discontinued operations of
$20.4 million, cash used in operating activities of discontinued operations of
$4 million and net cash provided by working capital of $5.3 million,
primarily from a decrease in inventory related purchases of $1.4 million, a $2.7
million decrease in receivable balances related to increased collection efforts,
an increase in accounts payable of $2.4 million, offset by a decrease in
deferred revenues of $1.2 million. Cash provided by investing activities of
$31.4 million was related to cash used for investing activities of discontinued
operations of $0.8 million, $49.5 million in proceeds from the sale of
DeWind, offset by restricted cash of $17.2 held in escrow to cover contingent
liabilities in connection with the sale of DeWind, and $0.8 million from the
purchase of computer hardware and software, and equipment put in service in
anticipation of increased cable manufacturing activities. Cash used in financing
activities of $0.3 million was primarily due to cash repayments of $5.0 million
for notes payable related to the Northlight financing for which net cash
proceeds of $4.7 million was received in the June 2009 quarter.
 
 31
  We
believe our cash position as of September 30, 2009 of $24 million, expected cash
flows from revenue orders, potential recovery of escrowed cash,  and
value of “in the money” options and warrants will be sufficient to fund our
operations and satisfy our required debt service for the year ending September
30, 2010 on a consolidated basis.  Due to the sale of substantially
all of the Dewind business, recorded as discontinued operations, the cash
requirements of the Company have decreased due to significantly lower cash
operating expenses and the elimination of inventory purchases for costly wind
turbine parts.     As CTC Cable has sufficient
production capacity in its existing plant to achieve profitability, it is not
expected that significant capital expenditures will be required to expand
production, as seen in prior years.  CTC Cable has also significantly
reduced its reliance on one customer as compared to prior fiscal years and which
has lowered its customer concentration risk.  Additionally, as needed,
we intend to continue the practice of issuing stock, debt, or other financial
instruments for cash or for payment of services or debt extinguishment until our
cash flows from the sales of our primary products is sufficient to fully provide
cash from operations or if we believe such a financing event would be a sound
business strategy.
  Cash used
by operations during the year ended September 30, 2008 of $50.4 million was
primarily the result of operating losses of $53.5 million, offset by noncash
charges of $52.2 million including losses from discontinued operations of $43.4
million, depreciation and amortization of $0.8 million, stock related charges of
$4.1 million, inventory charges of $0.6 million, non-cash interest expense of
$2.8 million, a change of net liabilities from discontinued operations of $46.1
million, cash
provided by operating activities of discontinued operations of $1.9
million and net use of cash for working capital of $4.9 million,
primarily inventory related purchases of $1.0 million and $3.3 million increase
in receivable balances related to increased business levels offset by an
increase in accounts payable of $0.5 million. Cash used by investing activities
of $3.6 million was primarily related to cash used
for investing activities of discontinued operations of $1.1
million, the increase in the CTC Cable plant to increase capacity,
the purchase of computer hardware and software, and equipment put in service in
anticipation of increased cable manufacturing activities. Cash provided by
financing activities of $54.5 million was primarily due to the cash proceeds
from our Credit Suisse equity placements in May and June of 2008 along with $4.5
million of warrant exercise proceeds.
 
 Cash used
by operations during the year ended September 30, 2007 of $21.2 million was
primarily the result of operating losses of $44.5 million, offset by noncash
charges of $37.1 million, including a loss on discontinued operations of $26.5
million, non-cash interest of $6.0 million, depreciation and amortization of
$0.8 million, stock related charges of $3.7 million, inventory charges of $0.1
million, a change in net assets/liabilities from discontinued operations of
$17.6 million, cash
provided by operating activities of discontinued operations of $8.2
million and net use of cash for working capital of $4.5 million,
primarily inventory related purchases of $6.8 million and $3.4 million increase
in receivable balances related to increased business levels, offset by an
increase in accounts payable of $3.7 million and an increase in deferred
revenues of $2.2 million. Cash used by investing activities of $6.4 million was
primarily related to
 cash used
for investing activities of discontinued operations of $4.6 million,an
increase in the CTC Cable plant to increase capacity, the purchase of computer
hardware and software, and equipment put in service in anticipation of increased
cable manufacturing activities. Cash provided by financing of $47.8 was
primarily the result of $21.5 million net proceeds from our February, 2007
convertible debt offering, $23.8 million net proceeds from our June, 2007 equity
placement, and $2.8 million in cash proceeds from the exercise of stock options
and warrants, offset by $0.3 million in capital lease repayments.


CAPITAL
EXPENDITURES
 
 The
Company does not have any material commitments for capital
expenditures.
 
 CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
 
 Our
discussion and analysis of our financial condition and results of operations is
based on our Consolidated Financial Statements, which have been prepared in
accordance with accounting principles generally accepted in the United States,
or US GAAP.  Critical accounting policies and estimates,
included in Note 1 to the Consolidated Financial Statements, are as
follows:
  Revenue
Recognition
 
 Revenues
are recognized based on guidance provided in the Securities and Exchange
Commission (SEC). Accordingly, our general revenue recognition policy is to
recognize revenue when there is persuasive evidence of an arrangement, the sales
price is fixed or determinable, collection of the related receivable is
reasonably assured, and delivery has occurred or services have been
rendered.
  The
Company derives, or seeks to derive revenues from product revenue sales of
composite core, stranded composite core, core and stranded core hardware, and
other electric utility related products.
 
 In
addition to the above general revenue recognition principles prescribed by the
SEC, our specific revenue recognition policies for each revenue source are as
follows:
 
 PRODUCT
REVENUES. Product revenues are recognized when product shipment has been made
and title has passed to the end user customer. Product revenues consist
primarily of revenue from the sale of: (i) stranded composite core and related
hardware to utilities either sold directly by the Company or through a
distribution agreement, and (ii) composite core and related hardware sold to a
cable stranding entity. Revenues are deferred for product contracts where the
Company is required to perform installation services until after the
installation is complete. Our distribution agreements are structured so that our
revenue cycle is complete upon shipment and title transfer of products to the
distributor with no right of return.
 
 CTC Cable
sales for the years ended September 30, 2009, 2008 and 2007 consisted of
stranded ACCC®
conductor and ACCC® hardware
sold to end user utilities, sales of ACCC®
conductor core and hardware sold to our Chinese distributor, and sales of
ACCC®
conductor core and ACCC® hardware
to two of our stranding manufacturers. All ACCC® product
related sales were recognized upon delivery of product and transfer of title.
There is no right of return for sales of ACCC®
conductor or ACCC® core to
our Chinese distributor.  For ACCC®
conductor product sales made directly by us and not through a manufacturer or
distributor, through a third-party insurance company, we provide the option to
purchase an extended warranty for periods up to five, seven or ten years. We
allocate a portion of sales proceeds to the estimated fair value of the cost to
provide such a warranty.  To date, most of our ACCC® related
product sales have been without warranty coverage.
 
 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 the years ended September 30, 2009, 2008 and 2007, we
recognized no consulting revenues.
 
 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 VSOE becomes available, or until the contract is
completed.
  32
  Warranty
Provisions
 
 Warranty
provisions consist of the costs and liabilities associated with any post-sales
associated with our ACCC®
conductor and related hardware parts.
 
 Warranties
related to our ACCC® products
relate to conductor and hardware sold directly by us to the end-user
customer.  We mitigate our loss exposure through the use of third
party warranty insurance.  Warranty related liabilities for time
periods in excess of one year are classified as non-current
liabilities.
 
 Use
of Estimates
 
 The
preparation of our financial statements conform with US GAAP, which requires
management to make estimates and judgments in applying our accounting policies
that have an important impact on our reported amounts of assets, liabilities,
revenue, expenses and related disclosures at the date of our financial
statements. On an on-going basis, management evaluates its estimates including
those related to accounts receivable, inventories, share-based compensation,
warranty provisions and goodwill and intangibles, as applicable. Management
bases its estimates and judgments on historical experience and on various other
factors that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from management’s estimates. We believe that the application of our
critical accounting policies requires significant judgments and estimates on the
part of management. We believe that the estimates, judgments and assumption upon
which we rely are reasonable, and based upon information available to us at the
time that these estimates, judgments and assumptions are made. These estimates,
judgments and assumptions can affect the reported amounts of assets and
liabilities as of the date of the financial statements as well as the reported
amounts of revenues and expenses during the period presented. To the extent
there are material differences between these estimates, judgments or assumptions
and actual results, our financial statements will be affected. In many cases,
the accounting treatment of a particular transaction is specifically dictated by
US GAAP and does not require management's judgment in its application. There are
also many areas in which management's judgment in selecting among available
alternatives would produce a materially different result.
  Our key
estimates we use that rely upon management judgment include:
 
 -
                the estimates pertaining to the
      likelihood of our accounts receivable collectability, These estimates
      primarily rely upon past payment history by customer and management
      judgment on the likelihood of future payments based on the current
      business condition of each customer and the general business
      environment.
 -
                the estimates pertaining to the
      valuation of our inventories. These estimates primarily rely upon the
      current order book for each product in inventory along with management’s
      expectations and visibility into future sales of each product in
      inventory.
 -
                the assumptions used to calculate
      fair value of our share-based compensation, primarily the volatility
      component of the Black-Scholes-Merton option-pricing model used to value
      our warrants and our employee and non-employee options. This estimate
      relies upon the past volatility of our share price over time as well as
      the estimate of the option
life.
 -
                goodwill and intangible
      valuation. These estimates rely primarily on financial models reviewed by
      senior management which incorporate business assumptions made by
      management on the underlying products and technologies acquired and the
      likelihood that the values assigned during the initial valuations will be
      recoverable over time through increased revenues, profits, and enterprise
      value. As of September 30, 2009, we have no reportable goodwill or
      intangible assets (see related discussion at Note 2to
      the Consolidated Financial Statements).
 -
                The
      estimates and assumptions used to determine the settlement of certain
      accounts related to the sale of the DeWind assets for which a final
      accounting has not been completed and which may result in the increase or
      decrease of asset reserves or increase or decrease of accrued liabilities,
      principally penalty payments, interest, and other costs associated with
      the turbine parts suppliers for DeWind turbine parts. (See related
      discussion at Note 2 to
      the Consolidated Financial
  Statements).
 
 Derivative
Financial Instruments
 
 The
Company issues financial instruments in the form of stock options, and stock
warrants and debt conversion features as part of its convertible debt issuances.
The Company has not issued any derivative instruments for hedging purposes since
its inception. The Company uses the specific guidance and disclosure
requirements provided in US GAAP. 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 a liability. The Company has
accounted for all derivative instruments indexed to the Company’s stock as
equity.
  The
values of the financial instruments are estimated using the Black-Scholes-Merton
(Black-Scholes) option-pricing model. Key assumptions used to value options and
warrants granted or issued are as follows:
  Year ended
                      September 30,2009
                    
                    
                    2008
                    
                    
                    2007Risk
      Free Rate of Return
                    
                    
                    .50%-2.69
                    %
                    
                    
                    1.61%-4.29
                    %
                    
                    
                    4.01%-4.97
                    %Volatility
                    
                    
                    75%-116
                    %
                    
                    
                    66%-88
                    %
                    
                    
                    88%-98
                    %Dividend
      yield
                    
                    
                    0
                    %
                    
                    
                    0
                    %
                    
                    
                    0
                    %
 
 The
accounting for derivative financial instruments related to share-based
compensation is further described below.
 
 Share-Based
Compensation
 
 US GAAP
requires that compensation cost relating to share-based payment arrangements be
recognized in the financial statements. As of October 1, 2005, we adopted the
current US GAAP rules using the “modified prospective method”, which requires
measurement of compensation cost for all share-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 is determined using the
Black-Scholes valuation model, which is consistent with our valuation techniques
previously utilized for stock options in footnote disclosures required under
previous US GAAP rules. Such fair value is recognized as expense over the
service period, net of estimated forfeitures.
 
 US GAAP
requires that equity instruments issued to non-employees 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.
 
 In March
2005, the SEC issued new guidance, which provides the Staff’s views on a variety
of matters relating to share-based payments. The SEC
guidance requires share-based compensation to be classified in the same
expense line items as cash compensation.
  33





In
December 2007, the SEC issued new guidanceregarding the use of a "simplified" method in developing an estimate
of expected term of "plain vanilla" share options in accordance with US GAAP
rules. In particular, the Staff indicated that it will accept a company's
election to use the simplified method, regardless of whether the company has
sufficient information to make more refined estimates of expected term. The
Staff believed that more detailed external information about employee exercise
behavior (e.g., employee exercise patterns by industry and/or other categories
of companies) would, over time, become readily available to companies.
Therefore, the Staff stated that it would not expect a company to use the
simplified method for share option grants after December 31, 2007. The Staff
understood that such detailed information about employee exercise behavior may
not be widely available by December 31, 2007. Accordingly, the Staff continued
to accept, under certain circumstances, the use of the simplified method beyond
December 31, 2007. The Company currently uses the simplified method for “plain
vanilla” share options and warrants.
 
 Information
about share-based compensation is described in Note 11 to the
Consolidated Financial Statements.
 
 Convertible
Debt
 
 Convertible
debt is accounted for under specific guidelines established in US GAAP. 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, except that the contractual life of the
warrant is used. The Company evaluated the variable conversion features and
determined that they should be accounted for as equity.  The Company
first allocates the value of the proceeds received to the convertible instrument
and any other detachable instruments (such as detachable warrants) on a relative
fair value basis and then determines the amount of any BCF based on effective
conversion price to measure the intrinsic value, if any, of the embedded
conversion option. Using the effective yield method, 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.
 
 US GAAP
rules specify that a contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether issued
as a separate agreement or included as a provision of a financial instrument or
other agreement, should be separately recognized and measured in accordance with
US GAAP contingency rules. The contingent obligation to make future payments or
otherwise transfer consideration under a registration payment arrangement should
be separately recognized and measured in accordance with said rules, pursuant to
which a contingent obligation must be accrued only if it is more likely than not
to occur. Since the Company satisfied its registration rights obligation without
any payment and in management’s estimation, the contingent payments related to
the registration payment arrangement were not likely to occur, no amount needed
to be accrued.
  RECENT ACCOUNTING PROUNOUNCEMENTS
 
 Refer to
Note 1 to the Consolidated Financial Statements.
  OFF
BALANCE SHEET ARRANGEMENTS
 
 As of
September 30, 2009, we have no off balance sheet arrangements.
 
 CONTRACTUAL
OBLIGATIONS
 
 The
following table summarizes our contractual obligations (including interest
expense) and commitments as of September 30, 2009:
  Contractual Obligations
                          
                          
                          
                          
                          Less than
                          
                          
                          
                          
                          
                          In excess ofTotal
                          
                          
                          1 Year
                          
                          
                          1-3 Years
                          
                          
                          3 Years(In
      Thousands)Debt
      Obligations
                          
                          $
                          9,278
                          
                          
                          $
                          9,278
                          
                          
                          $
                          —
                          
                          
                          $
                          —Operating
      Lease Obligations
                          
                          $
                          1,385
                          
                          
                          $
                          1,107
                          
                          
                          $
                          278
                          
                          
                          $
                          —
 
 Not
included in the table above are amounts included on our balance sheet under
Warranty Provision in the amount of $564,000 at September 30,
2009.
  34




ITEM
7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK


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, 2009 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, 2009, we had $24 million in cash and
cash equivalents, including short-term investments purchased with original
maturities of three 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.
 
 ITEM
8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 PageINDEPENDENT
      REGISTERED PUBLIC ACCOUNTING FIRM REPORTS
                    
                    36Composite
      Technology Corporation and Subsidiaries Consolidated Financial
      StatementsConsolidated
      Balance Sheets As of September 30, 2009 and September 30,
    2008
                    
                    38Consolidated
      Statements of Operations and Comprehensive Loss For the Years Ended
      September 30, 2009, 2008, and 2007
                    
                    39Consolidated
      Statements of Shareholders' Equity (Deficit) for the Years Ended
      September 30, 2009, 2008, and 2007
                    
                    40Consolidated
      Statements of Cash Flows for the Years Ended September 30, 2009, 2008, and
      2007
                    
                    42Notes
      to the Consolidated Financial Statements
                    
                    46
  35
  REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors and Shareholders
 Composite
Technology Corporation and Subsidiaries
 Irvine,
California
 
 We have
audited the accompanying consolidated balance sheets of Composite Technology
Corporation and Subsidiaries (collectively, the “Company”) as of September 30,
2009 and 2008, 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, 2009. Our audits also included
the financial statement schedules of the Company listed in Item 15(2). 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 principle used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of September
30, 2009, and 2008, and the results of its operations and its cash flows for
each of the three years in the period ended September 30, 2009, 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.
 
 We have
also audited, in accordance with the standards of the Public Company
Accounting
 Oversight
Board (United States), the Company's internal control over financial reporting
as of September 30, 2009, based on criteria established in Internal Control —Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission. Our report dated December 14, 2009 expressed an opinion
that the Company had not maintained effective internal control over financial
reporting as of September 30, 2009, based on criteria established in Internal Control — Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission.
  /s/SINGERLEWAK
LLP
 
 SingerLewak
LLP
 Irvine,
California
 December
14,
2009
  36
  REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the Board of Directors and
Shareholders
 Composite Technology Corporation and
Subsidiaries
  We have audited Composite Technology
Corporation's internal control over financial reporting as of September 30,
2009, based on criteria established inInternal Control —
Integrated Frameworkissued
by the Committee of Sponsoring Organizations of the Treadway
Commission.  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 included in the accompanying Management’s Annual Report on Internal
Control over Financial Reporting.  Our responsibility is to express an
opinion on the company's internal control over financial reporting based on our
audit.
 
 We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United
States).  Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects.  Our
audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk.  Our audit also included performing such other
procedures as we considered necessary in the circumstances.  We
believe that our audit provides a reasonable basis for our
opinion.
 
 A company's internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles.  A company's internal control over financial
reporting includes those policies and procedures that(a)pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company;(b)provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and(c)provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company's assets that could have a material effect on the consolidated
financial statements.
 
 Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements.  Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
 
 A material weakness is a deficiency, or
a combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material misstatement of the
company's annual or interim consolidated financial statements will not be
prevented or detected on a timely basis.  The following material
weakness has been identified and included in management's
assessment:
 
 As of September 30, 2009, the Company
lacked an effective internal control environment.  Material
misstatements may result as the lack of controls and material weaknesses found
in the following transaction cycles
 
 ·
                Inventory costing and management
      process over on-hand inventory and inventory on
      consignment
 ·
                Shareholders’ equity (deficit)
      process
 ·
                Information technology controls
      and related systems
 ·
                Fixed
  Assets
 ·
                Financial close and
      reporting
  These material weaknesses were
considered in determining the nature, timing, and extent of audit tests applied
in our audit of the 2009 financial statements, and this report does not affect
our report dated December 14, 2009 on those consolidated financial statements
and financial statement schedules.
 
