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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

** **
| **x**                                                       | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|-------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
| ** **                                                  | ** ** | ** **                                                                                               |
| **For the  quarterly period ended September 30, 2009** |
| ** **                                                  | ** ** | ** **                                                                                               |
| **o**                                                       | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**For thetransition period from          to**

 

**Commissionfile number****0-****31313**

 

 

**BROADWIND ENERGY, INC.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                                     | ** ** | **88-0409160**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction  of incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

**47 EastChicago Avenue, Suite 332, Naperville, IL 60540**

(Address of principal executive offices)

 

**(630)637-0315**

(Registrant’s telephone number, including areacode)

 

###### **Not applicable**

(Former name, former address and former fiscalyear, if changed since last report)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90days.  Yes x   No o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files).  Yes o  No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See definitions of “large accelerated filer,” “acceleratedfiler,” and “smaller reporting company” in Rule 12b-2 of the ExchangeAct.:

 

| Large accelerated filer o                      |   | Accelerated filer x          |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated filer o                        |   | Smaller reporting  company o |
| (Do not check if a smaller  reporting company) |   |                              |

 

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

 

Number of shares of registrant’s common stock, parvalue $0.001, outstanding as of October 28, 2009: 96,631,630

 

 

 

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**BROADWIND ENERGY, INC. ANDSUBSIDIARIES**

 

**INDEX**

 
| ** **                              | ** **                                                                                  | **Page No.** |
|-----------------------------------------|---------------------------------------------------------------------------------------------|-------------------|
|                                    |                                                                                        |              |
| **PART I.  FINANCIAL INFORMATION** |                                                                                        |
|                                    |                                                                                        |              |
| Item 1.                                 | Financial Statements                                                                        | 2                 |
|                                    | Condensed Consolidated Balance Sheets                                                       | 2                 |
|                                    | Condensed Consolidated Statements of Operations                                             | 3                 |
|                                    | Condensed  Consolidated Statements of Cash Flows                                            | 4                 |
|                                    | Notes to Condensed Consolidated Financial Statements                                        | 5                 |
|                                    |                                                                                        |              |
| Item 2.                                 | Management’s Discussion and  Analysis of Financial Condition and Results of Operations | 21                |
| Item 3.                                 | Quantitative  and Qualitative Disclosures About Market Risk                                 | 35                |
| Item 4.                                 | Controls and  Procedures                                                                    | 35                |
|                                    |                                                                                        |              |
| **PART II.  OTHER INFORMATION**    |                                                                                        |
|                                    |                                                                                        |              |
| Item 1.                                 | Legal Proceedings                                                                           | 37                |
| Item 1A.                                | Risk Factors                                                                                | 37                |
| Item 2.                                 | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 37                |
| Item 3.                                 | Defaults  Upon Senior Securities                                                            | 37                |
| Item 4.                                 | Submission  of Matters to a Vote of Security Holders                                        | 37                |
| Item 5.                                 | Other Information                                                                           | 37                |
| Item 6.                                 | Exhibits                                                                                    | 37                |
| Signatures                              |                                                                                        | 38                |
|                                         |                                                                                             |                   |  |

 

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**PART I. FINANCIAL INFORMATION**

 

**Item 1.****          ****Financial Statements**

 

**BROADWINDENERGY, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(Inthousands, except share data)**

 
| ** **                                                                                                                                                                                      | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                      | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| ** **                                                                                                                                                                                      | ** ** | **(Unaudited)**        | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                                      |       |                   |       |                  |       |
| **CURRENT ASSETS:**                                                                                                                                                                             |       |                   |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                       |       | $                      | 7,660      |                  | $          | 15,253 |   |
| Restricted cash                                                                                                                                                                                 |       | 2,503                  |       | 500                   |       |
| Accounts receivable, net of allowance for doubtful  accounts of $455 and $1,504 as of September 30, 2009 and  December 31, 2008, respectively                                         |       | 26,673                 |       | 36,709                |       |
| Inventories, net                                                                                                                                                                                |       | 14,923                 |       | 41,895                |       |
| Prepaid expenses and other current assets                                                                                                                                                       |       | 3,996                  |       | 3,862                 |       |
| Total current assets                                                                                                                                                                            |       | 55,755                 |       | 98,219                |       |
| Property and equipment, net                                                                                                                                                                     |       | 138,488                |       | 144,707               |       |
| Goodwill                                                                                                                                                                                        |       | 33,984                 |       | 30,954                |       |
| Intangible assets, net                                                                                                                                                                          |       | 96,875                 |       | 105,593               |       |
| Other assets                                                                                                                                                                                    |       | 3,227                  |       | 275                   |       |
| **TOTAL ASSETS**                                                                                                                                                                                |       | $                      | 328,329    |                  | $          | 379,748 |   |
|                                                                                                                                                                                            |       |                   |       |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                  |       |                   |       |                  |       |
| **CURRENT LIABILITIES:**                                                                                                                                                                        |       |                   |       |                  |       |
| Lines of credit and notes payable                                                                                                                                                               |       | $                      | 10,544     |                  | $          | 3,340 |   |
| Current maturities of long-term debt                                                                                                                                                            |       | 8,996                  |       | 9,711                 |       |
| Current portions of capital lease obligations                                                                                                                                                   |       | 1,068                  |       | 978                   |       |
| Accounts payable                                                                                                                                                                                |       | 19,178                 |       | 40,225                |       |
| Accrued liabilities                                                                                                                                                                             |       | 7,353                  |       | 10,386                |       |
| Customer deposits                                                                                                                                                                               |       | 8,275                  |       | 21,102                |       |
| Total current liabilities                                                                                                                                                                       |       | 55,414                 |       | 85,742                |       |
|                                                                                                                                                                                            |       |                   |       |                  |       |
| **LONG-TERM LIABILITIES:**                                                                                                                                                                      |       |                   |       |                  |       |
| Long-term debt, net of current maturities                                                                                                                                                       |       | 18,126                 |       | 25,792                |       |
| Long-term capital lease obligations, net of  current portions                                                                                                                                   |       | 3,535                  |       | 3,521                 |       |
| Interest rate swap agreements                                                                                                                                                                   |       | 320                    |       | 582                   |       |
| Deferred income tax liabilities                                                                                                                                                                 |       | 1,580                  |       | 1,497                 |       |
| Other                                                                                                                                                                                           |       | 2,128                  |       | 458                   |       |
| Total long-term liabilities                                                                                                                                                                     |       | 25,689                 |       | 31,850                |       |
|                                                                                                                                                                                            |       |                   |       |                  |       |
| **COMMITMENTS AND CONTINGENCIES**                                                                                                                                                               |       |                   |       |                  |       |
|                                                                                                                                                                                            |       |                   |       |                  |       |
| **STOCKHOLDERS’ EQUITY:**                                                                                                                                                                  |       |                   |       |                  |       |
| Preferred stock, $0.001 par value; 10,000,000  shares authorized; no shares issued or outstanding                                                                                               |       | —                 |       | —                |       |
| Common stock, $0.001 par value; 150,000,000 shares  authorized; 96,614,282 and 96,470,415 shares issued and outstanding as of  September 30, 2009 and December 31, 2008, respectively |       | 97                     |       | 96                    |       |
| Additional paid-in capital                                                                                                                                                                      |       | 299,811                |       | 297,222               |       |
| Accumulated deficit                                                                                                                                                                             |       | (52,682                | )          | (35,162               | )          |
| Total stockholders’ equity                                                                                                                                                                 |       | 247,226                |       | 262,156               |       |
| **TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                                                                                            |       | $                      | 328,329    |                  | $          | 379,748 |   |

 

The accompanying notes are an integral part of thesecondensed consolidated financial statements.