 In our opinion, because of the effect of
the material weaknesses described above on the achievement of the objectives of
the control criteria, the Company has not maintained effective internal control
over financial reporting as of September 30, 2009, based on criteria established
inInternal Control —
Integrated Frameworkissued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
 
 We have also audited, in accordance with
the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of the Company as of September 30, 2009 and
2008, and the consolidated statements of operations and comprehensive loss,
shareholders’ deficit and cash flows for each of the three years in the period
ended September 30, 2009, and our report dated December 14, 2009 expressed an
unqualified opinion.
  /s/
SINGERLEWAk LLP
 
 SingerLewak
LLP
 Irvine,
California
 December
14,
2009
  37
  FINANCIAL
STATEMENTS
 COMPOSITE
TECHNOLOGY CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 (IN
THOUSANDS)
 
 September 30,
                      2009
                    
                    
                    September 30,
                      2008ASSETSCURRENT
      ASSETSCash
      and Cash Equivalents
                    
                    $
                    23,968
                    
                    
                    $
                    23,085Restricted
      Cash, Current Portion (Note 2)
                    
                    
                    5,500
                    
                    
                    
                    693Accounts
      Receivable, net of reserve of $81 and $0
                    
                    
                    1,732
                    
                    
                    
                    4,484Inventory,
      net of reserve of $923 and $978
                    
                    
                    4,378
                    
                    
                    
                    6,050Prepaid
      Expenses and Other Current Assets
                    
                    
                    959
                    
                    
                    
                    699Current
      Assets of Discontinued Operations (Note 2)
                    
                    
                    2,522
                    
                    
                    
                    82,807Total
      Current Assets
                    
                    
                    39,059
                    
                    
                    
                    117,818Property
      and Equipment, net of accumulated depreciation of $3,766 and
      $2,758
                    
                    
                    3,214
                    
                    
                    
                    3,430Restricted
      Cash, Non-Current (Note 2)
                    
                    
                    11,675
                    
                    
                    
                    —Other
      Assets
                    
                    
                    891
                    
                    
                    
                    1,071Non-Current
      Assets of Discontinued Operations (Note 2)
                    
                    
                    —
                    
                    
                    
                    50,768TOTAL
      ASSETS
                    
                    $
                    54,839
                    
                    
                    $
                    173,087LIABILITIES
      AND SHAREHOLDERS' EQUITY (DEFICIT)CURRENT
      LIABILITIESAccounts
      Payable and Other Accrued Liabilities
                    
                    $
                    7,217
                    
                    
                    $
                    4,793Deferred
      Revenues and Customer Advances
                    
                    
                    16
                    
                    
                    
                    1,568Warranty
      Provision
                    
                    
                    258
                    
                    
                    
                    86Notes
      Payable – Current, net of discount of $315 and $0
                    
                    
                    8,723
                    
                    
                    
                    —Current
      Liabilities of Discontinued Operations (Note 2)
                    
                    
                    43,469
                    
                    
                    
                    97,899Total
      Current Liabilities
                    
                    
                    59,683
                    
                    
                    
                    104,346LONG
      TERM LIABILITIESLong-Term
      Portion of Deferred Revenues
                    
                    
                    561
                    
                    
                    
                    249Long-Term
      Portion of Warranty Provision
                    
                    
                    306
                    
                    
                    
                    133Notes
      Payable – Long-Term, net of discount of $0 and $1,199
                    
                    
                    —
                    
                    
                    
                    7,838Non-Current
      Liabilities of Discontinued Operations (Note 2)
                    
                    
                    1,120
                    
                    
                    
                    841Total
      Long-Term Liabilities
                    
                    
                    1,987
                    
                    
                    
                    9,061Total
      Liabilities
                    
                    
                    61,670
                    
                    
                    
                    113,407COMMITMENTS
      AND CONTINGENCIESSHAREHOLDERS'
      EQUITY (DEFICIT)Common
      Stock, $.001 par value 600,000,000 shares authorized 288,088,370 and
      287,988,370 issued and outstanding
                    
                    
                    288
                    
                    
                    
                    288Additional
      Paid in Capital
                    
                    
                    259,755
                    
                    
                    
                    252,445Accumulated
        Deficit
                    
                    
                    (266,874
                    )
                    
                    
                    (193,123
                    )Accumulated
      Other Comprehensive Gain
                    
                    
                    —
                    
                    
                    
                    70Total
      Shareholders’ Equity (Deficit)
                    
                    
                    (6,831
                    )
                    
                    
                    59,680TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
                    
                    $
                    54,839
                    
                    
                    $
                    173,087
 
 The
accompanying notes are an integral part of these financial
statements.
  38
  COMPOSITE
TECHNOLOGY CORPORATION
 AND
SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
 (IN
THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
 For the Years ended September 30,2009
                    
                    
                    2008
                    
                    
                    2007Revenue
                    
                    $
                    19,602
                    
                    
                    $
                    32,715
                    
                    
                    $
                    16,008Cost
      of Revenue
                    
                    
                    14,285
                    
                    
                    
                    21,129
                    
                    
                    
                    11,425Gross Profit
                    
                    
                    5,317
                    
                    
                    
                    11,586
                    
                    
                    
                    4,583OPERATING
      EXPENSESOfficer
      Compensation
                    
                    
                    3,225
                    
                    
                    
                    2,129
                    
                    
                    
                    1,864General
      and Administrative
                    
                    
                    9,913
                    
                    
                    
                    7,141
                    
                    
                    
                    6,369Research
      and Development
                    
                    
                    2,703
                    
                    
                    
                    4,519
                    
                    
                    
                    4,187Sales
      and Marketing
                    
                    
                    5,598
                    
                    
                    
                    3,485
                    
                    
                    
                    2,544Depreciation
      and Amortization
                    
                    
                    368
                    
                    
                    
                    339
                    
                    
                    
                    272Total
      Operating Expenses
                    
                    
                    21,807
                    
                    
                    
                    17,613
                    
                    
                    
                    15,236LOSS
      FROM OPERATIONS
                    
                    
                    (16,490
                    )
                    
                    
                    (6,027
                    )
                    
                    
                    (10,653
                    )OTHER
      INCOME / (EXPENSE)Interest
      Expense
                    
                    
                    (2,961
                    )
                    
                    
                    (3,844
                    )
                    
                    
                    (7,210
                    )Interest
      Income
                    
                    
                    26
                    
                    
                    
                    270
                    
                    
                    
                    226Other
      Income / (Expense)
                    
                    
                    (1
                    )
                    
                    
                    74
                    
                    
                    
                    4Expense
      Related to Modification of Warrants due to Anti-Dilution
      Events
                    
                    
                    (7
                    )
                    
                    
                    (553
                    )
                    
                    
                    (374
                    )Total
      Other Income / (Expense)
                    
                    
                    (2,943
                    )
                    
                    
                    (4,053
                    )
                    
                    
                    (7,354
                    )Loss
      from Continuing Operations before Income Taxes
                    
                    
                    (19,433
                    )
                    
                    
                    (10,080
                    )
                    
                    
                    (18,007
                    )Income
      Tax Expense
                    
                    
                    5
                    
                    
                    
                    3
                    
                    
                    
                    3NET
      LOSS FROM CONTINUING OPERATIONS
                    
                    
                    (19,438
                    )
                    
                    
                    (10,083
                    )
                    
                    
                    (18,010
                    )Loss
      from Discontinued Operations, net of tax of $0, $21 and $(49),
      respectively (including Loss on Sale of $1,357
      in 2009) (Note 2)
                    
                    
                    (54,313
                    )
                    
                    
                    (43,430
                    )
                    
                    
                    (26,474
                    )NET
      LOSS
                    
                    
                    (73,751
                    )
                    
                    
                    (53,513
                    )
                    
                    
                    (44,484
                    )OTHER
      COMPREHENSIVE INCOME (LOSS)Foreign
      Currency Translation Adjustment:Unrealized
      Holding Gain (Loss) Arising During Period
                    
                    
                    (431
                    )
                    
                    
                    574
                    
                    
                    
                    (468
                    )Less:
      Reclassification Adjustment for Losses Included in Net
Loss
                    
                    
                    361
                    
                    
                    
                    —
                    
                    
                    
                    —Other
      Comprehensive Income (Loss), net of tax of $0, $0 and $0,
      respectively
                    
                    
                    (70
                    )
                    
                    
                    574
                    
                    
                    
                    (468
                    )COMPREHENSIVE
      LOSS
                    
                    $
                    (73,821
                    )
                    
                    $
                    (52,939
                    )
                    
                    $
                    (44,952
                    )BASIC
      AND DILUTED LOSS PER SHARELoss
      per share from continuing operations
                    
                    $
                    (0.07
                    )
                    
                    $
                    (0.04
                    )
                    
                    $
                    (0.09
                    )Loss
      per share from discontinued operations
                    
                    $
                    (0.19
                    )
                    
                    $
                    (0.18
                    )
                    
                    $
                    (0.14
                    )TOTAL
      BASIC AND DILUTED LOSS PER SHARE
                    
                    $
                    (0.26
                    )
                    
                    $
                    (0.22
                    )
                    
                    $
                    (0.23
                    )WEIGHTED-AVERAGE
      COMMON SHARES OUTSTANDING
                    
                    
                    287,990,562
                    
                    
                    
                    243,369,110
                    
                    
                    
                    189,683,876
 
 The
accompanying notes are an integral part of these financial
statements.
  39
  COMPOSITE
TECHNOLOGY CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT) FOR
 THE
YEARS ENDED SEPTEMBER 30, 2009, 2008 and 2007
  Common Stock( In Thousands Except
                                      For Share Amounts)
                                    
                                    Shares
                                    
                                    
                                    Amount
                                    
                                    
                                    Subscription
                                      Receivable
                                    
                                    
                                    Additional
                                      paid-in capital
                                    
                                    
                                    Accumulated
                                      Other
                                      Comprehensive
                                      Income (Loss)
                                    
                                    
                                    Accumulated
                                      deficit
                                    
                                    
                                    TotalBalance
      at September 30, 2006
                                    
                                    
                                    178,635,325
                                    
                                    
                                    $
                                    179
                                    
                                    
                                    $
                                    (378
                                    )
                                    
                                    $
                                    137,461
                                    
                                    
                                    $
                                    (36
                                    )
                                    
                                    $
                                    (95,126
                                    )
                                    
                                    $
                                    42,100Issuance
      of Common Stock for:Cash
      pursuant to PIPE placement
                                    
                                    
                                    25,201,954
                                    
                                    
                                    
                                    25
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    24,928
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    24,953Cash
      pursuant to warrant exercises
                                    
                                    
                                    2,314,135
                                    
                                    
                                    
                                    2
                                    
                                    
                                    
                                    378
                                    
                                    
                                    
                                    2,445
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    2,825Cash
      pursuant to option exercises
                                    
                                    
                                    1,133,066
                                    
                                    
                                    
                                    1
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    365
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    366Conversion
      of Convertible Debt
                                    
                                    
                                    14,612,136
                                    
                                    
                                    
                                    15
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    16,661
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    16,676Fair
      value of Services provided
                                    
                                    
                                    227,523
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    248
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    248Recovery
      of common stock - EU Energy Acquisition claim
                                    
                                    
                                    (815,789
                                    )
                                    
                                    
                                    (1
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (1,149
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (1,150
                                    )Offering
      Costs paid in Cash
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (1,497
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (1,497
                                    )Offering
      Cost paid in Warrants
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (975
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (975
                                    )Issuance
      of Warrants for:Services
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    754
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    754Offering
      Costs
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    975
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    975$22.8
      million Convertible Debt Offering
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    4,682
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    4,682Settlement
      of legal claims
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    166
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    166Interest
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    1,008
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    1,008Warrant
      modifications due to antidilutive events
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    553
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    553Additional
      conversion feature - antidilutive event
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    626
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    626Share-Based
      Compensation to non-employees
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    831
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    831Share-Based
      Compensation to employees
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    1,523
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    1,523Other
      Comprehensive Loss
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (468
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (468
                                    )Net
      Loss
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (44,484
                                    )
                                    
                                    
                                    (44,484
                                    )Balance
      at September 30, 2007
                                    
                                    
                                    221,308,350
                                    
                                    
                                    $
                                    221
                                    
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    189,605
                                    
                                    
                                    $
                                    (504
                                    )
                                    
                                    $
                                    (139,610
                                    )
                                    
                                    $
                                    49,712
  The
accompanying notes are an integral part of these financial
statements.
  40
  COMPOSITE
TECHNOLOGY CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT) FOR
 THE
YEARS ENDED SEPTEMBER 30, 2009, 2008 and 2007
 (CONTINUED)
 Common Stock( In Thousands Except
                                        For Share Amounts)
                                      
                                      Shares
                                      
                                      
                                      Amount
                                      
                                      
                                      Subscription
                                        Receivable
                                      
                                      
                                      Additional
                                        paid-in capital
                                      
                                      
                                      Accumulated
                                        Other
                                        Comprehensive
                                        Income (Loss)
                                      
                                      
                                      Accumulated
                                        deficit
                                      
                                      
                                      TotalIssuance
      of Common Stock for:Cash
      pursuant to PIPE placement
                                      
                                      
                                      58,787,877
                                      
                                      
                                      
                                      59
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      49,941
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      50,000Cash
      pursuant to warrant exercises
                                      
                                      
                                      4,129,139
                                      
                                      
                                      
                                      4
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      4,453
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      4,457Cash
      pursuant to option exercises
                                      
                                      
                                      490,000
                                      
                                      
                                      
                                      1
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      196
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      197Conversion
      of Convertible Debt
                                      
                                      
                                      3,073,004
                                      
                                      
                                      
                                      3
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      3,132
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      3,135Fair
      value of Services provided
                                      
                                      
                                      200,000
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      208
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      208Offering
      Costs paid in Cash
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (91
                                      )
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (91
                                      )Issuance
      of Warrants for:Services
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      127
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      127Antidilutive
      effect of stock issuance
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      138
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      138$5
      million Debt Financing
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      1,045
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      1,045Warrant
      modifications due to antidilutive events
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      415
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      415Additional
      conversion feature - antidilutive event
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      302
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      302Share-Based
      Compensation
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      2,974
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      2,974Other
      Comprehensive Income
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      574
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      574Net
      Loss
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (53,513
                                      )
                                      
                                      
                                      (53,513
                                      )Balance
      at September 30, 2008
                                      
                                      
                                      287,988,370
                                      
                                      
                                      $
                                      288
                                      
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      252,445
                                      
                                      
                                      $
                                      70
                                      
                                      
                                      $
                                      (193,123
                                      )
                                      
                                      $
                                      59,680
 Issuance
      of Common Stock for:Cash
      pursuant to option exercises
                                          
                                          
                                          100,000
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          35
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          35Issuance
      of Warrants for:$5
      million Debt Financing
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          726
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          726Warrant
      modifications due to antidilutive events
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          9
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          9Warrant
      modification due to repricing
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          22
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          22Additional
      conversion feature - antidilutive event
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          27
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          27Share-Based
      Compensation
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          6,491
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          6,491Other
      Comprehensive Loss
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (70
                                          )
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (70
                                          )Net
      Loss
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (73,751
                                          )
                                          
                                          
                                          (73,751
                                          )Balance
      at September 30, 2009
                                          
                                          
                                          288,088,370
                                          
                                          
                                          $
                                          288
                                          
                                          
                                          $
                                          —
                                          
                                          
                                          $
                                          259,755
                                          
                                          
                                          $
                                          —
                                          
                                          
                                          $
                                          (266,874
                                          )
                                          
                                          $
                                          (6,831
                                          )
 The
accompanying notes are an integral part of these financial
statements.
 41
  COMPOSITE
TECHNOLOGY CORPORATION
 AND
SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (IN
THOUSANDS)
 
 For
      the Years Ended September 30,2009
                  
                  
                  2008
                  
                  
                  2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                  
                  $
                  (73,751
                  )
                  
                  $
                  (53,513
                  )
                  
                  $
                  (44,484
                  )Loss
      from discontinued operations (Note 2)
                  
                  
                  54,313
                  
                  
                  
                  43,430
                  
                  
                  
                  26,474Interest
      and deferred finance charge amortization related to detachable warrants
      and fixed conversion features
                  
                  
                  1,827
                  
                  
                  
                  2,824
                  
                  
                  
                  6,019Depreciation
      and amortization
                  
                  
                  1,011
                  
                  
                  
                  776
                  
                  
                  
                  799Share-based
      compensation
                  
                  
                  4,707
                  
                  
                  
                  2,655
                  
                  
                  
                  2,342Amortization
      of prepaid expenses paid in stock
                  
                  
                  328
                  
                  
                  
                  524
                  
                  
                  
                  422Issuance
      of warrants for services
                  
                  
                  22
                  
                  
                  
                  127
                  
                  
                  
                  164Issuance
      of common stock for settlement
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  166Issuance
      of common stock for services
                  
                  
                  —
                  
                  
                  
                  208
                  
                  
                  
                  249Compensation
      expense related to modification of stock warrants
                  
                  
                  7
                  
                  
                  
                  553
                  
                  
                  
                  374Bad
      debt expense
                  
                  
                  81
                  
                  
                  
                  —
                  
                  
                  
                  —Inventory
      reserve expense
                  
                  
                  223
                  
                  
                  
                  602
                  
                  
                  
                  117Impairment
      on obsolete inventory
                  
                  
                  —
                  
                  
                  
                  554
                  
                  
                  
                  —Gain
      on sale of fixed assets
                  
                  
                  —
                  
                  
                  
                  (75
                  )
                  
                  
                  —Changes
      in Assets / Liabilities:Inventory
                  
                  
                  1,448
                  
                  
                  
                  (1,044
                  )
                  
                  
                  (6,772
                  )Accounts
      receivable
                  
                  
                  2,671
                  
                  
                  
                  (3,285
                  )
                  
                  
                  (3,399
                  )Prepaids
      and other current assets
                  
                  
                  (68
                  )
                  
                  
                  (441
                  )
                  
                  
                  (975
                  )Other
      assets
                  
                  
                  (231
                  )
                  
                  
                  (297
                  )
                  
                  
                  764Accounts
      payable and other accruals
                  
                  
                  2,425
                  
                  
                  
                  460
                  
                  
                  
                  3,735Deferred
      revenue
                  
                  
                  (1,240
                  )
                  
                  
                  (517
                  )
                  
                  
                  2,170Accrued
      warranty liability
                  
                  
                  344
                  
                  
                  
                  220
                  
                  
                  
                  —Net
      assets/liabilities of discontinued operations
                  
                  
                  (20,423
                  )
                  
                  
                  (46,125
                  )
                  
                  
                  (17,622
                  )Cash
      used in operating activities - continuing operations
                  
                  $
                  (26,306
                  )
                  
                  $
                  (52,364
                  )
                  
                  $
                  (29,457
                  )Cash
      provided by (used in) operating activities – discontinued
      operations
                  
                  
                  (3,968
                  )
                  
                  
                  1,944
                  
                  
                  
                  8,221Net
      cash used in operating activities
                  
                  $
                  (30,274
                  )
                  
                  $
                  (50,420
                  )
                  
                  $
                  (21,236
                  )CASH
      FLOWS FROM INVESTING ACTIVITIESProceeds
      from sale of fixed assets
                  
                  
                  —
                  
                  
                  
                  110
                  
                  
                  
                  —Purchase
      of property, plant and equipment
                  
                  
                  (795
                  )
                  
                  
                  (1,959
                  )
                  
                  
                  (1,463
                  )Restricted
      Cash (Note2)
                  
                  
                  (16,482
                  )
                  
                  
                  (693
                  )
                  
                  
                  —Proceeds
      from sale of DeWind (including $17,175 held in escrow) (Note 2)
                  
                  
                  49,500
                  
                  
                  
                  —
                  
                  
                  
                  —Cash
      investment in unconsolidated subsidiary
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (413
                  )Cash
      provided by (used in) investing activities - continuing
      operations
                  
                  $
                  32,223
                  
                  
                  $
                  (2,542
                  )
                  
                  $
                  (1,876
                  )Cash
      used for investing activities – discontinued
    operations
                  
                  
                  (806
                  )
                  
                  
                  (1,064
                  )
                  
                  
                  (4,562
                  )Net
      cash provided by (used in) investing activities
                  
                  $
                  31,417
                  
                  
                  $
                  (3,606
                  )
                  
                  $
                  (6,438
                  )
  The
accompanying notes are an integral part of these financial
statements.
  42
  COMPOSITE
TECHNOLOGY CORPORATION
 AND
SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (IN
THOUSANDS)
 (CONTINUED)
 
 For
      the Years Ended September 30,2009
                          
                          
                          2008
                          
                          
                          2007CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from issuance of convertible debentures
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          21,456Proceeds
      from issuance of common stock (net of issuing costs of $0, $91 and
      $1,497)
                          
                          
                          —
                          
                          
                          
                          49,910
                          
                          
                          
                          23,834Proceeds
      from senior secured debt agreements (net of fees of $295 and
      $0)
                          
                          
                          4,705
                          
                          
                          
                          2,500
                          
                          
                          
                          —Proceeds
      from factoring arrangements
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          1,800Proceeds
      from notes payable
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          500Payments
      on capital leased assets
                          
                          
                          —
                          
                          
                          
                          (109
                          )
                          
                          
                          (289
                          )Proceeds
      from exercise of warrants
                          
                          
                          —
                          
                          
                          
                          4,457
                          
                          
                          
                          2,447Proceeds
      from exercise of options
                          
                          
                          35
                          
                          
                          
                          196
                          
                          
                          
                          366Repayments
      of notes payable, debt and factoring arrangements
                          
                          
                          (5,000
                          )
                          
                          
                          (2,500
                          )
                          
                          
                          (2,300
                          )Cash
      advances to officers
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (62
                          )Cash
      provided by (used in) financing activities
                          
                          $
                          (260
                          )
                          
                          $
                          54,454
                          
                          
                          $
                          47,752Total
      net increase in cash and cash equivalents
                          
                          $
                          883
                          
                          
                          $
                          428
                          
                          
                          $
                          20,078Total
      cash and cash equivalents at beginning of period
                          
                          $
                          23,085
                          
                          
                          $
                          22,657
                          
                          
                          $
                          2,579Total
      cash and cash equivalents at end of period
                          
                          $
                          23,968
                          
                          
                          $
                          23,085
                          
                          
                          $
                          22,657SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:INTEREST
      PAID
                          
                          $
                          847
                          
                          
                          $
                          1,160
                          
                          
                          $
                          1,089TAXES
      PAID
                          
                          $
                          5
                          
                          
                          $
                          11
                          
                          
                          $
                          4
  The
accompanying notes are an integral part of these financial
statements
  43
  SUPPLEMENTAL
DISCLOSURE OF NON-CASH FINANCING ACTIVITES:
 
 During
the fiscal year ended September 30, 2009, the Company:
 
 Issued
150,000 warrants at an exercise price of $0.96 per share in settlement of a
disputed financing fee related to the May 2008 debt financing. The Company had
accrued $18,000 in general and administrative expense in fiscal 2008 for the
issuance of these warrants.
 
 Re-priced
200,000 $1.75 warrants, 200,000 $1.50 warrants, and 200,000 $1.25 warrants to a
strike price of $0.75 per warrant for all three series of warrants. The Company
recorded $22,062 to general and administrative expense for the re-pricing of
these warrants.
 
 Issued
4,000,000 warrants at an exercise price of $0.25 per share in conjunction with a
$5,000,000 Bridge Note financing. The Company recorded $726,000 as debt discount
for the warrants issued. The issuance triggered anti-dilution exercise price
protection between $0.01 and $0.02 per warrant for warrants issued in
conjunction with the 2007 Convertible Debt and Private Equity Placement
financings. The Company recorded $7,000 to general and administrative expense
and $27,000 as additional debt discount to the convertible notes as a result of
the re-pricings.
 
 During
the fiscal year ended September 30, 2008, the Company issued:
 
 2,073,004
shares of Common Stock for the conversion of $2,135,000 of Convertible Debt at a
conversion price of $1.03 per share.
 
 1,000,000
shares of Common Stock for the conversion of $1,000,000 of Convertible Debt at a
conversion price of $1.00 per share.
 
 200,000
shares of Common Stock as a prepayment for investor relations services valued at
$208,000, the market price on the date of issuance.
 
 2,500,000
warrants valued at the fair value on the issuance dates of $1,045,000 issued
pursuant to the May 5, 1008 Debt agreement.
 
 542,272
warrants valued at the fair value on the issuance date of $138,000 were issued
pursuant to anti-dilution protection provisions of our 2005 DIP and 2006 Bridge
Note warrant holders as a result of our May 2008 equity financing.
 