 

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**BROADWINDENERGY, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

**(Inthousands, except per share data)**

 
| ** **                                                         | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                         | ** ** | **2009**                                  | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                         | ** ** | ** **                                | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                           |       | $                                         | 59,507     |                                     | $          | 63,688 |   | $ | 164,882 |   | $ | 139,682 |   |
| Cost  of sales                                                     |       | 52,925                                    |       | 54,706                                   |       | 150,464 |   | 112,599 |   |
| Gross  profit                                                      |       | 6,582                                     |       | 8,982                                    |       | 14,418 |   | 27,083 |   |
|                                                               |       |                                      |       |                                     |       |   |   |   |   |
| **OPERATING EXPENSES:**                                            |       |                                      |       |                                     |       |   |   |   |   |
| Selling,  general and administrative                               |       | 8,247                                     |       | 12,110                                   |       | 27,688 |   | 28,475 |   |
| Intangible  amortization                                           |       | 2,906                                     |       | 2,932                                    |       | 8,718 |   | 8,249 |   |
| Total  operating expenses                                          |       | 11,153                                    |       | 15,042                                   |       | 36,406 |   | 36,724 |   |
| Operating  loss                                                    |       | (4,571                                    | )          | (6,060                                   | )          | (21,988 | ) | (9,641 | ) |
|                                                               |       |                                      |       |                                     |       |   |   |   |   |
| **OTHER (EXPENSE) INCOME, net:**                                   |       |                                      |       |                                     |       |   |   |   |   |
| Interest  (expense) income, net                                    |       | (732                                      | )          | 90                                       |       | (1,831 | ) | (1,921 | ) |
| Other,  net                                                        |       | 243                                       |       | (319                                     | )          | 5,910 |   | 57 |   |
| Total  other (expense) income, net                                 |       | (489                                      | )          | (229                                     | )          | 4,079 |   | (1,864 | ) |
|                                                               |       |                                      |       |                                     |       |   |   |   |   |
| Net  loss before (benefit) provision for income taxes              |       | (5,060                                    | )          | (6,289                                   | )          | (17,909 | ) | (11,505 | ) |
| **(BENEFIT) PROVISION FOR INCOME TAXES**                           |       | (116                                      | )          | 1,210                                    |       | (389 | ) | 1,410 |   |
| **NET LOSS**                                                       |       | $                                         | (4,944     | )                                        | $          | (7,499 | ) | $ | (17,520 | ) | $ | (12,915 | ) |
|                                                               |       |                                      |       |                                     |       |   |   |   |   |
| **NET LOSS PER COMMON SHARE - Basic and diluted**                  |       | $                                         | (0.05      | )                                        | $          | (0.08 | ) | $ | (0.18 | ) | $ | (0.15 | ) |
|                                                               |       |                                      |       |                                     |       |   |   |   |   |
| **WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - Basic and diluted** |       | 96,609                                    |       | 96,470                                   |       | 96,550 |   | 87,692 |   |

 

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

 

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**BROADWINDENERGY, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

**(Inthousands)**

 
| ** **                                                                                         | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                         | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| ** **                                                                                         | ** ** | ** **                               | ** ** | ** ** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                                         |       |                                     |       |   |   |
| Net loss                                                                                           |       | $                                        | (17,520    | ) | $ | (12,915 | ) |
| **Adjustments to reconcile net loss  to net****cash provided by  (used in) operating activities:** |       |                                     |       |   |   |
| Depreciation and amortization expense                                                              |       | 20,131                                   |       | 15,706 |   |
| Change in fair value of interest rate swap  agreements                                             |       | (262                                     | )          | 16 |   |
| Deferred income taxes                                                                              |       | 83                                       |       | 1,134 |   |
| Stock-based compensation                                                                           |       | 1,491                                    |       | 988 |   |
| Allowance for doubtful accounts                                                                    |       | (1,032                                   | )          | (1,850 | ) |
| (Gain) loss on disposal of assets                                                                  |       | (78                                      | )          | 4 |   |
| Changes in operating assets and liabilities:                                                       |       |                                     |       |   |   |
| Accounts receivable                                                                                |       | 11,067                                   |       | (11,454 | ) |
| Inventories                                                                                        |       | 26,972                                   |       | (18,970 | ) |
| Prepaid expenses and other current assets                                                          |       | (140                                     | )          | (15,711 | ) |
| Accounts payable                                                                                   |       | (21,046                                  | )          | 19,709 |   |
| Accrued liabilities                                                                                |       | (4,116                                   | )          | 6,071 |   |
| Customer deposits                                                                                  |       | (11,070                                  | )          | 12,132 |   |
| Other non-current assets                                                                           |       | (1,627                                   | )          | (672 | ) |
| Net cash provided by (used in) operating activities                                                |       | 2,853                                    |       | (5,812 | ) |
|                                                                                               |       |                                     |       |   |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                                         |       |                                     |       |   |   |
| Cash paid for acquisitions, net of cash received                                                   |       | —                                   |       | (24,597 | ) |
| Purchases of property and equipment                                                                |       | (9,761                                   | )          | (49,613 | ) |
| Proceeds from disposals of property and equipment                                                  |       | 54                                       |       | — |   |
| Increase in restricted cash                                                                        |       | (2,003                                   | )          | (10,436 | ) |
| Net cash used in investing activities                                                              |       | (11,710                                  | )          | (84,646 | ) |
|                                                                                               |       |                                     |       |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                                         |       |                                     |       |   |   |
| Proceeds from issuance of stock                                                                    |       | 547                                      |       | 117,390 |   |
| Payments on lines of credit and notes payable                                                      |       | (8,312                                   | )          | (3,484 | ) |
| Payments on related party notes payable                                                            |       | —                                   |       | (1,365 | ) |
| Proceeds from lines of credit and notes payable                                                    |       | 5,033                                    |       | 6,840 |   |
| Proceeds from capital and sale-leaseback  transactions                                             |       | 3,686                                    |       | — |   |
| Proceeds from deposits on equipment                                                                |       | 665                                      |       | — |   |
| Principal payments on capital leases                                                               |       | (906                                     | )          | (453 | ) |
| Issuance of restricted stock grants                                                                |       | 551                                      |       | 140 |   |
| Net cash provided by financing activities                                                          |       | 1,264                                    |       | 119,068 |   |
|                                                                                               |       |                                     |       |   |   |
| **NET (DECREASE) INCREASE IN CASH  AND CASH EQUIVALENTS**                                          |       | (7,593                                   | )          | 28,610 |   |
| **CASH AND CASH EQUIVALENTS,  beginning of period**                                                |       | 15,253                                   |       | 5,782 |   |
| **CASH AND CASH EQUIVALENTS, end of  period**                                                      |       | $                                        | 7,660      |   | $ | 34,392 |   |
|                                                                                               |       |                                     |       |   |   |
| **Supplemental cash flow  information:**                                                           |       |                                     |       |   |   |
| Interest paid, net of capitalized interest                                                         |       | $                                        | 1,697      |   | $ | 2,812 |   |
| Income taxes paid                                                                                  |       | $                                        | 531        |   | $ | 33 |   |
| **Non-cash investing and financing  activities:**                                                  |       |                                     |       |   |   |
| Common stock issued for acquisitions                                                               |       | $                                        | —     |   | $ | 19,821 |   |
| Non-cash purchase accounting allocation changes                                                    |       | $                                        | 3,030      |   | $ | 2,758 |   |

 

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

 

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**BROADWIND ENERGY, INC. ANDSUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

**(In thousands, except share andper share data)**

 

**NOTE 1 —DESCRIPTION OF THE COMPANY**

 

As used in thisQuarterly Report on Form 10-Q, the terms “we,” “us,” “our,” “Broadwind,”and the “Company” refer to Broadwind Energy, Inc., a Delaware incorporatedcompany headquartered in Naperville, Illinois, and its wholly-ownedsubsidiaries.

 

**Business Overview**

 

We are an independent, horizontally integratedsupplier of customized products and services to the U.S. wind industry. Ourproduct and service portfolio provides our customers, including wind turbinemanufacturers, wind farm developers and wind farm operators, with access to abroad array of wind component and service offerings. We are a manufacturer ofgearing systems and wind tower for the wind industry. We also provide technicalservice and precision repair and engineering and specialized logistics to thewind industry in the United States.

 

Our businesses are currently organized in twooperating segments, Products and Services.

 

***Products***

 

We manufacture high precision gearing systems andstructural towers for wind turbines. We also manufacture custom-engineeredgearing systems, and fabrications and weldments for the mining, energy andother industrial sectors.

 

*Wind Turbine Gearing Systems*

 

We manufacture precision gearing systems for the windindustry in North America, with plants in Illinois and Pennsylvania. We use anintegrated manufacturing process, which includes our machining process inCicero, Illinois, our heat treatment process in Neville Island, Pennsylvaniaand our finishing process in our Cicero factory.

 

*Wind Turbine Structural Towers*

 

We manufacture wind towers, specifically the large andheavier wind towers that are designed for 2 megawatts (“MW”) and larger windturbines. Our production facilities are strategically located in closeproximity to the primary U.S. wind resource regions, sited in Wisconsin andTexas, with a third wind tower manufacturing facility currently underconstruction in Brandon, South Dakota.

 

*Industrial Products*

 

We manufacture products for industrial marketsincluding mining and oilfield equipment and cranes. Our industrial productsinclude gearing, gear drives and custom weldments. These products are producedin Illinois and Wisconsin and serve to diversify our customer and productportfolio and balance our plant loadings.

 

***Services***

 

We offer a variety of services to our customers,including technical services, precision repair and engineering and logistics.Our service locations are in Illinois, California, South Dakota, Texas andColorado.

 

*Technical Services*

 

We are an independent service provider of constructionsupport and operations and maintenance services to the wind industry. Ourspecialty services include oil change-out, up-tower tooling for gearingsystems, drive-train and blade repairs and component replacement. Our constructionsupport capabilities include assembly of towers, nacelles, blades and othercomponents. We also provide customer support, preventive maintenance and windtechnician training. Our technicians utilize our regional service centers forstorage and repair of parts as well as our training offerings.

 

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*Precision Repair &Engineering Services*

 

Through our precision repair and engineering services,we repair and refurbish complex wind components, including control systems,gearboxes and blades. We also conduct warranty inspections, commission turbinesand provide technical assistance. Additionally, we build replacement controlpanels for kilowatts (“kW”) class wind turbines and repair both kW and MWblades.

 

*Logistics*

 

We offer specialized transportation, permitting andlogistics management to the wind industry for oversize and overweight machineryand equipment. We deliver complete turbines to the installation site, includingblades, nacelles and tower sections for final erection. We focus on the projectmanagement of the delivery of complete wind turbine farms.

 

**Financing and Liquidity**

 

We have a limitedhistory of operations and have incurred operating losses since inception. TheCompany has amended several of its primary debt agreements during 2009, whichhave resulted in reducing debt obligations coming due during the current yearand obtained waivers for financial covenant violations.  While we expect that we will be in compliancewith the amended and restated covenants contained in the loan agreements, therecan be no certainty that we will be in compliance with such covenants for anyfuture periods or that we will be able to attain a waiver from our lenders inthe event of a violation of one or more such covenants.  As a result, among other things, our debtholders could declare all outstanding principal and interest to be due andpayable.  In addition, if sales andsubsequent collections from several large customers, as well as revenuesgenerated from new customer orders, are not materially consistent withmanagement’s plans, we may encounter cash flow and liquidity issues. Additionalfunding may not be available when needed or on terms acceptable to us and wemay not be able to obtain financing under our current primary debt agreements.If we are unable to obtain additional capital or if our current sources offinancing are reduced or unavailable, we will likely be required to delay,reduce the scope of or eliminate our plans for expansion and growth and thiscould affect our overall operations. On October 30, 2009, the Company filed aregistration statement with the Securities and Exchange Commission (the “SEC”)related to a proposed public equity offering of 15,000,000 shares of theCompany’s common stock, of which the Company proposes to sell 10,000,000 sharesand Tontine Capital Partners, L.P., and its affiliated funds propose to sell5,000,000 shares. Any additional equity financing, if available, may bedilutive to stockholders, and additional debt financing, if available, willlikely require covenants that restrict us and certain of such covenants maymaterially restrict us.

 

**NOTE 2 —BASIS OF PRESENTATION**

 

Theaccompanying unaudited condensed consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States (“GAAP”) for interim financial information and in accordance withthe instructions to Form 10-Q and Article 10 of Regulation S-X.Accordingly, the financial statements do not include all of the information andnotes required by GAAP for complete financial statements. In the opinion ofmanagement, all adjustments, including normal recurring accruals, considerednecessary for a fair presentation have been included. Operating results for thethree and nine months ended September 30, 2009 are not necessarilyindicative of the results that may be expected for the year ending December 31,2009. The December 31, 2008 condensed consolidated balance sheets werederived from audited financial statements, but do not include all disclosuresrequired by GAAP. This financial information should be read in conjunction withthe consolidated financial statements and notes included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2008.