 During
the fiscal year ended September 30, 2007, the Company issued:
  50,000
shares of common stock for the settlement of accounts payable related to
marketing consulting services valued at $55,000.
  177,523
shares of common stock for settlement of accounts payable related to product
development services valued at $194,000.
  220,000
warrants valued at the fair value at the issuance date of $164,000 were issued
to a note holder in lieu of interest and recorded as interest expense during the
quarter at the fair value of the warrants issued.
  10,973,585
warrants valued at the fair value of $5,170,000 at the issuance date were issued
as part of the February 2007 Senior Convertible Note transaction.
  1,316,827
warrants valued at the fair value of $611,000 at the issuance date were issued
as fees related to the February 2007 Senior Convertible Note
transaction.
  1,800,000
warrants valued at the fair value of $844,000 at the issuance date were issued
in conjunction with the factored receivable arrangement.
  629,128
warrants valued at the fair value of $195,000 at the issuance date were issued
pursuant to anti-dilution protection provisions of our 2005 DIP financing as the
result of our February 2007 Convertible Debt offering.
  152,341
warrants valued at the fair value of $62,000 at the issuance date were issued
pursuant to anti-dilution protection provisions of our 2006 Bridge Notes
financing as the result of anti-dilution of our February 2007 Convertible Debt
offering.
  300,000
warrants valued at the fair value of $166,000 were issued in settlement of a
legal dispute.
  6,247,676
warrants valued at the fair value of $4,029,000 at the issuance date were issued
in conjunction with the two PIPE equity placements,
 
 1,564,901
warrants valued at the fair value of $1,009,000 at the issuance date were issued
for services related to the two PIPE equity placements.
  87,374
warrants valued at the fair value of $76,000 at the issuance date were issued
for the anti-dilution impact of the 2006 Series A and the 2005 DIP warrants as a
result of our June, 2007 PIPE equity issuances.
  44
  4,273,000
shares of common stock for the conversion of $6,023,000 of the August 2004
Convertible Debentures as follows:
 -
              $1,010,000 of principal was
      converted at $1.46 per share into 691,816 shares of common
      stock;
 -
              $5,013,000 of principal was
      converted at $1.40 per share into 3,580,857 shares of common
      stock.
 
 10,383,150
shares of common stock for the conversion of $10,698,000 of the February 2007
Convertible Notes as follows:
 -
              $300,000 of principal was
      converted at $1.04 per share into 288,462 shares of common
      stock;
 -
              $10,353,000 of principal was
      converted at $1.03 per share into 10,050,997 shares of common
      stock.
  45
  COMPOSITE
TECHNOLOGY CORPORATION
 AND
SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED SEPTEMBER 30, 2009, 2008, AND 2007
 
 NOTE
1 – ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
 
 Composite
Technology Corporation (the “Company”), originally incorporated in Florida and
reincorporated in Nevada, is an Irvine, CA based company that has operated in
two segments, CTC Cable “Cable” and DeWind “Wind”. As discussed below, in
September 2009, the Company sold substantially all of its Wind segment, which
sold wind turbines under the brand name DeWind. The Cable Segment sells high
efficiency patented composite core electricity conductors known as "ACCC®
conductor" for use in electric transmission and distribution lines. ACCC®
conductor is commercially available in the United States and Canada through
distribution and purchase agreements with General Cable Industries, Inc; in
China through Far East Composite Cable; in Europe through Lamifil; in the Middle
East through Midal Cable; and directly through CTC Cable worldwide.
 
 BASIS
OF PRESENTATION AND PRINCIPALS OF CONSOLIDATION
 
 These
financial statements and the accompanying notes are prepared in accordance with
accounting principles generally accepted in the United States of America (US
GAAP) and conform to Regulation S-X under the Securities Exchange Act of 1934,
as amended.  The financial statements include the accounts of
Composite Technology Corporation and its wholly-owned subsidiaries, the most
significant of which is CTC Cable Corporation.
  The
Company consolidates the financial statements of all entities in which the
Company has a controlling financial interest, as defined in US GAAP. All
significant inter-company accounts and transactions are eliminated during
consolidation.
  DISCONTINUED
OPERATIONS AND SALE OF DEWIND
 
 On
September 4, 2009, our DeWind subsidiary sold substantially all of its existing
operating assets including all inventories, receivables, fixed assets, wind farm
project assets and intangible assets including all intellectual property and
transferred substantially all operating liabilities including supply chain and
operating expense accounts payables and accrued liabilities, warranty related
liabilities for US turbine installations, and deferred revenues.  All
of the remaining assets and liabilities of DeWind have been classified as net
assets/liabilities of discontinued operations.  All operations of our
former DeWind segment have been reported as discontinued operations. See
discussion at Note2,
including the accounting policies applicable to our discontinued
operations.
  46
 
 REVENUE
RECOGNITION
 
 Revenues
are recognized based on guidance provided in the Securities and Exchange
Commission (SEC). Accordingly, our general revenue recognition policy is to
recognize revenue when there is persuasive evidence of an arrangement, the sales
price is fixed or determinable, collection of the related receivable is
reasonably assured, and delivery has occurred or services have been
rendered.
  The
Company derives, or seeks to derive revenues from product revenue sales of
composite core, stranded composite core, core and stranded core hardware, and
other electric utility related products.
 
 In
addition to the above general revenue recognition principles prescribed by the
SEC, our specific revenue recognition policies for each revenue source are as
follows:
 
 PRODUCT
REVENUES. Product revenues are recognized when product shipment has been made
and title has passed to the end user customer. Product revenues consist
primarily of revenue from the sale of: (i) stranded composite core and related
hardware to utilities either sold directly by the Company or through a
distribution agreement, and (ii) composite core and related hardware sold to a
cable stranding entity. Revenues are deferred for product contracts where the
Company is required to perform installation services until after the
installation is complete. Our distribution agreements are structured so that our
revenue cycle is complete upon shipment and title transfer of products to the
distributor with no right of return.
 
 CTC Cable
sales for the years ended September 30, 2009, 2008 and 2007 consisted of
stranded ACCC®
conductor and ACCC® hardware
sold to end user utilities, sales of ACCC®
conductor core and hardware sold to our Chinese distributor, and sales of
ACCC®
conductor core and ACCC® hardware
to two of our stranding manufacturers. All ACCC® product
related sales were recognized upon delivery of product and transfer of title.
There is no right of return for sales of ACCC®
conductor or ACCC® core to
our Chinese distributor.  For ACCC®
conductor product sales made directly by us and not through a manufacturer or
distributor, through a third-party insurance company, we provide the option to
purchase an extended warranty for periods up to five, seven or ten years. We
allocate a portion of sales proceeds to the estimated fair value of the cost to
provide such a warranty.  To date, most of our ACCC® related
product sales have been without warranty coverage.
 
 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 the years ended September 30, 2009, 2008 and 2007, we
recognized no consulting revenues.
 
 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 VSOE becomes available, or until the contract is
completed.
 
 WARRANTY
PROVISIONS
 
 Warranty
provisions consist of the costs and liabilities associated with any post-sales
associated with our ACCC®
conductor and related hardware parts.
 
 Warranties
related to our ACCC® products
relate to conductor and hardware sold directly by us to the end-user
customer.  We mitigate our loss exposure through the use of third
party warranty insurance.  Warranty related liabilities for time
periods in excess of one year are classified as non-current
liabilities.
 
 USE
OF ESTIMATES
 
 The
preparation of our financial statements conform with US GAAP, which requires
management to make estimates and judgments in applying our accounting policies
that have an important impact on our reported amounts of assets, liabilities,
revenue, expenses and related disclosures at the date of our financial
statements. On an on-going basis, management evaluates its estimates including
those related to accounts receivable, inventories, share-based compensation,
warranty provisions and goodwill and intangibles, as applicable. Management
bases its estimates and judgments on historical experience and on various other
factors that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from management’s estimates. We believe that the application of our
critical accounting policies requires significant judgments and estimates on the
part of management. We believe that the estimates, judgments and assumption upon
which we rely are reasonable, and based upon information available to us at the
time that these estimates, judgments and assumptions are made. These estimates,
judgments and assumptions can affect the reported amounts of assets and
liabilities as of the date of the financial statements as well as the reported
amounts of revenues and expenses during the period presented. To the extent
there are material differences between these estimates, judgments or assumptions
and actual results, our financial statements will be affected. In many cases,
the accounting treatment of a particular transaction is specifically dictated by
US GAAP and does not require management's judgment in its application. There are
also many areas in which management's judgment in selecting among available
alternatives would produce a materially different result.
 
 47
  Our key
estimates we use that rely upon management judgment include:
 
 -
              the estimates pertaining to the
      likelihood of our accounts receivable collectability, These estimates
      primarily rely upon past payment history by customer and management
      judgment on the likelihood of future payments based on the current
      business condition of each customer and the general business
      environment.
 -
              the estimates pertaining to the
      valuation of our inventories. These estimates primarily rely upon the
      current order book for each product in inventory along with management’s
      expectations and visibility into future sales of each product in
      inventory.
 -
              the assumptions used to calculate
      fair value of our share-based compensation, primarily the volatility
      component of the Black-Scholes-Merton option-pricing model used to value
      our warrants and our employee and non-employee options. This estimate
      relies upon the past volatility of our share price over time as well as
      the estimate of the option
life.
 -
              goodwill and intangible
      valuation. These estimates rely primarily on financial models reviewed by
      senior management which incorporate business assumptions made by
      management on the underlying products and technologies acquired and the
      likelihood that the values assigned during the initial valuations will be
      recoverable over time through increased revenues, profits, and enterprise
      value. As of September 30, 2009, we have no reportable goodwill or
      intangible assets (see related discussion at Note2).
 -
              The
      estimates and assumptions used to determine the settlement of certain
      accounts related to the sale of the DeWind assets for which a final
      accounting has not been completed and which may result in the increase or
      decrease of asset reserves or increase or decrease of accrued liabilities,
      principally penalty payments, interest, and other costs associated with
      the turbine parts suppliers for DeWind turbine parts. (See related
      discussion at Note 2).
 
 DERIVATIVE
FINANCIAL INSTRUMENTS
 
 The
Company issues financial instruments in the form of stock options, and stock
warrants and debt conversion features as part of its convertible debt issuances.
The Company has not issued any derivative instruments for hedging purposes since
its inception. The Company uses the specific guidance and disclosure
requirements provided in US GAAP. 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 a liability. The Company has
accounted for all derivative instruments indexed to the Company’s stock as
equity.
  The
values of the financial instruments are estimated using the Black-Scholes-Merton
(Black-Scholes) option-pricing model. Key assumptions used to value options and
warrants granted or issued are as follows:
  Year ended
                    September 30,2009
                  
                  
                  2008
                  
                  
                  2007Risk
      Free Rate of Return
                  
                  
                  .50%-2.69
                  %
                  
                  
                  1.61%-4.29
                  %
                  
                  
                  4.01%-4.97
                  %Volatility
                  
                  
                  75%-116
                  %
                  
                  
                  66%-88
                  %
                  
                  
                  88%-98
                  %Dividend
      yield
                  
                  
                  0
                  %
                  
                  
                  0
                  %
                  
                  
                  0
                  %
 
 The
accounting for derivative financial instruments related to share-based
compensation is further described below.
 
 Share-Based
Compensation
 
 US GAAP
requires that compensation cost relating to share-based payment arrangements be
recognized in the financial statements. As of October 1, 2005, we adopted the
current US GAAP rules using the “modified prospective method”, which requires
measurement of compensation cost for all share-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 is determined using the
Black-Scholes valuation model, which is consistent with our valuation techniques
previously utilized for stock options in footnote disclosures required under
previous US GAAP rules. Such fair value is recognized as expense over the
service period, net of estimated forfeitures.
 
 US GAAP
requires that equity instruments issued to non-employees 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.
 
 In March
2005, the SEC issued new guidance, which provides the Staff’s views on a variety
of matters relating to share-based payments. The SEC
guidance requires share-based compensation to be classified in the same
expense line items as cash compensation.
  48
  In
December 2007, the SEC issued new guidance regarding the use of a
"simplified" method in developing an estimate of expected term of "plain
vanilla" share options in accordance with US GAAP rules. In particular, the
Staff indicated that it will accept a company's election to use the simplified
method, regardless of whether the company has sufficient information to make
more refined estimates of expected term. The Staff believed that more detailed
external information about employee exercise behavior (e.g., employee exercise
patterns by industry and/or other categories of companies) would, over time,
become readily available to companies. Therefore, the Staff stated that it
would not expect a company to use the simplified method for share option grants
after December 31, 2007. The Staff understood that such detailed information
about employee exercise behavior may not be widely available by December 31,
2007. Accordingly, the Staff continued to accept, under certain circumstances,
the use of the simplified method beyond December 31, 2007. The Company currently
uses the simplified method for “plain vanilla” share options and
warrants.
 
 Information
about share-based compensation is described in Note11.
 
 Convertible
Debt
 
 Convertible
debt is accounted for under specific guidelines established in US GAAP. 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, except that the contractual life of the
warrant is used. The Company evaluated the variable conversion features and
determined that they should be accounted for as equity.  The Company
first allocates the value of the proceeds received to the convertible instrument
and any other detachable instruments (such as detachable warrants) on a relative
fair value basis and then determines the amount of any BCF based on effective
conversion price to measure the intrinsic value, if any, of the embedded
conversion option. Using the effective yield method, 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.
 
 US GAAP
rules specify that a contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether issued
as a separate agreement or included as a provision of a financial instrument or
other agreement, should be separately recognized and measured in accordance with
US GAAP contingency rules. The contingent obligation to make future payments or
otherwise transfer consideration under a registration payment arrangement should
be separately recognized and measured in accordance with said rules, pursuant to
which a contingent obligation must be accrued only if it is more likely than not
to occur. Since the Company satisfied its registration rights obligation without
any payment and in management’s estimation, the contingent payments related to
the registration payment arrangement were not likely to occur, no amount needed
to be accrued.
 
 CASH
AND CASH EQUIVALENTS
 
 For the
purpose of the statements of cash flows, the Company considers all highly liquid
investments purchased with original maturities of three months or less to be
cash equivalents.
  RESTRICTED
CASH
 
 Restricted
cash represents cash on deposit under control of the Company that secures
standby letters of credit and other payment guarantees for certain vendors.
Restricted cash balances were $17,175,000 and $693,000 at September 30, 2009 and
2008, respectively.  At September 30, 2009, the reported restricted
cash balances are comprised of cash held in escrow in connection with the sale
of DeWind as discussed in Note 2.
  ACCOUNTS
RECEIVABLE
 
 The
Company has trade accounts receivable from cable customers. Cable customer
receivables are typically on net 30 day terms. Balances due greater than one
year from the balance sheet date are reclassified to long term assets, as
applicable. 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. Additions to the provision for bad debts are
included in General and Administrative expense on our Consolidated Statements of
Operations and Comprehensive Loss; charge-offs of uncollectible accounts are
made against existing provisions or direct to expense as
appropriate. 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 (currently at $250,000 per depositor, per insured
bank for interest bearing accounts). 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 two customers, representing 89% and 93% of the total net receivable
balance as of September 30, 2009 and 2008, respectively. The Company and its
wholly owned subsidiaries maintain allowances for doubtful accounts for
estimated losses resulting from the inability of its customers to make required
payments. If the financial condition of the Company’s customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. Management reviews delinquent accounts at
least quarterly, to identify potential doubtful accounts, and together with
customer follow-up estimates the amounts of potential losses.
  49
  For the
year ended September 30, 2009, three customers represented 77.8% of
revenue.  For the year ended September 30, 2008, two customers
represented 96.0% of revenue.  For the year ended September 30, 2007,
two customers represented 93.6% of revenue.
 
 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.
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.  Payments made to third party vendors
in advance of material deliveries are reported as a separate balance sheet line
item, as applicable.  Costs for product sold is recorded to cost of
goods sold as the expenses are incurred.
  PROPERTY
AND EQUIPMENT
 
 Property
is stated at the lower of cost or realizable value, net of accumulated
depreciation. Additions and improvements to property and equipment are
capitalized at cost. Designated project costs are capitalized to
construction-in-progress as incurred. 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. 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.
 
 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.
 
 We did
not recognize any impairment charges in fiscal 2009, 2008 or 2007; except during
2009 for certain charges reported as discontinued operations in connection with
the sale of DeWind (see Note 2).
 
 FAIR
VALUE MEASUREMENTS
 
 Fair
value is defined as the price that would be received to sell an asset, or paid
to transfer a liability, in an orderly transaction between market participants
at the measurement date. Assets and liabilities recorded at fair value in the
consolidated balance sheets are categorized based upon the level of judgment
associated with the inputs used to measure their fair value. The fair value
hierarchy distinguishes between (1) market participant assumptions
developed based on market data obtained from independent sources (observable
inputs) and (2) an entity’s own assumptions about market participant
assumptions developed based on the best information available in the
circumstances (unobservable inputs). The fair value hierarchy consists of three
broad levels, which gives the highest priority to unadjusted quoted prices in
active markets for identical assets or liabilities (Level 1) and the lowest
priority to unobservable inputs (Level 3). The three levels of the fair value
hierarchy are described as follows:
 
 Level 1
- Quoted prices in active markets for identical assets or
liabilities.
 Level 2
- Inputs other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs that are observable or
can be corroborated by observable market data for substantially the full term of
the assets or liabilities.
 Level 3
- Unobservable inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or
liabilities.  Inputs are based on management’s best estimate of what
market participants would use in pricing the asset or liability at the
measurement date.
 
 As of
September 30, 2009, the Company held certain assets that are required to be
measured at fair value on a recurring basis. The fair value of these assets
was determined using the following inputs:
  (In Thousands)Description
                          
                          Total
                          
                          
                          Level 1
                          
                          
                          Level 2
                          
                          
                          Level 3Cash
      and cash equivalents
                          
                          $
                          23,968
                          
                          
                          $
                          23,968
                          
                          
                          $
                          —
                          
                          
                          $
                          —Restricted
      cash (Note 2)
                          
                          $
                          17,175
                          
                          
                          $
                          17,175
                          
                          
                          $
                          —
                          
                          
                          $
                          —
  FAIR
VALUE INFORMATION ABOUT FINANCIAL INSTRUMENTS
 
 US GAAP
regarding fair value disclosures of financial instruments requires disclosure of
fair value information about certain financial instruments for which it is
practical to estimate that value.  The carrying amounts reported in
our balance sheet for cash, cash equivalents, accounts receivable, accounts
payable, notes and convertible notes approximate fair value due to the short
maturity of these financial instruments.  Additionally, we have no
financial instruments not measured at fair value. Considerable judgment is
required to develop such estimates of fair value.  Accordingly, such
estimates would not necessarily be indicative of the amounts that could be
realized in a current market exchange.  The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair amounts.
  50
  FOREIGN
CURRENCY TRANSLATION
 
 The
Company’s primary functional currency is the U.S. dollar. 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 shareholders’ equity (deficit) except those
resulting from investments by, and distributions to, shareholders. Accordingly,
the Company’s Consolidated Statements of Operations and Comprehensive Loss
include net loss, and foreign currency translation adjustments that arise from
the translation of foreign currency financial statements into U.S.
dollars.
 
 In
connection with the sale of DeWind and resulting discontinued operations (see
Note 2),
our Consolidated Statement of Operations and Comprehensive Loss for the year
ended September 30, 2009 includes a reclassification adjustment of the
accumulated foreign currency translation adjustments for DeWind through
September 4, 2009 (date of sale), to recognize the accumulated adjustments as a
component of the loss from discontinued operations within net
loss.  Since inception, other comprehensive income (loss) had been
derived from DeWind foreign currency translation adjustments.
  RESEARCH
AND DEVELOPMENT EXPENSES
 
 Research
and development expenses are charged to operations as incurred.
 
 START-UP
COSTS
 
 US GAAP
defines start-up activities as one-time activities an entity undertakes when it
opens a new facility, introduces a new product or service, conducts business in
a new territory, or with a new class of customer or beneficiary, initiates a new
process in an existing facility or commences some new
operation.  Start-up activities include activities related to
organizing a new entity (i.e. organization costs), which include initial
incorporation and professional fees in connection with establishing the new
entity.  In accordance with US GAAP, we expense all start-up
activities as incurred.
 
 During
the year ended September 30, 2009, we recorded start-up expenses in the
approximate amount of $160,000, which are included in general and administrative
expenses.  Our start-up activities related to professional fees for
organization costs incurred.
 
 DEFINED
CONTRIBUTION PLAN
 
 The
Company maintains a 401(k) plan covering substantially all of its employees who
are at least 21 years old with 1,000 hours of service.  Such
employees are eligible to contribute a percentage of their annual eligible
compensation and receive discretionary Company matching
contributions.  Discretionary Company matching contributions are
determined by the Board of Directors and may be in the form of cash or Company
stock.  To date, the Company has not made any matching contributions
in either cash or Company stock. There were no changes to the 401 (k) plan
during the year ended September 30, 2009.
 
 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, 2009, 2008, and 2007, the deferred tax assets related primarily to
the Company's net operating loss carry-forwards are fully reserved. Due to the
provisions of Internal Revenue Code Section 382, the Company may not have any
net operating loss carry-forwards available to offset financial statement or tax
return taxable income in future periods as a result of a change in control
involving 50 percentage points or more of the issued and outstanding securities
of the Company.
  The
Company will recognize the impact of tax positions in the consolidated financial
statements if that position is more likely than not of being sustained on audit,
based on the technical merits of the position.  To date, we have not
recorded any uncertain tax positions. See Note 12.
  The
Company files consolidated tax returns in the United States Federal jurisdiction
and in California as well as foreign jurisdictions including Germany and the
United Kingdom. The Company is no longer subject to US Federal income tax
examinations for fiscal years before 2001, is no longer subject to state and
local income tax examinations by tax authorities for fiscal years before 2001,
and is no longer subject to foreign examinations before 2006.
  During
fiscal 2008, the Company’s federal returns were selected for examination by the
Internal Revenue Service (IRS) for prior fiscals years ended September 30, 2001
through 2005, all years in which net losses were reported and filed. The
examination has been completed and the company is awaiting final determination
of adjustment to be provided by the IRS. As of September 30, 2009, the
IRS has not proposed any significant adjustments to the Company’s tax positions.
Currently, the Company is not able to reasonably estimate the amount by which
the liability for unrecognized tax benefits may increase or decrease during the
next 12 months as a result of the ongoing IRS audit. However, the Company does
not anticipate any adjustments that would result in a material change to its
financial position. Payments relating to any proposed assessments arising from
the 2001 through 2005 audits will not be made until a final agreement is reached
between the Company and the IRS on such assessments or upon a final resolution
resulting from the administrative appeals process or judicial
action.
  The
Company recognizes potential accrued interest and penalties related to uncertain
tax positions in income tax expense. During the fiscal years ended September 30,
2009 and 2008, the Company did not recognize any amount in potential interest
and penalties associated with uncertain tax positions.
 LOSS
PER SHARE
 
 Basic
loss per share is computed by dividing loss available to common shareholders by
the weighted-average number of common shares outstanding. Diluted loss per share
is computed similar to basic loss per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the additional
common shares were dilutive. Common equivalent shares are excluded from the
computation if their effect is anti-dilutive.
  51
  The
following common stock equivalents were excluded from the calculation of diluted
loss per share for the years ended September 30, 2009, 2008, and 2007 since
their effect would have been anti-dilutive:
  September 30,2009
                      
                      
                      2008
                      
                      
                      2007Options
      for common stock
                      
                      
                      25,900,964
                      
                      
                      
                      25,130,521
                      
                      
                      
                      15,019,870Warrants
      for common stock
                      
                      
                      22,934,649
                      
                      
                      
                      26,150,817
                      
                      
                      
                      32,449,107Convertible
      Debentures, if converted
                      
                      
                      9,128,566
                      
                      
                      
                      9,037,280
                      
                      
                      
                      11,817,93557,964,179
                      
                      
                      
                      60,318,618
                      
                      
                      
                      59,286,912
  RECLASSIFICATIONS
 
 Certain
prior year balances have been reclassified to conform to the current year
presentation. Additionally, as discussed in Note 2, we have classified all
operations of our former DeWind segment as discontinued operations.
 
 RECENT
ACCOUNTING PROUNOUNCEMENTS
 
 In
December 2007, the Financial Accounting Standards Board (FASB) issued a revision
to existing business combination rules.  The new rule requires most
identifiable assets, liabilities, non-controlling interests, and goodwill
acquired in a business combination to be recorded at “full fair value.” The new
rule applies to all business combinations, including combinations among mutual
entities and combinations by contract alone. Additionally, all business
combinations will be accounted for by applying the acquisition method. The new
rule is effective for business combinations for which the acquisition date is on
or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. The adoption of this standard is not expected to
have a material impact on our consolidated financial statements.
 
 In April
2009, the FASB issued new rules related to accounting for assets acquired and
liabilities assumed in a business combination that arise from contingencies. The
new rules apply to all assets acquired and liabilities assumed in a business
combination that arise from certain contingencies as defined by the FASB and
requires (i) an acquirer to recognize at fair value, at the acquisition
date, an asset acquired or liability assumed in a business combination that
arises from a contingency if the acquisition-date fair value of that asset or
liability can be determined during the measurement period, otherwise the asset
or liability should be recognized at the acquisition date if certain defined
criteria are met; (ii) contingent consideration arrangements of an acquiree
assumed by the acquirer in a business combination be recognized initially at
fair value; (iii) subsequent measurements of assets and liabilities arising
from contingencies be based on a systematic and rational method depending on
their nature and contingent consideration arrangements be measured subsequently;
and (iv) disclosures of the amounts and measurement basis of such assets
and liabilities and the nature of the contingencies. The new rules are effective
for business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after
December 15, 2008. The adoption of this standard is not expected to have a
material impact on our consolidated financial statements.
 
 In April
2008, the FASB issued new rules related to determining the useful life of
intangible assets.  The new rules amend the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under existing FASB rules for
goodwill and other intangible assets. This change is intended to improve the
consistency between the useful life of a recognized intangible asset outside a
business combination and the period of expected cash flows used to measure the
fair value of an intangible asset in a business combination.  The new
rules are effective for the financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years.  The requirement for determining useful lives must be applied
prospectively to intangible assets acquired after the effective date and the
disclosure requirements must be applied prospectively to all intangible
recognized as of, and subsequent to, the effective date.  The adoption
of this standard is not expected to have a material impact on our consolidated
financial statements.
 
 In
December 2007, the FASB issued a new rule related to non-controlling interests
in consolidated financial statements. The new rule requires the ownership
interests in subsidiaries held by parties other than the parent to be treated as
a separate component of equity and be clearly identified, labeled, and presented
in the consolidated financial statements. The new rule is effective for fiscal
years beginning on or after December 15, 2008 and interim periods within
those fiscal years. Earlier adoption is prohibited. The adoption of this
standard is not expected to have a material impact on our consolidated financial
statements.
 
 In June
2009, the FASB issued new rules related to accounting for transfers of financial
assets. The new rules amend various provisions related to accounting for
transfers and servicing of financial assets and extinguishments of liabilities,
by removing the concept of a qualifying special-purpose entity and removes the
exception from applying FASB rules related to variable interest entities that
are qualifying special-purpose entities; limits the circumstances in which a
transferor derecognizes a portion or component of a financial asset; defines a
participating interest; requires a transferor to recognize and initially measure
at fair value all assets obtained and liabilities incurred as a result of a
transfer accounted for as a sale; and requires enhanced disclosure; among
others. The new rules become effective for the Company on October 1, 2010,
earlier application is prohibited. The adoption of this standard is not expected
to have a material impact on our consolidated financial
statements.
  52
  In June
2009, the FASB issued new rules to amend certain accounting for variable
interest entities.  The new rules require an enterprise to perform an
analysis to determine whether the enterprise’s variable interest or interests
give it a controlling financial interest in a variable interest entity (VIE); to
require ongoing reassessments of whether an enterprise is the primary
beneficiary of a VIE; to eliminate the quantitative approach previously required
for determining the primary beneficiary of a VIE; to add an additional
reconsideration event for determining whether an entity is a VIE when any
changes in facts and circumstances occur such that holders of the equity
investment at risk, as a group, lose the power from voting rights or similar
rights of those investments to direct the activities of the entity that most
significantly impact the entity’s economic performance; and to require enhanced
disclosures that will provide users of financial statements with more
transparent information about an enterprise’s involvement in a VIE. The new
rules become effective for the Company on October 1, 2010, earlier
application is prohibited.  The adoption of this standard is not
expected to have a material impact on our consolidated financial
statements.
 
 In June
2008, the FASB issued certain new rules related to determining whether an
instrument (or embedded feature) is indexed to an entity’s own
stock.  Existing accounting for derivatives and hedging activities,
specifies that a contract that would otherwise meet the definition of a
derivative but is both (a) indexed to the Company’s own stock and (b) classified
in shareholders’ equity in the statement of financial position would not be
considered a derivative financial instrument.  The new rules provide a
new two-step model to be applied in determining whether a financial instrument
or an embedded feature is indexed to an issuer’s own stock and thus able to
qualify for the existing scope exception.  The new rules become
effective for the first annual reporting period beginning after December 15,
2008, and early adoption is prohibited.  We are currently evaluating
the impact this standard will have on our consolidated financial
statements.
 
 In August
2009, the FASB issued Accounting Standards Update (ASU) No. 2009-5,Fair Value Measurements and
Disclosures (Topic 820)—Measuring Liabilities at Fair Value, which
changes the fair value accounting for liabilities. These changes clarify
existing guidance that in circumstances in which a quoted price in an active
market for the identical liability is not available, an entity is required to
measure fair value using either a valuation technique that uses a quoted price
of either a similar liability or a quoted price of an identical or similar
liability when traded as an asset, or another valuation technique that is
consistent with the principles of fair value measurements, such as an income
approach (e.g., present value technique) or a market approach. This guidance
also states that both a quoted price in an active market for the identical
liability and a quoted price for the identical liability when traded as an asset
in an active market when no adjustments to the quoted price of the asset are
required, are Level 1 fair value measurements. This ASU is effective October 1,
2009.  The adoption of this ASU is not expected to have a material
impact on our consolidated financial statements.
 
 In
October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging
Issues Task Force (ASU 2009-13).  ASU 2009-13 amends accounting
for revenue arrangements with multiple deliverables, to eliminate the
requirement that all undelivered elements have Vendor-Specific Objective
Evidence (VSOE) or Third-Party Evidence (TPE) before an entity can recognize the
portion of an overall arrangement fee that is attributable to items that already
have been delivered. In the absence of VSOE or TPE of the standalone selling
price for one or more delivered or undelivered elements in a multiple-element
arrangement, entities will be required to estimate the selling prices of those
elements. The overall arrangement fee will be allocated to each element (both
delivered and undelivered items) based on their relative selling prices,
regardless of whether those selling prices are evidenced by VSOE or TPE or are
based on the entity's estimated selling price. Application of the "residual
method" of allocating an overall arrangement fee between delivered and
undelivered elements will no longer be permitted upon adoption of ASU 2009-13.
Additionally, the new guidance will require entities to disclose more
information about their multiple-element revenue arrangements. ASU 2009-13 is
effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15,
2010.  Early adoption is permitted.  If a vendor elects
early adoption and the period of adoption is not the beginning of the entity’s
fiscal year, the entity will be required to apply the amendments in this Update
retrospectively from the beginning of the entity’s fiscal
year.  Additionally, vendors electing early adoption will be required
to disclose the following information at a minimum for all previously reported
interim periods in the fiscal year of adoption:  revenue, income
before income taxes, net income, earnings per share and the effect of the change
for the appropriate captions presented.  We are currently evaluating
the impact of the adoption of ASU 2009-13 on our consolidated financial
statements.
 
 Significant
recent accounting policies adopted or implemented during the year ended
September 30, 2009
 
 On
September 30, 2009, we adopted the FASB ASU No. 2009-1, Topic 105—Generally Accepted
Accounting Principles—amendments based on—Statement of Financial Accounting
Standards No. 168—The FASB Accounting Standards CodificationTMand the Hierarchy of Generally
Accepted Accounting Principles(ASU 2009-1).  ASU 2009-1
changes the authoritative hierarchy of GAAP. These changes establish the FASB
Accounting Standards CodificationTM
(Codification) as the source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with GAAP. Rules and interpretive releases of
the SEC under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. The FASB will no longer issue new
standards in the form of Statements, FASB Staff Positions, or Emerging Issues
Task Force Abstracts; instead the FASB will issue Accounting Standards Updates.
ASU’s will not be authoritative in their own right as they will only serve to
update the Codification. These changes and the Codification itself do not change
GAAP. Other than the manner in which new accounting guidance is referenced, the
adoption of these changes had no impact on our consolidated financial
statements.
 
 In
December 2008, the FASB issued new rules related to disclosures by public
entities about transfers of financial assets and interests in variable interest
entities. The new rules amend certain guidance to require public entities to
provide additional disclosures about transfers of financial assets, and to
require public enterprises to provide additional disclosures about their
involvement with VIE’s.  The new rules were effective for the
Company’s quarter ended December 31, 2008 and had no impact on our consolidated
financial statements.
 
 In
September 2006, the FASB issued new rules related to fair value
measurements, which define the fair value, establish a framework for measuring
fair value and expand disclosures about fair value measurements. The new rules
are effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years.  The Company adopted the applicable provisions as of October 1,
2008.  Except for added disclosure, the adoption had no impact on our
consolidated financial statements.
  53
 
 In
February 2007, the FASB issued a new rule related to the fair value option for
financial assets and financial liabilities, including an amendment to the
accounting for marketable securities guidance, which permits entities to choose
to measure many financial instruments and certain other items at fair
value.  The new rules are effective for financial statements issued
for fiscal years beginning after November 15, 2007.  The Company
adopted the provisions as of October 1, 2008, which had no impact on our
consolidated financial statements.
 
 In March,
2008, the FASB issued new rules related to disclosures about derivative
instruments and hedging activities.  The new rules amend and expand
the disclosure requirements by providing additional disclosure on the use of
derivative instruments including qualitative disclosures about fair value
amounts of gains and losses on derivative instruments, and disclosures about
credit-risk-related contingent features in derivative agreements. The new rules
are effective for fiscal years and interim periods beginning after November 15,
2008. The Company adopted the provisions as of January 1, 2009, which had no
impact on our consolidated financial statements as we currently do not have
applicable derivative financial instruments.
  On
June 30, 2009, the Company adopted new FASB rules related to subsequent
events. The new rules establish general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. Specifically,
they set forth the period after the balance sheet date during which management
of a reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date.  Disclosures must include the
effective date of management’s evaluation of subsequent events and the basis for
that date, that is, whether that date represents the date the financial
statements were issued or were available to be issued. The adoption had no
impact on the consolidated financial statements as management already followed a
similar approach prior to the adoption of this standard.
 
 In April
2009, the FASB issued various new rules intended to provide additional
application guidance and enhance disclosures regarding fair value measures and
impairments of securities, covering the following subjects: recognition and
presentation of other-than-temporary impairments; interim disclosures about fair
value of financial instruments; and determining fair value when the volume and
level of activity for the asset or liability have significantly decreased and
identifying transactions that are not orderly.  The new rules require
disclosure about fair value of financial instruments, including those not
recognized on the statement of financial position at fair value, for interim
reporting periods as well as in annual financial statements.  The new
rules are effective for interim and annual reporting periods ending after June
15, 2009.  The adoption did not have a material impact on our
consolidated financial statements or disclosures.
 
 NOTE
2 – DISCONTINUED OPERATIONS AND SALE OF DEWIND
 
 As of
September 30, 2009, all operations of our DeWind segment have been classified as
discontinued operations.  See Note 16
for the updated segment discussion.
 
 On
September 4, 2009, our DeWind subsidiary sold substantially all of its existing
operating assets including all inventories, receivables, fixed assets, wind farm
project assets and intangible assets including all intellectual property and
transferred substantially all operating liabilities including supply chain and
operating expense accounts payables and accrued liabilities, warranty related
liabilities for US turbine installations, and deferred revenues.  All
of the remaining assets and liabilities of DeWind have been classified as net
assets or liabilities of discontinued operations.  All operations of
our former DeWind segment have been reported as discontinued
operations.
 
 The sale
of DeWind was valued at $49.5 million in cash.  The Company received
approximately $32.3 million in cash with $17.2 million in cash escrowed to cover
certain contingent liabilities.  Of the escrowed cash, $5.5 million is
expected to be released within one year after the achievement of certain
milestones and $11.7 million is expected to be released over time periods that
may be as late as 2012 under certain conditions. The purchase price is further
subject to adjustment based on delivery of the value of the assets transferred
net of liabilities assumed.  The
Company has placed the $17.2 million in cash in escrow to indemnify the buyer if
claims are made against them by third parties and those claims are determined to
be valid and enforceable.  Our intention is to vigorously defend
against any such claims should they occur.  Defense of such claims may
result in additional costs to maintain the Company’s interest in the restricted
cash or to limit potential liability.  In the event that claims are
successful, the balance payable to the buyer may include all, part, or cash
amounts in excess of the $17.2 million escrowed, including potentially an
additional $17.7 million up to a total of $34.9 million under certain
conditions, which are not expected by the Company.  If such claims are
successfully made, this would result in additional losses on the DeWind sale
transaction and could require a substantial refund of the proceeds
received.  The Company believes the $17.2 million in escrow will be
released per the terms of the agreement.Accordingly, at September
30, 2009, we have classified the $17.2 million held in escrow as restricted
cash, with $5.5 million as current and $11.7 million as long-term.
 
 The
following is a summary of the net assets sold at September 4, 2009 and the
resulting loss on sale:
 
 (In Thousands)
                              
                              September 4, 2009ASSETSAccounts
      Receivable, net
                              
                              $
                              311Inventory,
      net
                              
                              
                              22,689Advanced
      Payments for Turbine Inventory
                              
                              
                              376Prepaid
      Expenses and Other Current Assets
                              
                              
                              2,021Property
      and Equipment, net
                              
                              
                              8,622Intangible
      Assets, net
                              
                              
                              18,538Other
      Assets
                              
                              
                              95TOTAL
      ASSETS
                              
                              $
                              52,652LIABILITIESAccounts
      Payable and Other Accrued Liabilities
                              
                              $
                              10,591Deferred
      Revenues and Customer Advances
                              
                              
                              3,121Warranty
      Provision
                              
                              
                              1,072Total
      Liabilities
                              
                              
                              14,784Net
      Assets Sold
                              
                              $
                              37,868Goodwill
                              
                              
                              5,914Currency
      Translation Adjustment - Loss
                              
                              
                              361Direct
      Costs Associated with the Sale
                              
                              
                              3,327Accrued Contingent
      Liabilities
                              
                              
                              3,38750,857Consideration
                              
                              
                              49,500Loss on
      Sale of DeWind
                              
                              $
                              (1,357
                              )
  54
  The loss
on sale includes professional service fees and expenses directly related to the
sale of DeWind in the amount of $3.3 million. The Company incurred no other
direct costs associated with the exit and disposal of DeWind.
 
 The
consolidated assets and liabilities of our former DeWind segment have been
classified on the balance sheet as Net Assets (Liabilities) of Discontinued
Operations.  The asset and liabilities comprising the balances, as
classified in our balance sheets, consist of:
 
 (In Thousands)
                            
                            September 30, 2009
                            
                            
                            September 30, 2008ASSETSAccounts
      Receivable, net
                            
                            
                            2,461
                            
                            
                            
                            14,250Inventory,
      net
                            
                            
                            —
                            
                            
                            
                            36,038Advance
      Payments for Turbine Inventory
                            
                            
                            —
                            
                            
                            
                            31,245Prepaid
      Expenses and Other Current Assets
                            
                            
                            61
                            
                            
                            
                            1,274Total
      Current Assets
                            
                            
                            2,522
                            
                            
                            
                            82,807Long-Term
      Accounts Receivable
                            
                            
                            —
                            
                            
                            
                            248Property
      and Equipment, net
                            
                            
                            —
                            
                            
                            
                            4,535Goodwill
                            
                            
                            —
                            
                            
                            
                            24,219Intangible
      Assets, net
                            
                            
                            —
                            
                            
                            
                            21,549Other
      Assets
                            
                            
                            —
                            
                            
                            
                            217TOTAL
      ASSETS
                            
                            $
                            2,522
                            
                            
                            $
                            133,575LIABILITIESAccounts
      Payable and Other Accrued Liabilities
                            
                            $
                            39,356
                            
                            
                            $
                            43,840Deferred
      Revenues and Customer Advances
                            
                            
                            2,869
                            
                            
                            
                            33,841Warranty
      Provision
                            
                            
                            1,244
                            
                            
                            
                            12,621Provision
      for Loss on Turbine Contracts
                            
                            
                            —
                            
                            
                            
                            7,597Total
      Current Liabilities
                            
                            
                            43,469
                            
                            
                            
                            97,899Long-Term
      Portion of Deferred Revenues
                            
                            
                            —
                            
                            
                            
                            478Long-Term
      Portion of Warranty Provision
                            
                            
                            1,120
                            
                            
                            
                            363Total
      Liabilities
                            
                            
                            44,589
                            
                            
                            
                            98,740Net
      Assets (Liabilities) of Discontinued Operations
                            
                            $
                            (42,067
                            )
                            
                            $
                            34,835
 Except
for former intercompany loans, significantly all of the assets and liabilities
of the discontinued operations pertain to activities outside of the United
States, primarily for turbines sold and installed in Europe and South America
and technology licenses to Chinese customers. At September 30, 2009,
included above in Accounts Payable and Other Accrued Liabilities are
net payables related to formerly consolidated, now insolvent European
subsidiaries of approximately $22 million, substantially all of which has been
assigned by the insolvency receiver to a third party. At September 30, 2009, the
net payables from insolvent subsidiaries is comprised of assets in the amount of
$8 million and liabilities in the amount of $30 million. Currently,
we have not received any update from the insolvency receiver related to the
assets and liabilities for the insolvent subsidiaries.
  The
consolidated net loss from operations of our former DeWind segment has been
classified on the statements of operations and comprehensive loss, as Loss from
Discontinued Operations. Summarized results of discontinued operations are as
follows:
  Period fromOctober 1, 2008
                      
                      
                      Year ended
                      
                      
                      Year ended(In Thousands)
                      
                      to September 4,
                        2009
                      
                      
                      September 30,
                        2008
                      
                      
                      September 30,
                        2007Revenues
                      
                      $
                      47,680
                      
                      
                      $
                      43,113
                      
                      
                      $
                      25,495Cost
      of Revenues
                      
                      
                      57,047
                      
                      
                      
                      60,593
                      
                      
                      
                      32,803Operating
      Expenses
                      
                      
                      20,005
                      
                      
                      
                      24,089
                      
                      
                      
                      18,462Impairment
      of Assets
                      
                      
                      23,369
                      
                      
                      
                      —
                      
                      
                      
                      —Other
      Expense
                      
                      
                      215
                      
                      
                      
                      1,840
                      
                      
                      
                      753Income
      Tax Expense (Benefit)
                      
                      
                      —
                      
                      
                      
                      21
                      
                      
                      
                      (49
                      )Loss on
      Sale of DeWind
                      
                      
                      1,357
                      
                      
                      
                      —
                      
                      
                      
                      —Loss
      from Discontinued Operations
                      
                      $
                      (54,313
                      )
                      
                      $
                      (43,430
                      )
                      
                      $
                      (26,474
                      )
  55
  In
connection with the disposal and discontinuation of our DeWind segment, we
determined certain retained assets have been impaired as of September 4,
2009.  Included in the loss from discontinued operations for the
period from October 1, 2008 to September 4, 2009, are impairment charges from
certain uncollectible accounts receivable, advance payments for inventory,
goodwill ($18.3 million during the quarter ended June 30, 2009) and intangible
assets in the aggregate amount of $23.4 million.
 