 

The unauditedcondensed consolidated financial statements presented herein include theaccounts of Broadwind Energy, Inc. and its wholly-owned subsidiaries. Allintercompany transactions and balances have been eliminated. The results ofoperations of all acquired businesses have been consolidated for all periodssubsequent to the date of acquisition. Additionally, certain reclassificationshave been made to prior period financial statements to conform to the currentperiod presentation.

 

**NOTE 3—INVENTORIES**

 

Inventories arestated at the lower of cost or market value and primarily consist of rawmaterial, work-in-process, and finished goods. Work-in-process consists oflabor and overhead, processing costs and materials purchased for specificcustomer orders. Finished goods consist of components manufactured by theCompany that will be used to produce final customer products. The components ofinventories as of September 30, 2009 and December 31, 2008 aresummarized as follows:

 

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| ** **                                       | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2009**               |       | **2008**              |       |
|                                             |       |                   |       |                  |       |
| Raw  materials                                   |       | $                      | 5,205      |                  | $          | 16,429 |   |
| Restricted  material (1)                         |       | 2,293                  |       | 9,936                 |       |
| Work-in-process                                  |       | 5,216                  |       | 16,226                |       |
| Finished  goods                                  |       | 3,707                  |       | 401                   |       |
|                                             |       | 16,421                 |       | 42,992                |       |
| Less:  Reserve for excess and obsolete inventory |       | (1,498                 | )          | (1,097                | )          |
| Net  inventories                                 |       | $                      | 14,923     |                  | $          | 41,895 |   |

 

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(1) In December 2008, Tower Tech entered into an agreementpursuant to which it agreed to convey to a customer ownership of certain rawmaterials (the “Bailment Materials”) that Tower Tech had acquired for use inconstructing wind turbine towers for such customer, in exchange for the releaseof a down payment of $9,936 paid by the customer pursuant to the terms of apurchase order. In connection with the transaction, the customer caused therelease/cancellation of a letter of credit securing the down-payment (the “L/C”)in order for the cash being held by the L/C issuer as security for the L/C tobe released to Tower Tech. The customer also granted Tower Tech a securityinterest in a portion of the Bailment Materials in the event the purchase orderis not fully performed by the customer for any reason other than the breach ordefault of Tower Tech. Tower Tech issued a new performance letter of credit inthe amount of $500 as a guarantee of complete performance by Tower Tech of its obligationsunder the purchase order. The Bailment Materials continue to be held by TowerTech as a bailment for the sole and exclusive benefit and use of the customer,and are intended to be used by Tower Tech for construction of the wind turbinetowers for such customer under the purchase order. As a result of thistransaction, $9,436 was released from restricted cash and made available forother operating purposes. Based upon current production volumes, the remainingBailment Materials are scheduled to be used in the construction of wind turbinetowers during November 2009.

 

**NOTE 4 —BUSINESS ACQUISITIONS**

 

*EnergyMaintenance Service, LLC*

 

On January 16,2008, the Company acquired all of the outstanding membership interests in EMS,a South Dakota-based company engaged in construction, operations andmaintenance, and component repair services for the wind energy industry. Theaggregate purchase price was $32,250, excluding $536 of transaction-relatedcosts. The purchase price consisted of $18,429 of cash and 1,629,834unregistered shares of the Company’s common stock at a price per share of$8.48. The Company entered into a registration rights agreement with the formerowners of EMS that provides the former owners with demand and piggybackregistration rights. The cash portion of the purchase price was financed by aprivate placement of the Company’s common stock.

 

*BadgerTransport, Inc.*

 

On June 4, 2008, theCompany acquired all of the outstanding shares of Badger, a Wisconsin-basedprovider of transportation services for oversize/overweight equipment andmachinery, primarily to the wind energy industry, for an aggregate purchaseprice of $11,811, excluding $184 of transaction-related costs. The purchaseprice consisted of $5,811 of cash and 581,959 unregistered shares of theCompany’s common stock at a price per share of $10.31. The Company entered intoa registration rights agreement with the former owner of Badger that providesthe former owner with limited piggyback registration rights. The cash portionof the purchase price was financed with cash on hand.

 

*ProForma Financial Information*

 

The following tablerepresents selected consolidated financial information for the Company on apro-forma basis, assuming the acquisitions of EMS and Badger had each occurredas of January 1, 2008. The historical financial information for EMS andBadger has been adjusted to give effect to pro-forma items that are directlyattributable to the acquisitions and expected to have a continuing impact onthe consolidated results. These items include adjustments to depreciationexpense related to the fair value of machinery and equipment acquired andamortization expense related to intangible assets assigned as a result of theseacquisitions.

 

The table sets forthunaudited financial information and has been compiled from historical financialstatements and other information, but is not necessarily indicative of theresults that actually would have been achieved had the transactions occurred onthe dates indicated or of the results that may be achieved in the future.

 

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| ** **         | ** ** | **Nine Months Ended September 30,** |        |
|--------------------|------------|------------------------------------------|-------------|
| ** **         | ** ** | **2009**                                 | ** **  | **2008** |   |
| ** **         | ** ** | **As  reported**                         | ** **  | **As  reported** | ** ** | **Pro-forma  adjustments  (Unaudited)** |   | **Pro-forma  (Unaudited)** |   |
|               |       |                                     |        |   |   |   |   |   |   |
| Revenues           |       | $                                        | 164,882     |   | $ | 139,682 |   | $ | 5,710 | (1) | $ | 145,392 |   |
| Net  loss          |       | (17,520                                  | )           | (12,915 | ) | (1,826 | )(2) | (14,741 | ) |
| Loss  per share    |       |                                     |        |   |   |   |   |   |   |
| Basic  and diluted |       | $                                        |  (0.18 | ) | $ |  (0.15 | ) | $ |  (0.02 | ) | $ |  (0.17 | ) |

 

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(1)      Represents revenues of EMS for the periodof January 1, 2008 through January 15, 2008 and revenues of Badgerfor the period of January 1, 2008 through June 3, 2008.

(2)      Represents net loss of EMS for the periodof January 1, 2008 through January 15, 2008 and net loss of Badgerfor the period of January 1, 2008 through June 3, 2008. Adjustmentsto net loss include depreciation expense adjustments related to the fair valueof machinery and equipment acquired and amortization of assigned intangibleassets.