 As of
September 4, 2009, the Company will have no continuing involvement with our
former DeWind segment, any subsequent cash flows are directly related to the
liquidation of the remaining assets and liabilities.  No corporate
overhead has been allocated to discontinued operations.
  ACCOUNTING
POLICIES – DISCONTINUED OPERATIONS
 
 In
addition to the general accounting policies discussed in Note 1, the following
policies are applicable to our discontinued operations:
 
 Revenue
Recognition
 
 PRODUCT
REVENUES. Product revenues are recognized when product shipment has been made
and title has passed to the end user customer. Product revenues consist
primarily of revenue from the sale of turbines, turbine parts, or license
rights sold to wind farm operators, utilities, and technology licensees.
Revenues are deferred for product contracts where the Company is required to
perform installation services until after the installation is complete. Our
distribution agreements are structured so that our revenue cycle is complete
upon shipment and title transfer of products to the distributor with no right of
return.
 
 DeWind
Turbine related sales for the years ended September 30, 2009, 2008 and 2007
consisted of completed and installed wind turbine units, turbine parts, and
license fees. For DeWind turbine revenues, for turbine sales, we recognized
revenues for completed and installed wind turbine units upon the commissioning,
or operational viability of each wind turbine unit. We recognized revenues on
turbine parts sales upon delivery to the customer and title transfer. We
recognized revenues on the license fees upon collection of the license fees and
reporting by the licensee of units sold under each license
agreement.
 
 For
turbine sales, our contracted sales typically include the turbine and warranty
services for up to two years after turbine installation and we offer extended
warranties for an additional fee. One turbine was sold during the fiscal year
ending September 30, 2009 that did not have a warranty. All other turbines sold
carried a two year warranty. Our turbine sales are documented by turbine supply
agreements that specify the contracted value of the turbine, the warranty
service period, and the timing of cash payments by our customers. Our
operational history and the value of extended warranties sold allow us to
provide sufficient vendor specific objective evidence (VSOE) to value the
warranty included with a wind turbine, generally $25,000 per rated megawatt of
power per year representing expected warranty and availability related
liabilities during the warranty period. We recognize as revenue the contracted
turbine value reduced by the value of the warranty portion when the revenue
cycle is completed as described above. Progress payments and customer deposits
are recorded as deferred revenues until the revenue cycle is completed. Costs
incurred and turbine materials purchased during the production of turbines in
completion of the revenue cycle are capitalized into inventory. Operating
expenses, including indirect costs and administrative expenses, are charged as
incurred to periodic income and not allocated to contract costs.  The value
of the warranty portion determined by the VSOE is deferred and recognized
ratably over the life of the warranty service period. For multiple element
contracts where there is no vendor specific objective evidence (VSOE) or
third-party evidence that would allow the allocation of an arrangement fee
amongst various pieces of a multi-element contract, fees received in advance of
services provided would be recorded as deferred revenues until additional
operational experience or other vendor specific objective evidence becomes
available, or until the contract is completed.
 
 SERVICE
REVENUES. Service revenues consist of service and maintenance on our wind
turbines under flat rate contracts, typically billed in advance on an annual or
semi-annual basis on a flat rate, as a full service contract, typically
calculated as a rate per kilowatt of generation and billed monthly or quarterly
in arrears, or as a point of sale service call basis billed on a time and
materials basis. Service revenues are deferred and recognized ratably over the
life of a flat rate service contract, recognized as billed for full service
contracts, or for point of delivery services, when the service has been
provided. Direct costs of uncompleted work related to maintenance or repairs
activity is capitalized and expensed upon completion.  Billings for
turbines on a time and materials basis are recorded into revenue as the services
are delivered.
 
 LICENSE
REVENUE. License revenues consist of cash payments for the licensing of our
older D6 and D8 turbines on a per unit delivered basis. We have license
agreements with three companies in China and India that call for progress
payments to DeWind upon the completion of certain technology transfer
milestones. We defer all payments received and recognize revenue when the
licensee has shipped the finished turbine to the wind farm
operator.
 
 56
  Warranty, Retrofit, and
Availability Provisions
 
 Warranty
provisions consist of the estimates of the costs and liabilities associated with
the post-sale servicing of our DeWind wind turbines. Warranty periods for our
wind turbines range from zero to seven years and may include parts-only
warranties or parts and repair services warranties and may or may not include
revenue guarantees. Warranty conditions are specific to and are governed by the
turbine supply agreement contract. Warranty related liabilities for time periods
in excess of one year are classified as non-current liabilities.
 
 Provision for Loss on
Turbine Contracts and Turbine Contract Inventory
 
 Provision
for loss on turbine contracts represents incurred and estimated costs in excess
of contracted and expected billings on turbine supply
contracts.  Management reviews all turbine supply contracts and
evaluates each contract on an individual basis to determine if estimated costs
to complete exceed projected billings.  For contracts projected to be
at a loss, a provision for contract loss is accrued and expensed to turbine cost
of sales.  After the related inventory is purchased, the provision is
reclassified to inventory reserves to reduce the value of the inventory to the
net realizable value based on the sales price under the
contract.
  NOTE
3 - ACCOUNTS RECEIVABLE
 
 Accounts
receivable, net consists of the following:
  (In Thousands)
                              
                              September 30,
                                2009
                              
                              
                              September 30,
                                2008Cable
      Receivables
                              
                              $
                              1,813
                              
                              
                              $
                              4,484Reserves
                              
                              
                              (81
                              )
                              
                              
                              —Net
      Accounts Receivable
                              
                              
                              1,732
                              
                              
                              
                              4,484
  NOTE
4 – INVENTORY
 
 Inventories
consist of the following:
 
 (In Thousands)
                      
                      September 30,
                        2009
                      
                      
                      September 30,
                        2008Raw
      Materials
                      
                      $
                      2,040
                      
                      
                      $
                      3,869Work-in-Progress
                      
                      
                      —
                      
                      
                      
                      35Finished
      Goods
                      
                      
                      3,261
                      
                      
                      
                      3,124Gross
      Inventory
                      
                      
                      5,301
                      
                      
                      
                      7,028Reserves
                      
                      
                      (923
                      )
                      
                      
                      (978
                      )Net
      Inventory
                      
                      $
                      4,378
                      
                      
                      $
                      6,050
 
 NOTE
5 – PROPERTY AND EQUIPMENT
 
 Property
and equipment consisted of the following:
  September 30,(In Thousands)
                        
                        Estimated Useful
                          Lives
                        
                        
                        2009
                        
                        
                        2008Office
      Furniture and Equipment
                        
                        
                        3-10
      yrs
                        
                        
                        $
                        936
                        
                        
                        $
                        661Production
      Equipment
                        
                        
                        3-10
      yrs
                        
                        
                        
                        4,994
                        
                        
                        
                        3,453Construction-in-Progress
                        
                        
                        
                        
                        
                        
                        302
                        
                        
                        
                        1,377Leasehold
      Improvements
                        
                        
                        Lesser of lease term
      or 7 yrs
                        
                        
                        
                        748
                        
                        
                        
                        697Total
      Property
                        
                        
                        
                        
                        
                        
                        6,980
                        
                        
                        
                        6,188Accumulated
      Depreciation
                        
                        
                        
                        
                        
                        
                        (3,766
                        )
                        
                        
                        (2,758
                        )Property
      and Equipment, net
                        
                        
                        
                        
                        
                        $
                        3,214
                        
                        
                        $
                        3,430
 
 Depreciation
expense was $1,011,000, $776,000, and $799,000, for the years ended September
30, 2009, 2008, and 2007, respectively.
  57
  NOTE
6 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
 
 Accounts
payable and accrued liabilities consisted of the following:
 
 September 30,(In Thousands)
                                                            
                                                            2009
                                                            
                                                            
                                                            2008Trade
      Payables
                                                            
                                                            $
                                                            4,179
                                                            
                                                            
                                                            $
                                                            2,789Accrued
      Commissions
                                                            
                                                            
                                                            667
                                                            
                                                            
                                                            
                                                            —Accrued
      Insurance
                                                            
                                                            
                                                            441
                                                            
                                                            
                                                            
                                                            —Accrued
      Payroll and Payroll Related
                                                            
                                                            
                                                            541
                                                            
                                                            
                                                            
                                                            734Accrued
      Interest
                                                            
                                                            
                                                            183
                                                            
                                                            
                                                            
                                                            186Deferred
      Rents
                                                            
                                                            
                                                            133
                                                            
                                                            
                                                            
                                                            199Accrued
      Sales Tax
                                                            
                                                            
                                                            128
                                                            
                                                            
                                                            
                                                            136Accrued
      Other
                                                            
                                                            
                                                            945
                                                            
                                                            
                                                            
                                                            749Total
      Accounts Payable and Accrued Liabilities
                                                            
                                                            $
                                                            7,217
                                                            
                                                            
                                                            $
                                                            4,793
 
 NOTE
7 – DEFERRED REVENUES AND CUSTOMER ADVANCES
 
 The
Company records all cash proceeds received from customers on orders and extended
warranties, as opted by the customer, to deferred revenues and customer advances
until such time as the revenue cycle is completed and the amounts are recognized
into revenues.  Deferred revenues and customer advances consist of the
following:
  (In Thousands)
                                      
                                      September 30,
                                        2009
                                      
                                      
                                      September 30,
                                        2008Deferred
      Revenues
                                      
                                      $
                                      563
                                      
                                      
                                      $
                                      737Customer
      Advances
                                      
                                      
                                      14
                                      
                                      
                                      
                                      1,080Total
      Deferred Revenues and Customer Advances
                                      
                                      
                                      577
                                      
                                      
                                      
                                      1,817Less
      amount classified in current liabilities
                                      
                                      
                                      16
                                      
                                      
                                      
                                      1,568Long-term
      Deferred Revenues
                                      
                                      $
                                      561
                                      
                                      
                                      $
                                      249
    NOTE
8 – WARRANTY PROVISION
 
 Cable
warranties relate to our ACCC® products
for conductor and hardware sold directly by us to the end-user customer.
We mitigate our loss exposure through the use of third party warranty
insurance. We have classified all warranty reserves considered to be payable
within one year as current liabilities and all warranty reserves considered to
be payable greater than one year as long-term liabilities.
  Warranty
provision consisted of:
  (In Thousands)
                                  
                                  September 30,
                                    2009
                                  
                                  
                                  September 30,
                                    2008Warranty
      Provision
                                  
                                  $
                                  564
                                  
                                  
                                  $
                                  219Less
      amount classified in current liabilities
                                  
                                  
                                  258
                                  
                                  
                                  
                                  86Long-Term
      Warranty Provision
                                  
                                  $
                                  306
                                  
                                  
                                  $
                                  133
  The
following table sets forth an analysis of warranty provision
activity:
  (In Thousands)
                                
                                September 30, 2009
                                
                                
                                September 30, 2008Beginning
      balance
                                
                                $
                                219
                                
                                
                                $
                                —Additional
      reserves recorded to expense
                                
                                
                                513
                                
                                
                                
                                259Reserves
      utilized
                                
                                
                                (168
                                )
                                
                                
                                (40
                                )Ending
      balance
                                
                                $
                                564
                                
                                
                                $
                                219
  NOTE
9 – DEBT AND NOTES PAYABLE
 
 The
following table summarizes the Company’s debt structure as of September 30, 2009
and 2008:
  (In Thousands)
                                    
                                    September 30, 2009
                                    
                                    
                                    September 30, 2008Senior
      Convertible 8% Notes due January 2010, net discount of $315 and
      $1,199
                                    
                                    $
                                    8,723
                                    
                                    
                                    $
                                    7,838Total
      Debt
                                    
                                    
                                    8,723
                                    
                                    
                                    
                                    7,838Less
      amount classified in current liabilities
                                    
                                    
                                    8,723
                                    
                                    
                                    
                                    —Long-Term
      Debt
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    7,838
  58





Debt
outstanding or issued during the year ended September 30, 2009 and 2008 consists
of:





A.  Convertible
Notes Payable:





In
February, 2007 we sold $22,825,000 face value of Senior Convertible Notes and
detachable stock warrants to a group of private investors for gross proceeds of
$22,825,000.  The notes are currently convertible into common stock of
the Company at a price of $0.99 per share.  The Notes bear interest at
the rate of 8% per year and may be redeemed by the Company at the Company’s
option upon 30 days notice, for 103% of the outstanding principal at any time
after the two year anniversary of the February 2007 closing but prior to
maturity, if the weighted average price of the Company’s common stock is 125% of
the conversion price for twenty consecutive trading days.





In fiscal
2008, the combined effect of the issuance of common stock and common stock
options and warrant securities decreased the conversion price from $1.03 to
$1.00 and the Company recorded an additional $302,000 of convertible debt
discount.  In fiscal 2009, the issuance of common stock warrants
associated with the secured bridge notes resulted in the decrease in the
conversion price to $0.99 and resulted in $30,000 of additional convertible debt
discount.  The additional debt discount will be amortized to interest
expense over the remaining life of the convertible debt.





The
following tables summarize the debt discount and deferred cash financing fees
for the years ended September 30, 2009 and 2008:




(In
      Thousands)Debt Discount:Discount
      balance, September 30, 2007
                                              
                                              $
                                              2,338Additional
      discount – anti-dilution impacts - 2008
                                              
                                              
                                              302Discount
      amortized to interest expense - 2008
                                              
                                              
                                              (889
                                              )Discount
      amortization accelerated due to conversion - 2008
                                              
                                              
                                              (552
                                              )Discount
      balance, September 30, 2008
                                              
                                              $
                                              1,199Additional
      discount – anti-dilution impacts – 2009
                                              
                                              
                                              30Discount
      amortized to interest expense – 2009
                                              
                                              
                                              (914
                                              )Discount
      balance, September 30, 2009
                                              
                                              $
                                              315




Deferred Cash Financing
    Fees:Deferred
      cash financing fees balance, September 30, 2007
                                            
                                            $
                                            587Deferred
      cash financing fees amortized to interest expense - 2008
                                            
                                            
                                            (206
                                            )Deferred
      cash financing fees accelerated due to conversion - 2008
                                            
                                            
                                            (132
                                            )Deferred
      cash financing fees balance, September 30, 2008
                                            
                                            $
                                            249Deferred
      cash financing fees amortized to interest expense – 2009
                                            
                                            
                                            (187
                                            )Deferred
      cash financing fees balance, September 30, 2009
                                            
                                            $
                                            62




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





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





(In Thousands)
                                                        
                                                        Principal
                                                        
                                                        
                                                        Common Shares
                                                          Issued or IssuablePrincipal
      balance at issuance, February, 2007
                                                        
                                                        $
                                                        22,825Conversions
      at $1.04 per share
                                                        
                                                        
                                                        (300
                                                        )
                                                        
                                                        
                                                        288Conversions
      at $1.03 per share
                                                        
                                                        
                                                        (10,353
                                                        )
                                                        
                                                        
                                                        10,051Principal
      balance at September 30, 2007
                                                        
                                                        $
                                                        12,172Conversions
      at $1.03 per share
                                                        
                                                        
                                                        (2,135
                                                        )
                                                        
                                                        
                                                        2,073Conversions
      at $1.00 per share
                                                        
                                                        
                                                        (1,000
                                                        )
                                                        
                                                        
                                                        1,000Principal
      balance at September 30, 2008 and 2009
                                                        
                                                        $
                                                        9,037Total
      Shares issued for conversions to date
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        13,412Total
      Shares issuable at the current conversion price of $0.99
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        9,129




59





B.  Senior
Secured Note Payable:





On June
30, 2009, the Company entered into a bridge note financing structured as a
Senior Secured Promissory Note transaction with an aggregate principal value of
$5,000,000, plus interest on the unpaid principal balance at a rate of 10% per
annum to be repaid no later than December 30, 2009. Pursuant to the note
agreement, the Company paid $200,000 in closing fees, along with $95,000 in
other legal and financing costs, which we recorded as deferred financing costs
to be amortized over the six month life of the bridge note.





In
connection with the Senior Secured Promissory Note transaction, The Company
granted and issued 4,000,000 warrants with an exercise price of $0.25 in
conjunction with this transaction and valued the warrants at $0.1814 per warrant
or $726,000 using the Black-Scholes option-pricing model to value the fair value
of the warrants issued using the following assumptions: the market price was
$0.30, the volatility was estimated at 88%, the life of the warrants was 3
years, the risk free rate was 1.64% and the dividend yield of 0%. The value
assigned for the warrants issued in conjunction with the bridge note was
recorded as debt discount and will be amortized over the six month life of the
bridge note.





The
issuance of the warrants triggered anti-dilution protection in several series of
previously issued warrants and in the conversion price of the remaining
$9,037,280 of Convertible Notes due January 30, 2010. The conversion price of
the Convertible Notes was reduced from $1.00 to $0.99, which would result in an
additional 91,289 shares issuable upon full conversion of the remaining Notes.
The intrinsic value of the additional shares issuable upon full conversion is
$27,000, which will be amortized to interest expense over the expected remaining
life of the Convertible Notes. Previously outstanding warrants with exercise
prices between $0.96 and $1.28 and which expire between February, 2010 and May,
2011 were reset by between $0.01 and $0.02 per warrant and which resulted in
$7,000 of additional expense, calculated as the difference in fair value of the
warrants immediately before and after the change in exercise
prices.





In
September 2009, the Company fully repaid the $5,000,000 in principal plus
accrued interest, and amortized the remaining portions of the $726,000 debt
discount to interest expense and $295,000 deferred financing cost to operating
expenses.





NOTE
10 – SHAREHOLDERS' EQUITY (DEFICIT)





PREFERRED
STOCK





We have
5,000,000 shares of preferred stock authorized.  As of the
year ended September 30, 2009 there was no preferred stock
outstanding.




COMMON
STOCK




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





The
following issuances of common stock were made during fiscal 2009:




CASH





During
the year ended September 30, 2009 the Company received $35,000 in cash from the
exercise of 100,000 consultant options.





WARRANTS





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





The
following table summarizes all warrant activity from September 30, 2006 through
September 30, 2009:





Number of
                                            Shares
                                          
                                          
                                          Weighted-Average
                                            Exercise PriceOutstanding,
      September 30, 2006
                                          
                                          
                                          11,488,393
                                          
                                          
                                          $
                                          1.58Granted
                                          
                                          
                                          23,291,849
                                          
                                          
                                          $
                                          1.13Exercised
                                          
                                          
                                          (2,314,135
                                          )
                                          
                                          $
                                          1.06Cancelled
                                          
                                          
                                          (17,000
                                          )
                                          
                                          $
                                          1.00Outstanding,
      September 30, 2007
                                          
                                          
                                          32,449,107
                                          
                                          
                                          $
                                          1.30Granted
                                          
                                          
                                          2,250,000
                                          
                                          
                                          $
                                          0.99Issued
      pursuant to antidilution protection
                                          
                                          
                                          542,272
                                          
                                          
                                          
                                          n/aExercised
                                          
                                          
                                          (4,129,139
                                          )
                                          
                                          $
                                          1.08Cancelled
                                          
                                          
                                          (4,961,425
                                          )
                                          
                                          $
                                          1.33Outstanding,
      September 30, 2008
                                          
                                          
                                          26,150,815
                                          
                                          
                                          $
                                          1.20Granted
                                          
                                          
                                          4,150,000
                                          
                                          
                                          $
                                          0.28Exercised
                                          
                                          
                                          —
                                          
                                          
                                          $
                                          —Cancelled
                                          
                                          
                                          (7,366,166
                                          )
                                          
                                          $
                                          1.37OUTSTANDING,
      September 30, 2009
                                          
                                          
                                          22,934,649
                                          
                                          
                                          $
                                          0.95EXERCISABLE,
      September 30, 2009
                                          
                                          
                                          22,934,649
                                          
                                          
                                          $
                                          0.95




60





The
following table summarizes the warrants issued, outstanding, and exercisable as
of September 30, 2009:




Warrant Series
                                              
                                              Grant Date
                                              
                                              Strike
                                                Price
                                              
                                              Expiration Date
                                              
                                              Warrants
                                                remaining
                                              
                                              
                                              Proceeds if
                                                Exercised (in
                                                $000s)
                                              
                                              Call
                                                feature2006
      Series C
                                              
                                              May,
      2006
                                              
                                              $
                                              0.75
                                              (A)
                                              December,
      2010
                                              
                                              
                                              200,000
                                              
                                              
                                              $
                                              150
                                              
                                              None2006
      Series D
                                              
                                              May,
      2006
                                              
                                              $
                                              0.75
                                              (B)
                                              December,
      2010
                                              
                                              
                                              200,000
                                              
                                              
                                              
                                              150
                                              
                                              None2006
      Series E
                                              
                                              May,
      2006
                                              
                                              $
                                              0.75
                                              (C)
                                              December,
      2010
                                              
                                              
                                              200,000
                                              
                                              
                                              
                                              150
                                              
                                              None2007
      Series F
                                              
                                              Nov,
      2006
                                              
                                              $
                                              1.10
                                              
                                              November,
      2009
                                              
                                              
                                              220,000
                                              
                                              
                                              
                                              242
                                              
                                              None2007
      Convertible Debt
                                              
                                              Feb,
      2007
                                              
                                              $
                                              1.04
                                              (D)
                                              February,
      2010
                                              
                                              
                                              7,367,815
                                              
                                              
                                              
                                              7,663
                                              
                                              None2007
      Convertible Debt Fees
                                              
                                              Mar,
      2007
                                              
                                              $
                                              0.99
                                              (E)
                                              February,
      2010
                                              
                                              
                                              1,291,833
                                              
                                              
                                              
                                              1,279
                                              
                                              NoneJune
      PIPE Series 1
                                              
                                              Jun,
      2007
                                              
                                              $
                                              1.26
                                              (E)
                                              June,
      2010
                                              
                                              
                                              5,490,100
                                              
                                              
                                              
                                              6,918
                                              
                                              NoneJune
      PIPE Series 2
                                              
                                              Jun,
      2007
                                              
                                              $
                                              1.27
                                              (E)
                                              June,
      2010
                                              
                                              
                                              1,564,901
                                              
                                              
                                              
                                              1,987
                                              
                                              None2008
      Debt Series 1
                                              
                                              May,
      2008
                                              
                                              $
                                              0.95
                                              (E)
                                              May,
      2011
                                              
                                              
                                              1,125,000
                                              
                                              
                                              
                                              1,069
                                              
                                              None2008
      Debt Amendment
                                              
                                              May,
      2008
                                              
                                              $
                                              0.98
                                              (E)
                                              May,
      2011
                                              
                                              
                                              1,125,000
                                              
                                              
                                              
                                              1,103
                                              
                                              None2008
      Debt Service
                                              
                                              October,
      2008
                                              
                                              $
                                              0.95
                                              (E)
                                              May,
      2011
                                              
                                              
                                              150,000
                                              
                                              
                                              
                                              143
                                              
                                              None2009
      Bridge Note Warrants
                                              
                                              June,
      2009
                                              
                                              $
                                              0.25
                                              (F)
                                              June,
      2012
                                              
                                              
                                              4,000,000
                                              
                                              
                                              
                                              1,000
                                              
                                              NoneTotal
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              22,934,649
                                              
                                              
                                              $
                                              21,854





(A)  Warrants
were re-priced on December 23, 2008 from $1.25 to $0.75 per
warrant.





(B)  Warrants
were re-priced on December 23, 2008 from $1.50 to $0.75 per
warrant.





(C)  Warrants
were re-priced on December 23, 2008 from $1.75 to $0.75 per
warrant.





(D)
Subject to anti-dilution provisions. Certain future equity or equity equivalent
issuances below the current exercise price per warrant may result in a weighted
average price reset of the exercise price.  Warrant strike price was
reset by $0.02 per warrant as a result of the issuance of the 4,000,000 warrants
related to the 2009 Bridge Note.





(E)
Subject to anti-dilution provisions. Certain future equity or equity equivalent
issuances below the current exercise price per warrant may result in a weighted
average price reset of the exercise price.  Warrant strike price was
reset by $0.01 per warrant as a result of the issuance of the 4,000,000 warrants
related to the 2009 Bridge Note.





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





On
October 15, 2008 we issued 150,000 warrants with a strike price of $0.96 per
warrant in settlement of a disputed fee related to placement services for the
May, 2008 Archer debt issuance.  The expense for these warrants was
accrued for as of September 30, 2008.  On December 23, 2008 we agreed
to modify the exercise price of three series of warrants originally issued in
May, 2006.  A total of 600,000 warrants were re-priced to $0.75 per
warrant including 200,000 warrants previously priced at $1.75 per warrant;
200,000 warrants previously priced at $1.50 per warrant; and 200,000 warrant
previously priced at $1.25 per warrant.





On June
30, 2009 we issued 4,000,000 three-year warrants with a strike price of $0.25
per warrant in as part of the bridge note financing.  The issuance of
the warrants triggered anti-dilution protection which reset the strike price
warrants associated with past financings by between $0.01 and $0.02 per warrant
as described above.  We valued the price changes and additional
warrants issued using the Black-Scholes option-pricing model.  We
recorded additional debt discount for modification of warrants associated with
our remaining convertible debt and additional expense for modification of
non-debt warrants both of which were calculated as the difference between the
fair value of the warrants prior to the exercise price reset and after the
exercise price reset.  The total expense related to warrant
modifications and issuances during the year ended September 30, 2009 was $29,000
recorded to general and administrative expense and an additional $30,000 was
recorded to debt discount which will be amortized to interest over the remaining
life of the convertible debt.  The value assigned for the warrants
issued in conjunction with the bridge note was $726,000, which will be amortized
over the six month life of the bridge note.





61





The
following assumptions were used to value the warrant issuances and modifications
discussed above:





Dividend
rate = 0%


Risk free
return between 0.56% and 1.89%


Volatility
of between 75% and 116%


Market
price for October 15, 2008 issuance:  $0.40


Market
price for December 23, 2008 modification: $0.30


Market
price for June 30, 2009 issuance and modification: $0.30





Time to
maturity was the remaining life of the warrant series in question of between 2
and 3 years.





Management
has reviewed and assessed the warrants issued during the year ended September
30, 2009 and determined that they do not qualify for treatment as derivatives
under applicable US GAAP rules.





STOCK
OPTIONS





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





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





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





Certain
options granted under the 2008 Plan may be exercised at any time for restricted
stock of the Company if not otherwise prohibited by the Company’s Board of
Directors.  Any 2008 Plan option exercises for unvested options would
have restricted stock issued and which is earned according to the terms of the
option agreement that gave rise to the restricted stock issuance.  The
Company has the right, but not the obligation, to repurchase any restricted
stock that is unearned as of the date of any optionee’s
termination.  As of September 30, 2009 all of the 2008 Plan option
grants were exercisable. To date, no restricted stock has been issued under the
2008 Plan.  Of the 2008 plan options exercisable, 3,110,481 options
were vested and exercisable into unrestricted stock.




The
following table summarizes the 2002 Stock Plan and 2008 Stock Plan stock option
activity from September 30, 2006 through September 30, 2009.





2002 Plan
                                                    Number of
                                                    Options
                                                  
                                                  
                                                  2008 Plan
                                                    Number of
                                                    Options
                                                  
                                                  
                                                  Total Number of
                                                    Options
                                                  
                                                  
                                                  Average
                                                    Exercise
                                                    PriceOutstanding,
      September 30, 2006
                                                  
                                                  
                                                  15,965,336
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  15,965,336
                                                  
                                                  
                                                  $
                                                  0.83Granted
                                                  
                                                  
                                                  3,972,000
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  3,972,000
                                                  
                                                  
                                                  
                                                  1.11Exercised
                                                  
                                                  
                                                  (1,133,066
                                                  )
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  (1,133,066
                                                  )
                                                  
                                                  
                                                  0.32Cancelled
                                                  
                                                  
                                                  (3,784,400
                                                  )
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  (3,784,400
                                                  )
                                                  
                                                  
                                                  1.04Outstanding,
      September 30, 2007
                                                  
                                                  
                                                  15,019,870
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  15,019,870
                                                  
                                                  
                                                  $
                                                  0.91Granted
                                                  
                                                  
                                                  3,745,000
                                                  
                                                  
                                                  
                                                  7,231,000
                                                  
                                                  
                                                  
                                                  10,976,000
                                                  
                                                  
                                                  
                                                  1.42Exercised
                                                  
                                                  
                                                  (490,000
                                                  )
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  (490,000
                                                  )
                                                  
                                                  
                                                  0.40Cancelled
                                                  
                                                  
                                                  (375,349
                                                  )
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  (375,349
                                                  )
                                                  
                                                  
                                                  1.44Outstanding,
      September 30, 2008
                                                  
                                                  
                                                  17,899,521
                                                  
                                                  
                                                  
                                                  7,231,000
                                                  
                                                  
                                                  
                                                  25,130,521
                                                  
                                                  
                                                  $
                                                  1.14Granted
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  3,460,000
                                                  
                                                  
                                                  
                                                  3,460,000
                                                  
                                                  
                                                  
                                                  0.35Exercised
                                                  
                                                  
                                                  (100,000
                                                  )
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  (100,000
                                                  )
                                                  
                                                  
                                                  0.35Cancelled
                                                  
                                                  
                                                  (1,587,365
                                                  )
                                                  
                                                  
                                                  (1,002,192
                                                  )
                                                  
                                                  
                                                  (2,589,557
                                                  )
                                                  
                                                  
                                                  0.64Outstanding,
      September 30, 2009
                                                  
                                                  
                                                  16,212,156
                                                  
                                                  
                                                  
                                                  9,688,808
                                                  
                                                  
                                                  
                                                  25,900,964
                                                  
                                                  
                                                  $
                                                  0.28Exercisable
      , September 30, 2009
                                                  
                                                  
                                                  14,491,141
                                                  
                                                  
                                                  
                                                  9,688,808
                                                  
                                                  
                                                  
                                                  24,179,949
                                                  
                                                  
                                                  $
                                                  0.35




62





The
weighted-average remaining contractual life of the options outstanding at
September 30, 2009 was 7.3 years. The exercise prices of the options outstanding
at September 30, 2009 ranged from $0.25 to $2.50, 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$
      0.25-0.34
                                    
                                    
                                    728,000
                                    
                                    
                                    
                                    728,000
                                    
                                    
                                    
                                    7.25
                                    
                                    
                                    $
                                    0.25
                                    
                                    
                                    $
                                    0.25$
      0.35-$0.49
                                    
                                    
                                    25,143,564
                                    
                                    
                                    
                                    23,422,549
                                    
                                    
                                    
                                    7.31
                                    
                                    
                                    $
                                    0.35
                                    
                                    
                                    $
                                    0.35$
      1.50-2.50
                                    
                                    
                                    29,400
                                    
                                    
                                    
                                    29,400
                                    
                                    
                                    
                                    1.40
                                    
                                    
                                    $
                                    1.00
                                    
                                    
                                    $
                                    1.00Total
                                    
                                    
                                    25,900,964
                                    
                                    
                                    
                                    24,179,949




During
fiscal 2009 the Company granted 3,460,000 options with a weighted average fair
value of $0.15 per option, determined using the Black-Scholes option-pricing
model.





As of
September 30, 2009 the Company had 24,179,949 options exercisable with a total
aggregate intrinsic value of $8,409,292.




LOSS
PER SHARE





Basic
loss per share is computed by dividing loss available to common shareholders by
the weighted-average number of common shares outstanding. Diluted loss per share
is computed similar to basic loss per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the additional
common shares were dilutive.  Common equivalent shares are excluded
from the computation if their effect is anti-dilutive.




NOTE
11 – EQUITY BASED COMPENSATION





US GAAP
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. US GAAP
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. The fair value of
stock options is determined using the Black-Scholes valuation
model.





US GAAP
requires that equity instruments issued to non-employees 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 ended September 30,
2009, 2008, and 2007 are as follows:





Fiscal year ending September 30
              
              Risk Free
                Rate
              
              Volatility2007
              
              
              4.01-4.97
              %
              88-98
              %2008
              
              
              2.30-4.29
              %
              78-88
              %2009
              
              
              1.48-2.69
              %
              88-96
              %





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




Share-based
compensation included in the results from continuing operations for the years
ended September 30, 2009, 2008, and 2007 is as follows:





Year ended
                        
                        
                        Year ended
                        
                        
                        Year ended(In Thousands)
                        
                        September 30
                        
                        
                        September 30
                        
                        
                        September 302009
                        
                        
                        2008
                        
                        
                        2007Cost
      of products sold
                        
                        $
                        81
                        
                        
                        $
                        63
                        
                        
                        $
                        77Officer
      compensation
                        
                        
                        2,234
                        
                        
                        
                        1,148
                        
                        
                        
                        873Selling
      and marketing
                        
                        
                        630
                        
                        
                        
                        326
                        
                        
                        
                        533Research
      and development
                        
                        
                        834
                        
                        
                        
                        532
                        
                        
                        
                        569General
      and administrative
                        
                        
                        928
                        
                        
                        
                        586
                        
                        
                        
                        290Totals
                        
                        $
                        4,707
                        
                        
                        $
                        2,655
                        
                        
                        $
                        2,342




63





In
September, 2009, the Company sold substantially all of the assets of its DeWind
subsidiary and terminated all of its DeWind employees as of September 4,
2009.  For DeWind employees who remained as employees through
September 4, 2009 the Company accelerated the vesting of certain options granted
between 2007 and 2009 to provide for up to one year of additional option vesting
service credit and extended the option exercise period to September 4, 2010 for
all vested options held by these employees including any options subject to such
acceleration.  All remaining unvested options for the DeWind employees
were cancelled.   The acceleration of vesting resulted in an
additional 1,053,503 options vested which resulted in $834,000 in additional
expense, included in the loss from discontinued operations.  A total
of 2,136,860 options with an intrinsic value of $798,000, including the options
subject to acceleration, had the exercise period extended to September 4,
2010.  A total of 718,140 options with an intrinsic value of $251,000
were unvested and cancelled on September 4, 2009.  For the years ended
September 30, 2009, 2008 and 2007, all DeWind employee share-based compensation
expense was reported in the loss from discontinued operations in the amounts of
$1,784,000, $318,000 and $12,000, respectively (see further discussion at Note
2).





As of
September 30, 2009, there was $4.5 million of total unrecognized compensation
cost related to non-vested share-based compensation arrangements related to
stock options consisting of $3.1 million related to employee grants and $1.4
million related to consultant and director grants. The costs are expected to be
recognized over a weighted-average period of 1.8 years.  For options
that vest on a quarterly basis, the actual vesting is used to calculate the
compensation expense.  For options vesting on other than a quarterly
basis, an estimate of the forfeiture rate, between 0% and 20%, is used to
calculate the expense, which is then trued up on each vesting
occurrence.





On
January 20, 2009 the Company’s Board of Directors voted to approve a re-pricing
of all individuals continuing to provide ongoing services to the Company
including substantially all employee, director, and consultant stock
options.  The Company has treated the re-pricing as a modification of
terms of the options outstanding.  The Company expensed the
incremental fair value for all vested and re-priced options during the quarter
ended March 31, 2009.  The Company will expense the incremental fair
value for all unvested and re-priced options as these options are
vested.  The fair value of the modification was determined as the
difference in the fair value of each option immediately before and after the
re-pricing using the Black-Scholes option-pricing model with a dividend rate of
0%, a risk free rate of 1.48%, a volatility of 96%, a life of 4 years, and a
market price of $0.30 per share.  As a result of this re-pricing, the
Company incurred expenses of $554,000 in the March 31, 2009 quarter, which are
included in the table above, for options which had vested prior to the
re-pricing and will prospectively recognize an additional $965,000 of
compensation cost related to non-vested options that were
re-priced.  The additional share-based compensation is expected to be
recorded to expense over the next 1.8 years.





The fair
value of the Company’s share-based compensation was estimated at the date of
grant using the Black-Scholes option-pricing model, assuming no dividends and
using the valuation assumptions noted in the following table. The risk-free rate
is based on the U.S. Treasury yield curve in effect at the time of grant. The
expected life (estimated period of time outstanding) of the stock options
granted was estimated using the historical exercise behavior of employees and
the option expiration date. Due to the lack of an efficient public market in the
Company’s stock prior to 2003, the estimated volatility for option grants is the
historical volatility for the shorter of a three year look back period or the
equivalent look back period for the expected life of the grant. All volatility
calculations were made on a daily basis. The Company has valued 2009, 2008 and
2007 grants using 3 year volatility. Options granted used the following range of
assumptions:




Expected
      term
              
              0.5-5 yearsExpected
      and weighted average volatility
              
              
              95.2
              %Risk-free
      rate
              
              
              0.50-4.97
              %





Tax
Effect related to Share-based Compensation Expense





US GAAP
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, 2009.





NOTE
12 – INCOME TAXES




The
provision for income taxes from continuing operations 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 continuing operations as a result of the
following:
 
 (In
      Thousands)
                                    
                                    Year
      Ended September 30,2009
                                    
                                    
                                    2008
                                    
                                    
                                    2007Statutory
      regular federal tax rate
                                    
                                    $
                                    (6,607
                                    )
                                    
                                    
                                    34.0
                                    %
                                    
                                    $
                                    (3,427
                                    )
                                    
                                    
                                    34.0
                                    %
                                    
                                    $
                                    (6,122
                                    )
                                    
                                    
                                    34.0
                                    %Change
      in valuation allowance
                                    
                                    
                                    6,568
                                    
                                    
                                    
                                    (33.8
                                    )%
                                    
                                    
                                    4,261
                                    
                                    
                                    
                                    (42.3
                                    )%
                                    
                                    
                                    6,722
                                    
                                    
                                    
                                    (37.3
                                    )%State
      tax, net of federal benefit
                                    
                                    
                                    3
                                    
                                    
                                    
                                    (0.0
                                    )%
                                    
                                    
                                    3
                                    
                                    
                                    
                                    (0.0
                                    )%
                                    
                                    
                                    3
                                    
                                    
                                    
                                    (0.0
                                    )%Research  credit
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (633
                                    )
                                    
                                    
                                    6.3
                                    %
                                    
                                    
                                    (206
                                    )
                                    
                                    
                                    1.1
                                    %Other
                                    
                                    
                                    41
                                    
                                    
                                    
                                    (0.2
                                    )%
                                    
                                    
                                    (201
                                    )
                                    
                                    
                                    2.0
                                    %
                                    
                                    
                                    (394
                                    )
                                    
                                    
                                    2.2
                                    %Income
      tax expense
                                    
                                    $
                                    5
                                    
                                    
                                    
                                    0.0
                                    %
                                    
                                    $
                                    3
                                    
                                    
                                    
                                    0.0
                                    %
                                    
                                    $
                                    3
                                    
                                    
                                    
                                    0.0
                                    %




64


Net
deferred tax assets from continuing operations comprised the following at
September 30, 2009 and 2008:
  2009
                              
                              
                              2008Deferred
      tax assetsNet
      operating loss carry-forwards and tax credits
                              
                              $
                              39,440
                              
                              
                              $
                              33,310Warrants
      issued for services
                              
                              
                              230
                              
                              
                              
                              170Share-based
      compensation
                              
                              
                              3,670
                              
                              
                              
                              1,970Asset
      reserves and  provisions
                              
                              
                              1,180
                              
                              
                              
                              1,170Fixed
      assets
                              
                              
                              (40
                              )
                              
                              
                              610Less:
      Valuation allowance
                              
                              
                              (44,480
                              )
                              
                              
                              (37,230
                              )Net
      deferred tax assets
                              
                              $
                              —
                              
                              
                              $
                              —
  The
valuation allowance increased by $7.3 million and $3.3 million during 2009 and
2008, respectively. The increases were due to the full reservation of additional
deferred tax assets, primarily the additional net operating loss carry-forwards
generated from the Company’s annual net losses from continuing
operations.
 
 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, 2009, the Company had provided a full valuation allowance to
reduce net deferred tax assets to zero.
 
 Discontinued
Operations: The Company recognized an income tax expense (benefit) of $0,
$21,000 and $(49,000) for the years ended September 30, 2009, 2008 and 2007,
respectively.  At September 30, 2009 and 2008, net deferred tax assets
amounted to $42,730,000 and $24,190,000, respectively, which are primarily
comprised of net operating loss carry-forwards.  Consistent with
continuing operations, the Company has provided a full valuation allowance
against the discontinued operations net deferred tax assets, as discussed
above.
 
 As of
September 30, 2009 and 2008, the Company had consolidated net operating loss
(NOL) carry-forwards for federal and state income tax purposes of approximately
$109,007,000 and $114,545,000, and $95,034,000 and
$72,341,000, respectively. The net operating loss carry-forwards begin
expiring in 2020 and 2010, for the Federal and State,
respectively.
 
 Utilization
of the NOL and R&D credit carry-forwards may be subject to a substantial
annual limitation due to ownership change limitations that may have occurred or
that could occur in the future, as required by Section 382 of the Internal
Revenue Code of 1986, as amended (the “Code”), as well as similar state and
foreign provisions. These ownership changes may limit the amount of NOL and
R&D credit carry-forwards that can be utilized annually to offset future
taxable income and tax, respectively. In general, an “ownership change” as
defined by Section 382 of the Code results from a transaction or series of
transactions over a three-year period resulting in an ownership change of more
than 50 percentage points of the outstanding stock of a company by certain
stockholders or public groups. Since the Company’s formation, the Company has
raised capital through the issuance of capital stock on several occasions which,
combined with the purchasing shareholders’ subsequent disposition of those
shares, may have resulted in such an ownership change, or could result in an
ownership change in the future upon subsequent disposition.
 
 The
Company has not fully completed a study to assess whether an ownership change
has occurred or whether there have been multiple ownership changes since the
Company’s formation due to the complexity and cost associated with such a study,
and the fact that there may be additional such ownership changes in the future.
If the Company has experienced an ownership change at any time since its
formation, utilization of the NOL or R&D credit carry-forwards would be
subject to an annual limitation under Section 382 of the Code, which is
determined by first multiplying the value of the Company’s stock at the time of
the ownership change by the applicable long-term, tax-exempt rate, and then
could be subject to additional adjustments, as required. Any limitation may
result in expiration of a portion of the NOL or R&D credit carry-forwards
before utilization. Further, until a study is fully completed and any limitation
known, no amounts are being considered as an uncertain tax position or disclosed
as an unrecognized tax benefit under US GAAP rules. Due to the existence of the
valuation allowance, future changes in the Company’s unrecognized tax benefits
will not impact its effective tax rate. Any carry-forwards that will expire
prior to utilization as a result of such limitations will be removed from
deferred tax assets with a corresponding reduction of the valuation
allowance.
 