 

**NOTE 5 —GOODWILL AND INTANGIBLE ASSETS**

 

Changesin the carrying value of goodwill as of and during the nine months ended September 30,2009 were as follows:

 
| ** **                                         | ** ** | **Products   segment** | ** ** | **Services  segment** | ** ** | **Total**   | ** ** |
|----------------------------------------------------|------------|------------------------|------------|-----------------------|------------|-------------|------------|
| ** **                                         | ** ** | ** **             | ** ** | ** **            | ** ** | ** **  | ** ** |
| **Goodwill balance as of December 31, 2008**  |       | $                      | 21,239     |                  | $          |  9,715 |       | $ | 30,954 |   |
| Purchase  accounting adjustments                   |       | 3,030                  |       | —                |       | 3,030       |       |
| **Goodwill balance as of September 30, 2009** |       | $                      | 24,269     |                  | $          |  9,715 |       | $ | 33,984 |   |

 

In May 2009,the Company recorded purchase accounting adjustments of $3,030 in connectionwith an escrow settlement agreement with the former owners of Brad Foote, asmore fully described in Note 7, “Related Party Transactions.” These adjustmentsrelated to the final settlement of tax obligations as part of the purchaseprice of the Company’s acquisition of Brad Foote.

 

Intangible assetsrepresent the fair value assigned to definite-lived assets such as trade names,customer relationships and non-compete agreements as part of acquisitionscompleted by the Company. Intangible assets are amortized on a straight-linebasis over their estimated useful lives, which range from 3 to 20 years.The Company performs its impairment test of goodwill as of October 31 ofeach year and tests intangible assets for impairment only when events orcircumstances indicate that the carrying value of these assets may not berecovered. During the three and nine months ended September 30, 2009 and2008, the Company did not record an impairment charge related to its intangibleassets.

 

A continued economic slowdown may result in impairmentto our goodwill and intangible assets and could result in changes to theCompany’s expectations with respect to future financial results and cash flows.These changes could indicate an unfavorable change in management’s estimates ofthe fair value of the Company’s reportable segments and could result in areview of our goodwill and intangible assets, which could indicate potentialimpairment to the carrying value of the Company’s assets.

 

As of September 30, 2009 and December 31,2008, the cost basis, accumulated amortization and net book value of intangibleassets were as follows:

 

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| ** **              | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|-------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **              | ** ** | ** **                  | ** ** | ** **                 | ** ** | **Net** | ** ** | ** ** | ** ** | ** ** | ** ** | **Net** | ** ** |
| ** **              | ** ** | ** **                  | ** ** | **Accumulated**            | ** ** | **Book** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | **Book** | ** ** |
| ** **              | ** ** | **Cost**                    | ** ** | **Amortization**           | ** ** | **Value** | ** ** | **Cost** | ** ** | **Amortization** | ** ** | **Value** | ** ** |
| Intangible  assets:     |       |                        |       |                       |       |   |   |   |   |   |   |   |   |
| Customer  relationships |       | $                           | 106,638    |                       | $          |  (19,899 | ) | $ |  86,739 |   | $ |  106,638 |   | $ |  (11,939 | ) | $ |  94,699 |   |
| Trade  names            |       | 10,279                      |       | (971                       | )          | 9,308 |   | 10,279 |   | (585 | ) | 9,694 |   |
| Non-compete  agreements |       | 1,490                       |       | (662                       | )          | 828 |   | 1,490 |   | (290 | ) | 1,200 |   |
| Intangible  assets      |       | $                           | 118,407    |                       | $          |  (21,532 | ) | $ |  96,875 |   | $ |  118,407 |   | $ |  (12,814 | ) | $ |  105,593 |   |

 

Amortization expense oncustomer relationships, trade names and non-compete agreements, which are beingamortized ratably over the estimated life of the related intangible assets, was$2,906 and $8,718 for the three and nine months ended September 30, 2009,respectively, compared to $2,932 and $8,249 for the three and nine months endedSeptember 30, 2008, respectively.

 

**NOTE 6 —ACCRUED LIABILITIES**

 

Accruedliabilities as of September 30, 2009 and December 31, 2008 consistedof the following:

 
| ** **                      | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2009**               | ** ** | **2008**              | ** ** |
|                            |       |                   |       |                  |       |
| Accrued  operating expenditures |       | $                      | 183        |                  | $          | 1,110 |   |
| Accrued  payroll and benefits   |       | 3,406                  |       | 3,631                 |       |
| Accrued  capital expenditures   |       | —                 |       | 2,204                 |       |
| Accrued  warranty liability     |       | 1,477                  |       | 890                   |       |
| Accrued  professional fees      |       | 601                    |       | 514                   |       |
| Accrued  other                  |       | 1,686                  |       | 2,037                 |       |
| Total  accrued liabilities      |       | $                      | 7,353      |                  | $          | 10,386 |   |

 

**NOTE 7 —RELATED PARTY TRANSACTIONS**

 

On May 26, 2009, theCompany entered into a settlement agreement (the “Settlement Agreement”) withthe former owners of Brad Foote (the “Selling Shareholders”), including J.Cameron Drecoll, the Company’s Chief Executive Officer and a member of theCompany’s board of directors, related to the post-closing escrow established inconnection with the Company’s acquisition of Brad Foote. Under the terms of theSettlement Agreement, the Company received the entire cash escrow balance of$5,000 plus accrued interest income of $82, which was recorded as other income.In exchange, the Company agreed to cause the release to the SellingShareholders of 2,500,000 shares of the Company’s common stock held under theescrow agreement in proportion to their ownership interest in Brad Foote priorto its acquisition by the Company. In addition, we agreed to make a cashpayment of $30 to one Selling Shareholder and issued promissory notes to thethree Selling Shareholders in the aggregate principal amount of $3,000 (each a “SellingShareholder Note”, and collectively the “Selling Shareholder Notes”). The cashpayment and promissory notes were recorded as an increase to the purchase pricethrough goodwill as these amounts were calculated in accordance with thepurchase agreement. The Company also paid to Mr. Drecoll certain taxrefunds in the aggregate amount of approximately $2,212 related to ouracquisition of Brad Foote and tax payments in respect of the period prior tothe acquisition to which we believe the Selling Shareholders may be entitled(or to which we may be entitled on their behalf). The Selling Shareholder Notesmature on May 28, 2012 and bear interest at a rate of 7% per annum, withinterest payments due quarterly. The Selling Shareholder Note issued to Mr. Drecollin the principal amount of $2,320 and pursuant to the terms of the SettlementAgreement is deemed by the Company to be a related party transaction. As of September 30,2009, principal of $3,000 and accrued interest of $53 was outstanding under theSelling Shareholder Notes. The Company has accounted for the SellingShareholder Notes as long-term debt in our condensed consolidated balancesheets as of September 30, 2009.