 The
Company adopted the FASB provisions for accounting for uncertainty in income
taxes, on January 1, 2007. The Company did not recognize any additional
liability for unrecognized tax benefit as a result of the implementation. As of
September 30, 2009, the Company did not increase or decrease the liability for
unrecognized tax benefit related to tax positions in prior period nor did the
Company increase the liability for any tax positions in the current year.
Furthermore, there were no adjustments to the liability or lapse of statute of
limitation or settlements with taxing authorities.
 
 The
Company expects resolution of unrecognized tax benefits, if created, would occur
while the full valuation allowance of deferred tax assets is maintained,
therefore, the Company does not expect to have any unrecognized tax benefits
that, if recognized, would affect the effective tax rate.




NOTE
13 – COMMITMENTS AND CONTINGENCIES





LEASES





The
company leases the following office and production space:





Monthly rent
                
                ExpiresIrvine,
      CA, headquarters
                
                $
                89,352
                
                December,
      2010





The
Irvine, California rent increases by $3,154 per month on each January 1 lease
anniversary date.





Additionally,
the Company leases office equipment with minimum payments of approximately
$1,541 per month. The office equipment leases expire through December,
2010.  Total rent expense was $1,065,000, $992,000, and $1,041,000 for
the years ended September 30, 2009, 2008, and 2007, respectively.





65





Future
minimum operating lease payments at September 30, 2009 are as
follows:





(In
      Thousands)                                             
      Year ending September 30,
                            
                            Operating
                              Leases2010
                            
                            $
                            1,1072011
                            
                            
                            2782012
                            
                            
                            —2013
                            
                            
                            —Thereafter
                            
                            
                            —$
                            1,385





PROFESSIONAL
SERVICES AGREEMENTS





The
Company and its CTC Cable Corporation subsidiary currently have one consulting
agreement and one legal services agreement for professional services with
entities affiliated with its director Michael McIntosh as follows:





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





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





·
            An agreement between TMG and CTC
      Cable, a wholly owned subsidiary operating as the “cable” segment of the
      Company to provide legal and intellectual property services for that
      segment.





·
            An agreement between TMA and the
      Company to provide management services related to the Company’s technology
      protection and management.





Each of
these agreements is for $250,000 per year, payable in equal installments at the
beginning of each calendar month. Each agreement was scheduled to 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
November 1, 2009 each of the agreements were renewed under the same
terms.


NOTE
14 – LITIGATION




FKI
Engineering Ltd., FKI plc, and Brush Electrical Machines Ltd (collectively
“FKI”) v. the Company and certain of its wind segment subsidiaries (here
referred to as “DeWind”); DeWind v. FKI
 
 As of
October 1, 2008 there were adjudicated claims from 2007 between FKI and DeWind
whereby the court awarded FKI damages of 1,546,000 Euros (US $2,323,000 at
November 30, 2009 exchange rates) against DeWind Holdings Ltd., a United Kingdom
corporation, and 765,000 Euros (US $1,149,000 at November 30, 2009 exchange
rates) against DeWind GmbH, a German corporation, related to parent-level
guarantees that DeWind GmbH customers made against them.
 
 DeWind
GmbH and DeWind Holdings also had pending claims against FKI for failure to
replenish DeWind GmbH’s capital accounts in 2005.
 
 In
September, 2008, DeWind GmbH filed for insolvency proceedings in part due to the
impending costs and losses related to the litigation against FKI and in part due
to the negative operational cash flows and cash position of the
subsidiary.  Effective in October, 2008 the receiver for DeWind GmbH
appointed by the court in such insolvency proceedings assumed responsible for
pursuing the DeWind GmbH claim against FKI for its capital accounts
litigation.   In November, 2008 a winding up petition was filed
by FKI for DeWind Holdings, Ltd due to non-payment of a statutory demand for
1,545,596 Euros (US $2,322,000 at November 30, 2009 exchange rates) filed
in January, 2008 and included in the amounts listed above that were adjudicated
in December, 2007.  On November, 21 2008 FKI filed for and received
approval to dismiss the DeWind GmbH capital accounts claim on December 10, 2008
unless a total of 110,000 Euros (US $165,000 at November 30, 2009 exchange
rates) of court and legal costs are paid for by DeWind Holdings or guaranteed by
another entity.  Composite Technology Corporation is no longer
involved in the court proceedings between DeWind GmbH and the FKI parties and
neither Composite Technology Corporation nor its remaining subsidiaries has made
or guaranteed payment.  The Company is not aware whether the DeWind
GmbH receiver has made, or intends to make, any such payment or intends to
pursue the DeWind GmbH capital claim.  Upon filing for insolvency, the
DeWind GmbH receiver, at his sole direction, is responsible for the legal
activity surrounding the capital accounts claim.
 
 FKI has
attempted to enforce collection of the judgments due to FKI in the DeWind cases
from two of the Company’s subsidiaries, DeWind GmbH and its holding company,
DeWind Holdings, both of which are now in insolvency proceedings. DeWind
Holdings’ only asset is the share capital of DeWind GmbH.  DeWind
Holdings is in turn a wholly owned subsidiary of DeWind Turbines, Ltd. which is
in turn a wholly owned subsidiary of Composite Technology
Corporation.  There are no parent company guarantees provided by
DeWind Turbines, Ltd. or Composite Technology Corporation for either DeWind
Holdings or DeWind GmbH.   Prior to insolvency proceedings,
DeWind GmbH operated substantially for the purpose of servicing and managing the
warranty liabilities related to wind turbines sold up to June, 2005 while DeWind
was under FKI control.  The resolution of the capital reserve accounts
issues is not reasonably estimable at this time and no contingent asset has been
recorded to date for any future funds potentially receivable from FKI, if any,
to resolve the capital reserve account issues.
 
 Insolvency
of DeWind GmbH and DeWind Holdings
 
 DeWind
GmbH
 
 On August
29, 2008 in Lubeck Local Court – Bankruptcy Court, Lubeck Germany, DeWind GmbH,
an indirect subsidiary of the Company, filed for voluntary insolvency in lieu of
a required recapitalization under German statute  of approximately
5,000,000 Euros (US $7,512,000 at November 30, 2009 exchange rates) (Case No.
53a1E
8/08).  The DeWind GmbH subsidiary had limited operational
function for the DeWind segment, functioning solely to provide services on wind
turbines that remained under warranty and which warranties were entered into
prior to June, 2005 and in pursuit of the FKI capital claim described
above.   DeWind GmbH had incurred losses of $11.9 million and $8.7
million for fiscal 2007 and 2008 respectively, despite a significant reduction
in the number of turbines under warranty.   Concurrent with the
filing of the insolvency, unless assigned by the receiver or pursued by the
receiver, DeWind effectively relinquished its right to pursue the capital
claim against FKI to the control of the insolvency receiver.
 
 66
  On
September 18, 2008 an insolvency receiver was appointed and set an initial
reporting date in December, 2008 and which was primarily procedural in
nature.  No formal reporting has been received since December,
2008.  During the year, the insolvency receiver has, or is in the
process of assigning all actual and potential claims of DeWind GmbH including
without limitation, potential claims of DeWind GmbH against the Company, DeWind
and other DeWind subsidiaries including potential claims against the Company’s
remaining operating subsidiary in the UK, DeWind Ltd.  On September 8,
2009, the insolvency receiver for DeWind GmbH and FKI entered into an Agreement
in regard to a Settlement of Claims in which the insolvency receiver assigned
any potential claim DeWind GmbH held against the Company, DeWind, Inc. and
related Company entities to FKI for undisclosed consideration. All liabilities
associated with these potential claims are recorded in liabilities from
discontinued operations.
 
 DeWind
Holdings Ltd.
 
 On
January 9, 2009 the Directors of DeWind Holdings, Ltd. filed for insolvency
proceedings in the Queen’s Bench Court.  On January 12, 2009 the court
dismissed the winding up petition filed by FKI as a result of DeWind
Holdings  filing for insolvency proceedings.
 
 Composite
Technology Corporation v. FKI PLC
 
 On
October 30, 2009 the Company filed an action for negative declaration in the
Court of Lubeck, Germany against FKI (Case No. 170256109) to set the value of
the intellectual property of Dewind GmbH that had been transferred to DeWind
Ltd. in August, 2008 at no more than 1,000,000 Euros ($1,502,000 at November 30,
2009 exchange rates) and to verify the propriety of the transfer.  The IP
had been transferred under the terms of a Dewind intercompany agreement for
500,000 Euros paid in cash ($751,000 at November 30, 2009 exchange rates) prior
to the Dewind GmbH insolvency filing.  FKI and the insolvency receiver
claim the value of the IP to be significantly higher and that the transfer was
improperly conducted.  The Company believes that the value of this IP is
substantially less than 1,000,000 Euros.  The Company has not recorded
a liability associated with the difference in the price paid and the amount
listed in the negative declaration, as it is uncertain that the court will
uphold the Company’s claim estimate.
 FKI
PLC and FKI Engineering Ltd v. Composite Technology Corporation
 
 On April
30, 2009, FKI PLC and FKI Engineering Ltd. (FKI) filed a petition with the
United States District Court, Central District of California, under 28 U.S.C.
§1782(a) (Case No. CV-09-5975-ABC(CFE)),
asking the Court to permit FKI to proceed with certain discovery in the United
States against the Company for use in the DeWind GmbH and DeWind Holdings
insolvency proceedings.  The Court granted the request and the Company
is currently in the process of responding to such requests.
 
 Composite
Technology Corporation and CTC Cable Corporation v. Mercury Cable & Energy,
LLC, Ronald Morris, Edward Skonezny, Wang Chen, and “Doe” Defendants 1-100
(“Mercury”)
 
 On August
15, 2008 the Company filed suit in the Superior Court of the State of
California, County of Orange, Central Justice Center (Case No. 30-2008 00110633)
against the Mercury parties including multiple unknown “Doe” defendants,
expected to be named in discovery proceedings, claiming Breach of Contract,
Unfair Competition, Fraud, Intentional Interference with Contract, and
Injunctive Relief.  Several of the Mercury parties had filed a claim
under the Company’s Chapter 11 bankruptcy proceedings which was settled during
the bankruptcy and which provided for certain payments for sales made to
China.  The settlement agreement included non-compete agreements and
stipulated the need to maintain confidentiality for the Company’s technology,
processes, and business practices.  The Company claims that the
Mercury parties have taken actions, which violate the Settlement Agreement and
the Bankruptcy Court Order, including the development of and attempting to
market similar conductor products and misusing confidential information and the
Company further claims that the Settlement Agreement was entered into with
fraudulent intent.  The Company claims that the Mercury parties
engaged in unlawful, unfair, and deceptive conduct and that these actions were
performed with malice and with intent to cause injury to the
Company.  The Company is asking for actual damages, punitive damages,
and attorney fees.  No estimate of such damages can be made at this
time and no accrual for such fees is included in the Company’s financial
statements at September 30, 2009.
  67
  On
December 5, 2008, Defendants filed a cross-complaint against CTC and some of the
company's officers. Defendants served the cross-complaint only on the company
(i.e., none of the individual cross-defendants have been served). The Company
filed several motions aimed at dismissing certain of the cross-claims, which
resulted in the Defendants filing several amended pleadings. On May 12, 2009 the
Court granted the Company’s motion directed to the sixth cause of action
contained in the second amended cross-complaint, and dismissed that claim with
prejudice.  The Defendants’ cross-complaint asserts claims for fraud
in inducing the settlement agreement, rescission of the settlement agreement,
breach of the settlement agreement, accounting, and declaratory
relief.
  On March
2, 2009, the Company’s subsidiary, CTC Cable Corporation ("CTC Cable"), filed a
lawsuit against Mercury Cable & Energy, LLC ("Mercury") in the United States
District Court for the Central District of California, Southern Division (Case
No. SA CV 09-261 DOC (MLGx)), seeking damages for infringement of CTC Cable's
United States Patent No. 7,368,162 (’162) and United States Patent No. 7,211,319
(‘319), and for infringement of a CTC Cable copyright
registration.  The Company is asking for actual damages, treble
damages, attorneys fees, interest, costs and injunctive relief.  No
estimate of such damages can be made at this time and no accrual for the
Company’s future fees and costs is included in the Company's financial
statements at September 30, 2009.
  In
response to this lawsuit, Mercury has requested the United States Patent and
Trademark Office reexamine the '162 and '319 patents and requested the Court to
stay the patent and copyright lawsuit pending the Patent Office's final
reexamination of CTC's patents.  The Court granted Mercury's request
to stay the lawsuit pending the Patent Office’s final decisions. CTC's copyright
infringement claim is also stayed pending the Patent Office’s
decisions.
  On
November 4, 2009, the Patent Office issued a first Office Action in the
re-examination of the '319 patent.  As is common practice, the Patent
Office has initially rejected most of the claims based on the prior art patents
submitted with Mercury's reexamination request pending response by CTC. However,
the Patent Office did confirm the validity of claim 17 of the patent. CTC is
currently preparing a full and complete response to this Office Action. On
November 23, 2009, Mercury issued a press release falsely stating that the
Patent Office “invalidated” 28 of 29 claims contained in the '319
patent.  Contrary to Mercury's latest press release, the Office Action
did not serve to invalidate any claims of the patent and all of the Company’s
patent claims being reexamined are in force during the pendency of the
reexamination.
  In
response to Mercury’s false press release, on November 25, 2009, the Company
filed an application with the Court requesting partial relief from the stay for
the purpose of amending the complaint against Mercury to include a trade libel
claim and to permit the Company to prosecute this claim against
Mercury.  The Company has also requested that a preliminary injunction
be issued to prohibit Mercury from making any further false or misleading
statements about the validity of the Company’s patents.  On December
1, 2009, Mercury filed its opposition with the Court.  The matter is
currently under submission.
  In Re
Composite Technology Corporation Derivative Litigation (Brad Thomas v. Benton
Wilcoxon, Michael Porter, Domonic J. Carney, Michael McIntosh, Stephen Bircher,
Rayna Limited, Keeley Services Limited, Ellsford Management Limited, Laikadog
Holdings Limited, James Carkulis, and Does 1 through 1000 (including D. Dean
McCormick, III, CPA as Doe 1, John P. Mitola, as Doe 2, and Michael K. Lee, as
Doe 3) and Nominal Defendant Composite Technology
Corporation)


68
  On June
26, 2009 Mr. Brad Thomas, alleged to be a shareholder of the Company, filed a
shareholder derivative complaint in the Superior Court of the State of
California, County of Orange (Case No. 30-2009-00125211) for damages and
equitable relief.  The complaint asserts claims for negligence, gross
negligence, breach of fiduciary duty, waste, mismanagement, gross mismanagement,
abuse of control, negligent misrepresentation, intentional misrepresentation,
fraudulent promise, constructive fraud, and violations of the California
Corporations Code, and seeks an accounting, rescission and/or
reformation.  The facts focus on the Company’s acquisition of its
DeWind subsidiary and also related self-interested transactions, accounting
deficiencies and misstatements.  Certain of the defendants are current
directors and/or officers or past officers of the Company.  Under the
Company’s articles of incorporation and bylaws, the Company is obligated to
provide for indemnification for director and officer liability.
 
 On
October 13, 2009, the Company and the individual defendants filed demurrers
(motions to strike) to the Complaint on the grounds that Plaintiff Thomas did
not make a written demand on the Company’s board of directors prior to filing
the Complaint as required under Nevada law and that any decisions made by the
individual director/office defendants in relation to the subject matter of the
Complaint are protected under the business judgment rule.  Prior to
the scheduled hearing on the demurrer, Plaintiff Thomas filed a First Amended
Complaint on or about November 11, 2009 naming three additional current board
members.  The deadline to respond to the First Amended Complaint is
January 4, 2010.  Several of the defendants named in the First Amended
Complaint have not been served.  The Company will be filing another
demurrer (motion to strike) to the First Amended Complaint on the same
grounds.  In addition, on October 20, 2009, the Company filed a Motion
to Stay Discovery in this matter on the grounds that Plaintiff Thomas should not
be permitted to conduct discovery until such time as the dispute over the
sufficiency of the First Amended Complaint is decided by the
Court.
  NOTE
15 – RELATED PARTY TRANSACTIONS
 
 As
discussed in Note 13, the Company maintains professional
services agreements with two companies affiliated with a member of the board of
directors.
 
 For the
fiscal year ended September 30, 2009 we recorded fees of $250,000 and patent
filing fees of $70,000 for TMG, and fees of $250,000 and incidental expenses of
$70,000 for TMA. All of these expenses were recorded to Research and Development
expense.
 
 As of
September 30, 2009 the Company had outstanding balances due to TMG and TMA of
$41,000 and $24,000 respectively, included in accounts
payable.
  69
 NOTE
16 – SEGMENT INFORMATION
 
 As of
September 30, 2009, we manage and report our operations through one business
segment: CTC Cable.  During the year ended September 30, 2009 we
revised our segments to reflect the disposal of DeWind. DeWind comprised our
previously reported Wind segment, which has been presented as discontinued
operations in our Consolidated Financial Statements (see Note 2).  When
applicable, segment data is organized on the basis of products. Historically,
the Company evaluates the performance of its operating segments primarily based
on revenues and operating income, any transactions between reportable segments
are eliminated in the consolidation of reportable segment data.
 
 Located
in Irvine, California with sales personnel located near Portland, Oregon and
Atlanta, Georgia, CTC Cable produces and sells ACCC®
conductor and related ACCC® hardware
products for the electrical transmission market. ACCC®
conductor production is a two step process. The Irvine operations produce the
high strength, light weight composite “core” which is then shipped to one of
four cable manufacturers in Canada, Belgium, China, or Bahrain where the core is
stranded with conductive aluminum wire to become ACCC®
conductor. ACCC®
conductor is sold both through a distribution agreement with General Cable in
the US and Canada, into China through our distribution agreement with Far East
Composite Cable,  as well as directly by CTC Cable to utility
customers worldwide.  ACCC®
conductor has been sold commercially since 2005 and is currently marketed
worldwide to electrical utilities and transmission companies.
  The
Company operates and markets its services and products on a worldwide
basis:
  (In Thousands)
                      
                      For the Years Ended September 30,2009
                      
                      2008
                      
                      2007Europe
                      
                      $
                      873
                      
                      
                      $
                      6,896
                      
                      $
                      50Middle
      East
                      
                      
                      1,445
                      
                      
                      
                      —
                      
                      
                      —China
                      
                      
                      10,499
                      
                      
                      
                      24,900
                      
                      
                      12,857Other
      Asia
                      
                      
                      422
                      
                      
                      
                      —
                      
                      
                      —North
      America
                      
                      
                      5,409
                      
                      
                      
                      851
                      
                      
                      3,101South
      America
                      
                      
                      26
                      
                      
                      
                      68
                      
                      
                      —Latin
      America
                      
                      
                      928
                      
                      
                      
                      —
                      
                      
                      —Total
      Revenue
                      
                      $
                      19,602
                      
                      
                      $
                      32,715
                      
                      $
                      16,008
  All
long-lived assets, comprised of property and equipment, are located in the
United States.
 
 For the
year ended September 30, 2009, three customers represented 77.8% of revenue (one
in China at 53.6%, one in Canada at 16.8% and one in the Middle East at
7.4%).  For the year ended September 30, 2008, two customers
represented 96.0% of revenue (one in China at 76.1% and one in Europe at
19.9%).  For the year ended September 30, 2007, two customers
represented 93.6% of revenue (one in China at 80.3% and one in Canada at
13.3%).  No other customer represented greater than 5% of consolidated
revenue.
 