 

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**NOTE 8 —DEBT AND CREDIT AGREEMENTS**

 

TheCompany’s outstanding debt balances as of September 30, 2009 and December 31,2008 consisted of the following:

 
| ** **                                 | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2009**               | ** ** | **2008**              | ** ** |
|                                       |       |                   |       |                  |       |
| Lines  of credit                           |       | $                      | 6,040      |                  | $          | 10,831 |   |
| Related  party note                        |       | 2,320                  |       | —                |       |
| Term  loans and notes payable              |       | 29,306                 |       | 28,012                |       |
|                                       |       | 37,666                 |       | 38,843                |       |
| Less  - Current portion                    |       | (19,540                | )          | (13,051               | )          |
| Long-term  debt, net of current maturities |       | $                      | 18,126     |                  | $          | 25,792 |   |

 

**CreditFacilities**

 

***Brad Foote***

 

Inconnection with our acquisition of Brad Foote in October 2007, we assumedoutstanding debt and available lines of credit totaling approximately $25,500under various debt facilities (the “Debt Facilities”) with Bank of America, assuccessor to LaSalle Bank (“BOA”). The Debt Facilities are governed by a Loanand Security Agreement dated as of January 17, 1997 (as previously amendedand/or restated, the “Loan Agreement”). Each of the Debt Facilities becomes immediately due and payable uponbreach of any covenants or representations made by Brad Foote in the LoanAgreement and upon other customary events of default.

 

BradFoote’s obligations under the Loan Agreement are secured by the following: (i) allof the assets of Brad Foote; (ii) all of the shares of stock of Brad Footeand all of Brad Foote’s indebtedness to us; (iii) an unconditionalguaranty from us and from the BF Subsidiaries (hereinafter defined); and (iv) mortgagesfrom the BF Subsidiaries and Brad Foote to BOA (“BF Subsidiaries” means thefollowing wholly-owned subsidiaries of Brad Foote that hold record title tocertain facilities used in Brad Foote’s operations: 1309 South Cicero Avenue,LLC, a Delaware limited liability company; and 5100 Neville Road, LLC, aDelaware limited liability company).

 

TheLoan Agreement requires Brad Foote to comply with standard covenants, includingcertain financial covenants, to provide monthly financial reporting and tosubmit the Company’s annual audited financial statements to BOA at the close ofeach fiscal year.  Other covenantscontained in the Loan Agreement include restrictions on Brad Foote’s ability tomake distributions or pay dividends, incur indebtedness or make subordinateddebt payments, as well as limitations on Brad Foote’s ability to make capitalexpenditures, any of which could ultimately affect our ability to undertakeadditional debt or equity financing. Certain of these covenants (as well ascertain other terms and conditions of the Debt Facilities) have been amendedand/or restated from time to time pursuant to various amendments to the LoanAgreement.  In addition, BOA has waivedviolations of certain covenants in certain instances.

 

OnMarch 13, 2009 and May 8, 2009, the Loan Agreement was amended as aresult of violations of certain covenants that occurred during the fourthquarter of 2008 and the first quarter of 2009, respectively.  Among other provisions, these amendmentsprovided for the waiver by BOA of such violations, the amendment and/orrestatement of certain financial covenants, and the modification of certainother terms and conditions of the Debt Facilities.

 

OnAugust 7, 2009, Brad Foote, the BF Subsidiaries and BOA entered into aThird Omnibus Amendment Agreement (the “Third Omnibus Amendment”), furtheramending the Loan Agreement and the documents evidencing the DebtFacilities.  The Third Omnibus Amendmentprovided that (i) BOA waive Brad Foote’s violation of the financialcovenants set forth in the Loan Agreement (i.e., the senior debt to EBITDA andminimum EBITDA covenants) for the second quarter of 2009 and the calendar monthof June 2009, respectively, (ii) the requirements with respect to maintenanceof ratios for the remainder of 2009 relating to senior debt to EBITDA, cashflow coverage, a minimum monthly revenue requirement, and starting in 2010 aminimum monthly EBITDA requirement, be amended and restated, (iii) BOAwaive certain breaches or events of default under the Loan Agreement relatingto Brad Foote’s inventory record keeping, the reporting of liens filed againstcertain of Brad Foote’s property (which have subsequently been released by thelien holders), and the delivery of certain Brad Foote financial information, (iv) certainprovisions pertaining to insurance, ownership of collateral and tax returns beamended to clarify the language therein, (v) Brad Foote pay BOA a $35amendment and waiver fee, as well as all accrued and unpaid fees and expensesunder the Loan Agreement and all reasonable fees and expenses of BOA incurredin connection with the Third Omnibus Amendment, (vi) the interest ratepayable under each of the Debt Facilities shall be equal to the greater of (A) theLondon Interbank Offered Rate (“LIBOR”) plus five percent (5%) and (B) sevenpercent (7%), and (vii) Brad Foote may borrow funds from the Company on arevolving basis, up to a maximum principal amount of

 

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$3,000,which shall be subordinated to indebtedness owed by Brad Foote to BOA and whichshall not be subject to certain restrictions imposed on reporting and paymentof otherwise previously existing intercompany debt between Brad Foote and theCompany.  As of September 30, 2009,Brad Foote had borrowed $1,932 from the Company. Additionally, the Company andthe BF Subsidiaries executed a Reaffirmation dated August 7, 2009,reaffirming that each of the Loan Documents (as defined in the Loan Agreement)to which they are a party remains in full force and effect and is ratified andconfirmed.

 

Asof September 30, 2009, the total amount outstanding under the DebtFacilities was $17,797 and required principal payments of $7,364 were due underthe Debt Facilities over the following twelve (12) months, with additionalprincipal payments due thereafter.  Theinterest rate under each of the Debt Facilities is the greater of (A) LIBORplus 5% and (B) 7%, and the maturity dates for the Debt Facilities rangefrom January 15, 2011 to December 31, 2011.  Brad Foote was in compliance with all of itsfinancial covenants under the Loan Agreement and had no availability forborrowings as of September 30, 2009.

 

***Tower Tech***

 

*ICB Line*

 

In October 2007, Tower Tech obtained from Investors Community Bank(“ICB”) a secured line of credit (the “ICB Line”) in the amount of $2,500,which was increased to $5,500 on March 21, 2008. The ICB Line is secured bysubstantially all of the assets of Tower Tech and RBA. Borrowings on the ICBLine bear interest at a variable rate equal to the greater of (A) 4.25% or(B) 1.75% above LIBOR. Pursuant to a Commercial Debt ModificationAgreement dated as of October 22, 2008, the maturity date of the ICB Linewas extended to April 22, 2009. In connection with the extension, theCompany provided re-executed guaranties to ICB for all debt owed to ICB by eachof Tower Tech and RBA. In addition, Tower Tech re-executed its guaranty fordebts owed to ICB by RBA and RBA re-executed its guaranty for debts owed to ICBby Tower Tech. On March 13, 2009, the maturity date of the ICB Line wasextended to March 13, 2010 (the “ICB Line Extension Agreement”).  Pursuant to the ICB Line Extension Agreement,Tower Tech agreed to establish new financial covenants with respect to minimumdebt service coverage ratio and minimum tangible net worth, and agreed tomaintain its primary deposit accounts with ICB and that no additional loans orleases shall be entered into by Tower Tech without the prior approval of ICB.As of September 30, 2009, Tower Tech had $1,160****availablefor additional borrowing under the ICB Line and was in compliance with all ofits financial covenants under the ICB Line.

 

*Great Western ConstructionLoan*

 

On April 28, 2009(the “Construction Loan Closing Date”), Tower Tech entered into a ConstructionLoan Agreement with Great Western Bank (“Great Western”), pursuant to whichGreat Western will provide up to $10,000 in financing (the “Construction Loan”)to fund construction of Tower Tech’s wind tower manufacturing facility inBrandon, South Dakota (the “Facility”). The Construction Loan bears interest ata rate of 7.5% per annum, requires monthly interest payments, and is scheduledto mature on January 5, 2010, unless the Construction Loan is converted asdescribed below. On the Construction Loan Closing Date, (i) Tower Tech wasrequired to pay a $100 origination fee, and (ii) Great Western agreed toadvance $3,703, representing amounts previously paid by Tower Tech relating toconstruction of the Facility. Tower Tech anticipates making additional draws asneeded until completion of the Facility.

 

The Construction Loan issecured by a first mortgage on the Facility and all fixtures, accounts andproceeds relating thereto, pursuant to a Mortgage and a Commercial SecurityAgreement, each between Tower Tech and Great Western and entered into on theConstruction Loan Closing Date. In addition, pursuant to an Assignment ofDeposit Account entered into on the Construction Loan Closing Date, Tower Techgranted Great Western a security interest in a $2,000 deposit account. TheCompany also executed a Commercial Guaranty and entered into a SubordinationAgreement in connection with the Construction Loan, under which it has agreedto guarantee Tower Tech’s performance and to subordinate all intercompany debtwith Tower Tech to the Construction Loan.

 

The Construction Loan maybe accelerated under certain events of default (subject to applicable noticeand cure provisions), including but not limited to: (i) failure to makeany payment on the Construction Loan when due; (ii) failure to comply withor perform any covenants or conditions under the Construction Loan; (iii) failureto construct the Facility in accordance with the plans and specificationsapproved by Great Western or in accordance with the construction contractsrelating to the Facility; and (iv) cessation of construction of theFacility. The Construction Loan contains representations, warranties andcovenants that are customary to a construction financing arrangement

 

Pursuant to a LetterAgreement dated as of the Construction Loan Closing Date among Great Western,Tower Tech and the Company (the “Letter Agreement”), Tower Tech may, any timeprior to January 1, 2010, convert the Construction Loan into a term loanfor up to $6,500, with an interest rate not to exceed 8.5% per annum (the “GreatWestern Term Loan”). Tower Tech would be required to pay a 1.0% origination feeon the outstanding loan balance upon the conversion, and would be required tomake monthly payments of principal and accrued interest over the life of theGreat Western Term Loan, which would be not less than seventy-eight months.Following the conversion to the Great Western Term Loan, Great Western wouldretain its security position in the collateral

 

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given as security for theConstruction Loan, except for the deposit account assigned pursuant to theAssignment of Deposit Account, which would be released upon conversion. Allother customary terms and conditions would be mutually agreed upon by GreatWestern and Tower Tech at the time of conversion. As of September 30,2009, Tower Tech had received proceeds of $3,808 under the Construction Loanand had the availability to borrow an additional $6,192.

 

***Badger***

 

On March 13, 2009, Badger obtained from First National Bank (“FNB”)a term loan (the “FNB Term Loan”) in the amount of $1,538. A portion of theproceeds from the FNB Term Loan was used to pay off Badger’s existing term loanand revolving line of credit with FNB, with the remainder available for workingcapital. The FNB Term Loan is secured by the inventory, accounts receivable andcertain equipment of Badger. The FNB Term Loan bears interest at a rate of6.75% per annum, matures on March 13, 2013, and is guaranteed by theCompany. As of September 30,2009, FNB Term Loan contained no financial covenants and the total amount ofoutstanding indebtedness under the FNB Term Loan was $1,367.

 

On September 30, 2009, Badger obtained from General ElectricCapital Corporation a term loan (the “GE Capital Term Loan”) in the principalamount of approximately $1,000. The GE Capital Term Loan bears interest at arate of 7.76% per annum, requires monthly payments of principal and interest,is secured by certain equipment of Badger and is scheduled to mature on September 30,2014. As of September 30,2009, the total amount of outstanding indebtedness under the GE Capital TermLoan was $990.

 

***RBA***

 

On April 7, 2008, RBA issued four promissory notes to ICB(the “ICB Notes”) in the aggregate principal amount of approximately $3,781, asfollows: (i) a term note in the maximum principal amount of approximately$421, bearing interest at a per annum rate of 6.85%, with a maturity date of October 5,2012; (ii) a term note in the maximum principal amount of $700, bearinginterest at a per annum rate of 5.65%, with a maturity date of April 25,2013; (iii) a term note in the maximum principal amount of $928, bearinginterest at a per annum rate of 5.65%, with a maturity date of April 25,2013; and (iv) a line of credit note in the maximum principal amount of $1,732,bearing interest at a per annum rate of 4.48% until May 1, 2008 andthereafter at LIBOR, with a maturity date of April 5, 2009 (the “Line ofCredit Note”). The ICB Notes provide for multiple advances, and are secured bysubstantially all of the assets of RBA.

 

On March 13, 2009, RBA and ICB extended the maturity date of theLine of Credit Note to March 13, 2010 (the “ICB Note Extension Agreement”).Pursuant to the ICB Note Extension Agreement, RBA established new financialcovenants with respect to minimum debt service coverage ratio and minimumtangible net worth (these covenants were subsequently modified by the partieson April 22, 2009, effective as of March 31, 2009). RBA also agreedto maintain its primary deposit accounts with ICB and that no additional loansor leases shall be entered into by RBA without the prior approval of ICB. As ofSeptember 30, 2009, (i) the total amount of indebtedness outstanding under theICB Notes was $3,386, (ii) RBA was in compliance with all of its financialcovenants with respect to the ICB Notes, and (iii) RBA had $32 available foradditional borrowing under the Line of Credit Note.

 

**SellingShareholder Notes**

 

As described in Note 7, “RelatedParty Transactions,” in May 2009 the Company entered into the Settlement Agreementwith the Selling Shareholders, including Mr. Drecoll, the Company’s ChiefExecutive Officer and a member of the Company’s board of directors, related tothe post-closing escrow established in connection with the Company’sacquisition of Brad Foote. Under the terms of the Settlement Agreement, amongother terms, the Company issued the three Selling Shareholder Notes in theaggregate principal amount of $3,000. The Selling Shareholder Notes mature on May 28,2012 and bear interest at a rate of 7% per annum, with interest payments duequarterly. The Selling Shareholder Note issued to Mr. Drecoll in theprincipal amount of $2,320 and pursuant to the terms of the SettlementAgreement is deemed by the Company to be a related party transaction. As of September 30,2009, principal of $3,000 and accrued interest of $53 were outstanding underthe Selling Shareholder Notes. The Company has accounted for the SellingShareholder Notes as long-term debt in our condensed consolidated balancesheets as of September 30, 2009.