 NOTE
17 – SUBSEQUENT EVENTS (Unaudited)
 
 Management
evaluated all activity of the Company through December 14,
2009 (the issue date of the consolidated financial statements) and concluded
that no subsequent events have occurred that would require recognition in the
consolidated financial statements or disclosure in the notes to financial
statements, except as disclosed below.
 On
December 4, 2009 DSME provided the Company with a preliminary net asset value
calculation in accordance with the terms and conditions of the Asset Purchase
Agreement dated September 4, 2009.  The Company is in the process of
reviewing the DSME net asset value calculation.  The Company expects
to resolve any differences with the DSME calculation during the quarter ended
March 31, 2010.
 On
December 14, 2009 the Company announced the hiring of John P. Brewster as Chief
Commercial Officer of Composite Technology Corporation and President of CTC
Cable Corporation.  Mr. Brewster brings over thirty years of U.S.
Utility Sales and Operations experience. The Company believes that Mr. Brewster
will be instrumental in our domestic and international sales expansion
strategy.
  Mr.
Brewster will receive an annual salary of $350,000 per year and will be eligible
to participate in any management incentive compensation plans.  He
will receive options to purchase 2,000,000 shares of Composite Technology
Corporation stock at $0.35 per share.  As an incentive to join the
company, Mr. Brewster will receive $50,000 in cash and $50,000 in common stock,
valued at market prices.
  NOTE
18 – SUPPLEMENTAL FINANCIAL INFORMATION (Unaudited)
 
 Supplemental
Quarterly Financial Information
 
 (In
Thousands)
 Fiscal year ended September 30, 2009
                      
                      December 31
                      
                      
                      March 31
                      
                      
                      June 30
                      
                      
                      September 30Revenue
                      
                      $
                      4,360
                      
                      
                      $
                      6,202
                      
                      
                      $
                      3,562
                      
                      
                      $
                      5,478Gross
      profit
                      
                      
                      1,278
                      
                      
                      
                      2,152
                      
                      
                      
                      631
                      
                      
                      
                      1,256Loss
      before income taxes
                      
                      
                      (4,201
                      )
                      
                      
                      (3,828
                      )
                      
                      
                      (4,469
                      )
                      
                      
                      (6,935
                      )Net
      loss from continuing operations
                      
                      
                      (4,204
                      )
                      
                      
                      (3,828
                      )
                      
                      
                      (4,469
                      )
                      
                      
                      (6,937
                      )Loss
      from discontinued operations
                      
                      
                      (4,132
                      )
                      
                      
                      (6,825
                      )
                      
                      
                      (22,456
                      )
                      
                      
                      (20,900
                      )Net
      loss
                      
                      
                      (8,336
                      )
                      
                      
                      (10,653
                      )
                      
                      
                      (26,925
                      )
                      
                      
                      (27,837
                      )Basic
      and diluted net loss per share - continuting operations
                      
                      
                      (0.02
                      )
                      
                      
                      (0.01
                      )
                      
                      
                      (0.02
                      )
                      
                      
                      (0.02
                      )Basic
      and diluted net loss per share - discontinued operations
                      
                      
                      (0.01
                      )
                      
                      
                      (0.03
                      )
                      
                      
                      (0.07
                      )
                      
                      
                      (0.08
                      )Total
      Basic and diluted net loss per share
                      
                      $
                      (0.03
                      )
                      
                      $
                      (0.04
                      )
                      
                      $
                      (0.09
                      )
                      
                      $
                      (0.10
                      )
  Fiscal year ended September 30, 2008
                      
                      December 31
                      
                      
                      March 31
                      
                      
                      June 30
                      
                      
                      September 30Revenue
                      
                      $
                      10,994
                      
                      
                      $
                      10,492
                      
                      
                      $
                      6,651
                      
                      
                      $
                      4,578Gross
      profit
                      
                      
                      4,173
                      
                      
                      
                      2,706
                      
                      
                      
                      2,780
                      
                      
                      
                      1,927Income
      (loss) before income taxes
                      
                      
                      14
                      
                      
                      
                      (1,864
                      )
                      
                      
                      (4,651
                      )
                      
                      
                      (3,580
                      )Net
      income (loss) from continuing operations
                      
                      
                      14
                      
                      
                      
                      (1,865
                      )
                      
                      
                      (4,651
                      )
                      
                      
                      (3,581
                      )Loss
      from discontinued operations
                      
                      
                      (7,375
                      )
                      
                      
                      (9,478
                      )
                      
                      
                      (8,541
                      )
                      
                      
                      (18,036
                      )Net
      loss
                      
                      
                      (7,361
                      )
                      
                      
                      (11,343
                      )
                      
                      
                      (13,192
                      )
                      
                      
                      (21,618
                      )Basic
      and diluted net loss per share - continuting operations
                      
                      
                      (0.00
                      )
                      
                      
                      (0.01
                      )
                      
                      
                      (0.02
                      )
                      
                      
                      (0.01
                      )Basic
      and diluted net loss per share - discontinued operations
                      
                      
                      (0.03
                      )
                      
                      
                      (0.04
                      )
                      
                      
                      (0.04
                      )
                      
                      
                      (0.07
                      )Total
      Basic and diluted net loss per share
                      
                      $
                      (0.03
                      )
                      
                      $
                      (0.05
                      )
                      
                      $
                      (0.06
                      )
                      
                      $
                      (0.08
                      )
 
 Fiscal year ended September 30, 2007
                      
                      December 31
                      
                      
                      March 31
                      
                      
                      June 30
                      
                      
                      September 30Revenue
                      
                      $
                      1,644
                      
                      
                      $
                      2,703
                      
                      
                      $
                      7,397
                      
                      
                      $
                      4,264Gross
      profit (Loss)
                      
                      
                      300
                      
                      
                      
                      882
                      
                      
                      
                      2,115
                      
                      
                      
                      1,286Loss
      before income taxes
                      
                      
                      (3,698
                      )
                      
                      
                      (4,302
                      )
                      
                      
                      (3,310
                      )
                      
                      
                      (6,698
                      )Net
      loss from continuing operations
                      
                      
                      (3,696
                      )
                      
                      
                      (4,304
                      )
                      
                      
                      (3,310
                      )
                      
                      
                      (6,700
                      )Loss
      from discontinued operations
                      
                      
                      (3,253
                      )
                      
                      
                      (6,755
                      )
                      
                      
                      (4,813
                      )
                      
                      
                      (11,653
                      )Net
      loss
                      
                      
                      (6,949
                      )
                      
                      
                      (11,059
                      )
                      
                      
                      (8,123
                      )
                      
                      
                      (18,354
                      )Basic
      and diluted net loss per share - continuting operations
                      
                      
                      (0.02
                      )
                      
                      
                      (0.02
                      )
                      
                      
                      (0.02
                      )
                      
                      
                      (0.03
                      )Basic
      and diluted net loss per share - discontinued operations
                      
                      
                      (0.02
                      )
                      
                      
                      (0.04
                      )
                      
                      
                      (0.02
                      )
                      
                      
                      (0.06
                      )Total
      Basic and diluted net loss per share
                      
                      $
                      (0.04
                      )
                      
                      $
                      (0.06
                      )
                      
                      $
                      (0.04
                      )
                      
                      $
                      (0.09
                      )
 70
  ITEM
9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
 
 None.
 
 ITEM
9A - CONTROLS AND PROCEDURES
 
 Evaluation
of Disclosure Controls and Procedures
 
 Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act of 1934.  Disclosure controls and procedures are controls and
other procedures of a company that are designed to ensure that information
required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the company’s management, including its principal executive and principal
financial officers, as appropriate to allow timely decisions regarding required
disclosure. Management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving their objectives and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Based on that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were ineffective
as of September 30, 2009 because of the material weaknesses identified
below.
 
 Management's
Annual Report on Assessment of Internal Control over Financial
Reporting
 
 The
management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting for the Company. Internal
control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f)
promulgated under the Securities Exchange Act of 1934 as a process designed by,
or under the supervision of, the Company’s principal executive and principal
financial officers and effected by the Company’s board of directors, management
and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with U.S. generally accepted accounting principles and
includes those policies and procedures that:
 
 •
              Pertain to the maintenance of
      records that in reasonable detail accurately and fairly reflect the
      transactions and dispositions of the assets of the
      Company;
 
 •
              Provide reasonable assurance that
      transactions are recorded as necessary to permit preparation of financial
      statements in accordance withU.S.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
 
 •
              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. 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.
 
 The
Company’s management assessed the effectiveness of the Company’s internal
control over financial reporting as of September 30, 2009. In making
this assessment, the Company’s management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework.
 
 Based on
their assessment, management concluded that, as of September 30, 2009, the
Company’s internal control over financial reporting is not effective based on
those criteria, because of the material weaknesses identified
below.
 
 A
material weakness (as defined by the PCAOB’s Auditing Standard No. 5) is a
deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a more than remote likelihood that a material
misstatement of the company’s annual or interim financial statements will not be
prevented or detected on a timely basis.
  During
management's annual review of our internal control over financial reporting, we
determined the following processes contain material weaknesses as of
September 30, 2009:
 
 ·
                Inventory
      costing and management process over on-hand inventory and inventory on
      consignment
 ·
                Shareholders’
      equity (deficit) process
 ·
                Information
      Technology controls and related
systems
 ·
                Fixed
      Assets
 ·
                Financial
      Close and Reporting
 71
 
  
 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.
  Inventory Processes.
The following weaknesses existed related to ineffective controls over our
inventory processes.  Taken as a whole, they comprise a material
control weakness:
 
 ·
                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.·
                Valuation:
      Ineffective control process to accurately value inventory units in
      accordance with US GAAP.·
                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 sufficient purchasing reports for management
      review.·
                The
      Company did not update its standard costs for manufactured inventory in a
      timely manner and did not change standard costs for purchased materials to
      reflect price changes in a timely
manner
 
 Shareholders’ equity
(deficit) process. The Company lacks proper segregation of duties over
tracking and recording stock related activity.
 
 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. The
Company does not have IT policies and procedures documented.
 
 Information Technology
General Controls (ITGC'S). ITGC'S include four basic information
technology (IT) areas relevant to internal control over financial reporting:
program development, program changes, computer operations, and access to
programs and data. A material weakness existed relating to our 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.
 
 Fixed Asset Process.
The following weaknesses existed related to ineffective controls over our fixed
asset processes.  Taken as a whole, the Company has determined these
weaknesses to be a material weakness:
 
 ·
                The
      Company has not performed an observation of fixed assets to verify
      existence and completeness·
                The
      Company does not have a process to account for self-constructed
      assets
  Financial Close and
Reporting Process. The following weaknesses existed related to
ineffective controls over our financial close and reporting
processes.  The lack of an internal audit function is an internal
control weakness.  The Company has determined that the following
weaknesses taken as a whole also comprise a material control
weakness:
 
 ·
                There
      is no formal approval by the audit committee and board of directors of
      financial statements for issuance·
                The
      Company has inadequate segregation of duties over the financial close
      process·
                The
      Company has no formal budget
process
 During
the year ended September 30, 2009, the Company improved certain internal
controls over financial reporting related to identified material weaknesses as
follows:
 
 ·
              In
      January, 2009 the Company appointed a third independent Director
      who serves on the Audit and Compensation Committees as well as to provide
      a majority of independent directors on our five person Board of
      Directors.
 
 ·
              In October, 2008, the Company
      completed an important phase of the upgrade to its accounting and
      manufacturing IT systems to more adequately track and maintain inventory
      quantities and to automate manufacturing and inventory
      variances.
 
 ·
              The Company improved its IT
      processes surrounding security of information and user administration and
      access validation
procedures.
 
 ·
              The Company implemented a
      complete and thorough project accounting review on a quarterly basis which
      is reviewed by senior management and the principal accounting
      officer.
 
 The
Company's management has identified the steps necessary to address the material
weaknesses existing as of September 30, 2009 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;
  72
 
 (3) Documenting to standards
established by senior accounting personnel and the principal accounting officer
the review, analysis and related conclusions with respect to complex,
non-routine transactions;
  (4) Requiring senior accounting
personnel and the principal accounting officer to review complex, non-routine
transactions to evaluate and approve the accounting treatment for such
transactions;
  (5)
Evaluatinganinternal
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 2010;
  (6)
Invest in additional enhancements to our IT systems including enhancements to
processing manufacturing and inventory transactions, and security over user
access and administration.
  (7) In
October 2009, we implemented a share-based compensation and equity
administration software system. Transactions are now processed and reported by a
representative from our legal department and reviewed by our Chief Financial
Officer.
  (8) Create policy and
procedures manuals for the accounting, finance and IT
functions.
  (9) Improve our purchasing and
accounts payable cycle controls.
  The
Company began to execute the remediation plans identified above in the first
fiscal quarter of 2010.
These remediation efforts are expected to continue through fiscal 2010.
 
 SingerLewak
LLP, our independent registered public accounting firm, has audited management's
assessment of the effectiveness of the Company's internal control over financial
reporting as of September 30, 2009 as stated in their report which appears
in this Annual Report on Form 10-K, Item 8.
 
 Changes
in Internal Control over Financial Reporting
 
 There was
no change in our internal control over financial reporting during the fourth
quarter ended September 30, 2009 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
  ITEM
9B - OTHER INFORMATION
 
 None.
  73
  PART
III
  ITEM
10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
 The
information required by Item 10 of Form 10-K is incorporated by reference from
the information contained in the sections captioned "DIRECTORS AND EXECUTIVE
OFFICERS", "CORPORATE GOVERNANCE" and "SECTION 16(A) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE" in the Proxy Statement that will be delivered to our
shareholders in connection with our March 2, 2010 Annual Meeting of
Shareholders.
 
 ITEM
11 - EXECUTIVE COMPENSATION
 
 The
information required by Item 11 of Form 10-K is incorporated by reference from
the information contained in the section captioned "EXECUTIVE COMPENSATION:
COMPENSATION DISCUSSION AND ANALYSIS" in the Proxy Statement that will be
delivered to our shareholders in connection with our March 2, 2010 Annual
Meeting of Shareholders.
 
 ITEM
12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
SHAREHOLDER MATTERS
 
 The
information required by Item 12 of Form 10-K is incorporated by reference from
the information contained in the section captioned "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS" in the
Proxy Statement that will be delivered to our shareholders in connection with
our March 2, 2010 Annual Meeting of Shareholders.
 
 ITEM
13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
 
 The
information, if any, required by Item 13 of Form 10-K is incorporated by
reference from the information contained in the sections captioned "CORPORATE
GOVERNANCE" and "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" in the Proxy
Statement that will be delivered to our shareholders in connection with our
March 2, 2010 Annual Meeting of Shareholders.
 
 ITEM
14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
 The
information required by Item 14 of Form 10-K is incorporated by reference from
the information contained in the section captioned "INDEPENDENT ACCOUNTANTS" in
the Proxy Statement that will be delivered to our shareholders in connection
with our March 2, 2010 Annual Meeting of Shareholders.
  PART IV
 
 ITEM
15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 
 The
following documents are filed as part of this report:
  (1)
Financial Statements - See Index to Consolidated Financial Statements under Item
8 above.
  (2)
Financial Statement Schedule. See Schedule II - Valuation and Qualifying
Accounts and Reserves in this section of this 10-K.
 
 (3)
Exhibits - See Index to Exhibits following the signatures to this
report.
  74
  COMPOSITE
TECHNOLOGY CORPORATION AND SUBSIDIARIES
 SCHEDULE
II — VALUATION AND QUALIFYING ACCOUNTS
 FOR
EACH FISCAL YEAR IN THE THREE YEAR PERIOD
 ENDED
SEPTEMBER 30, 2009
 (In
Thousands)
 
 Balance at
                            beginning
                            of year
                          
                          Reserves
                            Acquired
                          
                          Additions
                            charged to
                            costs and
                            expenses
                          
                          Payment or
                            utilization
                          
                          Balance at
                            end of yearFY2009Allowance
      for doubtful accounts
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          81
                          
                          
                          $
                          -
                          
                          
                          $
                          81Inventory
      reserve
                          
                          
                          978
                          
                          
                          
                          -
                          
                          
                          
                          223
                          
                          
                          
                          (278
                          )
                          
                          
                          923Warranty
      reserve
                          
                          
                          219
                          
                          
                          
                          -
                          
                          
                          
                          513
                          
                          
                          
                          (168
                          )
                          
                          
                          564FY2008Allowance
      for doubtful accounts
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -Inventory
      reserve
                          
                          
                          376
                          
                          
                          
                          -
                          
                          
                          
                          602
                          
                          
                          
                          -
                          
                          
                          
                          978Warranty
      reserve
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          259
                          
                          
                          
                          (40
                          )
                          
                          
                          219FY2007Allowance
      for doubtful accounts
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -Inventory
      reserve
                          
                          
                          259
                          
                          
                          
                          -
                          
                          
                          
                          117
                          
                          
                          
                          -
                          
                          
                          
                          376Warranty
      reserve
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
  75
  SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
  COMPOSITE
TECHNOLOGY CORPORATION
  /s/
      Benton H WilcoxonBenton
      H WilcoxonChief
      Executive Officer
  Date:
  December 14, 2009
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
  /s/
      Benton H WilcoxonBenton
      H WilcoxonChief
      Executive Officer andChairman
       (Principal Executive Officer)
  Date:
  December 14, 2009
  /s/
      Domonic J. CarneyDomonic
      J. CarneyChief
      Financial Officer (Principal Financial and Accounting
      Officer)
  Date:
  December 14, 2009
  /s/ D. Dean
      McCormick IIID. Dean
      McCormick IIIDirector
  Date:
  December 14, 2009
  /s/
      Michael D. McIntoshMichael
      D. McIntoshDirector
  Date:
  December 14, 2009
  /s/
      John P. MitolaJohn
      P. MitolaDirector
  Date:
  December 14, 2009
  /s/
      Michael LeeMichael
      LeeDirector
  Date:   December 14,
2009
  76
  EXHIBIT
INDEX
  Number
                
                Description2.1
      (23)
                
                Asset
      Purchase Agreement by and between Daewoo Shipbuilding & Marine
      Engineering Co. Ltd. and DeWind, Inc. and the Registrant dated as of
      August 10, 20092.2
      (23)
                
                Asset
      Purchase Agreement by and between Daewoo Shipbuilding & Marine
      Engineering Co. Ltd. and DeWind, Ltd. dated as of August 10,
      20092.3
      (24)
                
                Amendment
      No. 1 dated as of September 4, 2009 to the Asset Purchase
      Agreement  by and between Daewoo Shipbuilding & Marine
      Engineering Co. Ltd. and DeWind, Inc. and the Registrant dated as of
      August 10, 2009 (1)2.4
      (24)
                
                Amendment
      No. 1 dated as of September 4, 2009 by and between Daewoo Shipbuilding
      & Marine Engineering Co. Ltd. and DeWind, Ltd. dated as of August 10,
      20093.1(1)
                
                Articles
      of Incorporation of the Company3.2(2)
                
                Certificate
      of Amendment to Articles of Incorporation3.2(3)
                
                Bylaws
      of Composite Technology Corporation, as modified January 6,
      200610.19(14)
                
                Letter
      Agreement dated as of October 31, 2007 between the Registrant and John P
      Mitola10.20(14)
                
                Option
      Agreement dated as of October 31, 2007 between the Registrant and John P
      Mitola10.21(15)
                
                Factoring
      agreement by and between the Registrant and Bradley Rotter dated as
      of December 31, 200610.22(16)
                
                Sales
      Agreement, effective as of January 30, 2008 by and between S&M CZ
      s.r.o. and DeWind Ltd. (English translation)10.23(17)
                
                Financing
      Agreement, effective as of May 5, 2008 by and between the Registrant and
      ACF CTC, L.L.C10.24(17)
                
                Form
      of Warrant10.25(17)
                
                Subscription
      Agreement, effective as of May 9, 2008 by and between the Registrant and
      Credit Suisse Securities (Europe) Ltd10.26(17)
                
                Call
      Option Deed by and between the Registrant and Credit Suisse Securities
      (Europe) Ltd.10.26(18)
                
                Subscription
      Agreement, effective as of June 26, 2008 by and between the Registrant and
      Credit Suisse Securities (Europe) Ltd10.27(19)
                
                Promotion
      Letter, executed on September 3, 2008, by and between Composite Technology
      Corporation and Robert Rugh.10.28
      (20)
                
                Letter
      Agreement with Michael K. Lee10.29
      (20)
                
                Option
      Agreement with Michael K. Lee10.30(21)
                
                Form of 2002 Non-Qualified Stock
      Compensation Plan Master Option Agreement10.31(21)
                
                Form of 2002 Non-Qualified Stock
      Compensation Plan Stock Option Notice of Modification and
      Reissuance10.32 (21)
                
                Form of 2008 Stock Option Plan
      Stock Option Grant Notice10.33 (21)
                
                Form of 2008 Stock Option Plan
      Master Option Agreement10.34(22)
                
                Loan
      Agreement dated as of June 30, 200910.35(22)
                
                Promissory
      Note dated as of June 30, 200910.36(22)
                
                Form
      of Warrant to purchase common stock10.37(22)
                
                Security
      Agreement dated as of June 30, 200910.38(22)
                
                Stock
      Pledge Agreement (including form of Irrevocable Proxy) dated as of June
      30, 200910.39(22)
                
                Subsidiary
      Guaranty dated as of June 30, 200910.40(22)
                
                Grant
      of Security Interest in Trademarks between the Lender and the Company
      dated as of June 30, 200910.41(22)
                
                Grant
      of Security Interest in Patents between the Lender and CTC Cable
      Corporation dated as of June 30, 200910.42(22)
                
                Grant
      of Security Interest in Copyright between the Lender and CTC Cable
      Corporation dated as of June 30, 200910.43(22)
                
                Grant
      of Security Interest in Trademarks between the Lender and CTC Cable
      Corporation dated as of June 30, 200910.44(22)
                
                Grant
      of Security Interest in Patents between the Lender and DeWind, Inc. dated
      as of June 30, 200910.45
      (24)
                
                Escrow
      Agreement dated as of September 4, 2009 by and among Daewoo Shipbuilding
      & Marine Engineering Co. Ltd., DeWind, Inc., the Registrant and U.S.
      Bank National Association, as escrow agent10.46
      (24)
                
                Trademark
      Assignment Agreement dated as of September 4, 2009 by and among the
      Registrant and DeWind Turbine Co., a wholly-owned subsidiary of
      DSME
 77
 23.1(25)
                  
                  Consent
      of SingerLewak LLP31.1(25)
                  
                  Rule
      13a-14(a) / 15d-14(a)(4) Certification of Chief Executive
      Officer31.2(25)
                  
                  Rule
      13a-14(a) / 15d-14(a)(4) Certification of Chief Financial
      Officer32.1(25)
                  
                  Section
      1350 Certification of Chief Executive Officer32.2(25)
                  
                  Section
      1350 Certification of Chief Financial
Officer
 (1)
Incorporated herein by reference to Form 10-KSB filed as a Form 10-KT with the
U. S. Securities and Exchange Commission on February 14, 2002.
 
 (2)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on December 18, 2007.
 
 (3)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on January 12, 2006.
 
 (4)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on September 27, 2006.
 
 (5)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on October 6, 2006.
 
 (6)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on November 30, 2006.
 
 (7)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on January 25, 2007.
 
 (8)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on February 2, 2007.
 
 (9)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on February 13, 2007.
 (10)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on April 10, 2007.
 
 (11)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on May 9, 2007.
 
 (12)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on June 14, 2007.
 
 (13)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on June 21, 2007.
 
 (14)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on November 6, 2007.
 
 (15)
Incorporated herein by reference to Form 10-Q filed with the U.S. Securities and
Exchange Commission on February 14, 2007.
 
 (16)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on February 5, 2008.
 
 (17)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on May 9, 2008.
 
 (18)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on July 2, 2008.
 
 (19)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on September 9, 2008.
  (20)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on January 26, 2009
 
 (21)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on February 10, 2009
 
 (22)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on July 7, 2009
 
 (23)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on August 14, 2009
 
 (24)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on September 11, 2009
 (25)
Filed herewith.
  78