 

**NOTE 9 —INTEREST RATE SWAP AGREEMENTS**

 

As part of ouracquisition of Brad Foote in October 2007, we assumed two interest rateswap agreements. These swap agreements are intended to minimize the impact ofinterest rate fluctuations on certain debt instruments. Interest rate swapagreements involve exchanges of fixed or floating rate interest paymentsperiodically over the life of the agreement without the exchange of theunderlying principal amounts. Derivatives are measured at fair value and recognizedas either assets or liabilities on the Company’s balance sheet. The accountingfor changes in the fair value of a derivative is dependent upon the use of thederivative and its resulting

 

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designation. Unlessspecific hedge accounting criteria are met, changes in the fair value of thederivative must be recognized currently in earnings. The Company’s interestrate swaps do not qualify for hedge accounting, and therefore, the Company isrequired to recognize the swap agreements at their fair market value and recordthe fluctuations in the fair value of the swap agreements in current earnings.During the three and nine months ended September 30, 2009, the Companyreported a gain related to these fluctuations of approximately $64 and $262,respectively, compared to a loss of approximately $27 and $16, respectively,for the three and nine months ended September 30, 2008. The fair marketvalue of the interest rate swaps of $320 and $582 is recorded as a long-termliability in our condensed consolidated balance sheets as of September 30,2009 and December 31, 2008, respectively.

 

The following tablepresents the fair values of derivative instruments included on our condensedconsolidated balance sheets as of September 30, 2009:

 
| ** **                                               | ** ** | **Liability Derivatives**   | ** ** |
|----------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                               | ** ** | **Balance Sheet  Location** | ** ** | **Fair Value** | ** ** |
| **Derivatives  not designated as hedging instruments**   |       |                        |       |   |   |
| Interest rate contracts                                  |       | Long-term liabilities  (1)  |       | $ | 320 |   |
| Total derivatives not  designated as hedging instruments |       |                        |       | $ | 320 |   |

 

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(1)   The Company’s interest rate contracts areclassified on a separate line item titled “Interest rate swap agreements” inthe long-term liabilities section on our condensed consolidated balance sheets.

 

The followingtable presents the pretax amounts of interest rate contracts affecting ourcondensed consolidated statements of operations for the three and nine monthsended September 30, 2009:

 
| ** **                | ** ** | ** **                     | ** ** | **Amount of Gain or (Loss)** |
|---------------------------|------------|--------------------------------|------------|------------------------------|
| ** **                | ** ** | ** **                     | ** ** | **Recognized in Income on**  |
| **Derivatives Not**       | ** ** | **Location of Gain or (Loss)** | ** ** | **Derivative**               |
| **Designated as Hedging** | ** ** | **Recognized in Income on**    | ** ** | **Three Months Ended**       | ** ** | **Nine Months Ended** | ** ** |
| **Instruments**           | ** ** | **Derivative**                 | ** ** | **September 30, 2009**  | ** ** | **September 30, 2009** | ** ** |
| Interest rate contracts   |       | Other income (expense)         |       | $                            | 64 |   | $ | 262 |   |
|                      |       |                           |       |                         |   |   |   |
| Total                     |       |                           |       | $                            | 64 |   | $ | 262 |   |

 

**NOTE 10— FAIR VALUE MEASUREMENTS**

 

The Companymeasures its financial assets and liabilities at fair value. Fair value isdefined as the price that would be received to sell an asset or paid totransfer a liability (i.e., exit price) in an orderly transaction betweenmarket participants at the measurement date. Additionally, the Company isrequired to provide disclosure and categorize assets and liabilities measuredat fair value into one of three different levels depending on the assumptions(i.e., inputs) used in the valuation. Level 1 provides the most reliablemeasure of fair value while Level 3 generally requires significantmanagement judgment. Financial assets and liabilities are classified in theirentirety based on the lowest level of input significant to the fair valuemeasurement. The fair value hierarchy is defined as follows:

 

Level 1—Valuationsare based on unadjusted quoted prices in active markets for identical assets orliabilities.

 

Level 2—Valuationsare based on quoted prices for similar assets or liabilities in active markets,or quoted prices in markets that are not active for which significant inputsare observable, either directly or indirectly.

 

Level 3—Valuationsare based on prices or valuation techniques that require inputs that are bothunobservable and significant to the overall fair value measurement. Inputsreflect management’s best estimate of what market participants would use invaluing the asset or liability at the measurement date.

 

The followingtable represents the fair values of the Company’s financial liabilities as of September 30,2009:

 

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| ** **                       | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|----------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-----------|------------|
| Liabilities:                     |       |        |       |        |       |        |       |      |       |
| Interest  rate swaps             |       | $           | —     |        | $          | 320         |       | $         | —     |   | $ | 320 |   |
| Total  liabilities at fair value |       | $           | —     |        | $          | 320         |       | $         | —     |   | $ | 320 |   |

 

See Note 9, “Interest Rate Swap Agreements” of thenotes to our unaudited condensed consolidated financial statements for adiscussion of the Level 2 interest rate swap agreements.

 

**Fair value of financial instruments**

 

The carrying amounts ofthe Company’s financial instruments, which include cash and cash equivalents,accounts receivable and accounts payable, approximate their respective fairvalues due to the relatively short-term nature of these instruments. Based uponinterest rates currently available to the Company for debt with similar terms,the carrying value of the Company’s long-term debt is approximately equal toits fair value.

 

**NOTE 11 — INCOME TAXES**

 

TheCompany accounts for income taxes based upon an asset and liability approach.Deferred tax assets and liabilities represent the future tax consequences ofthe differences between the financial statement carrying amounts of assets andliabilities versus the tax basis of assets and liabilities. Under this method,deferred tax assets are recognized for deductible temporary differences, andoperating loss and tax credit carryforwards. Deferred tax liabilities arerecognized for taxable temporary differences. Deferred tax assets are reducedby a valuation allowance when, in the opinion of management, it is more likelythan not that some portion or all of the deferred tax assets will not berealized. The impact of tax rate changes on deferred tax assets and liabilitiesis recognized in the year that the change is enacted.

 

TheCompany recognizes interest and penalties related to uncertain tax positions inincome tax expense. As of September 30, 2009, the Company had accruedinterest or penalties related to uncertain tax positions totaling $67.

 

TheCompany files income tax returns in U.S. federal and state jurisdictions. As ofSeptember 30, 2009, open tax years in federal and some state jurisdictionsdate back to 1996 due to the taxing authorities’ ability to adjust operatingloss carryforwards. No changes in settled tax years have occurred through September 30,2009. The Company does not anticipate there will be a material change in thetotal amount of unrecognized tax benefits within the next 12 months.

 
| ** **                                        | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|---------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                        | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                        | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                              |       |                   |       |                   |       |   |   |   |   |
| Loss  before (benefit) provision for income taxes |       | $                      | (5,060     | )                      | $          | (6,289 | ) | $ | (17,909 | ) | $ | (11,505 | ) |
| (Benefit)  provision for income taxes             |       | (116                   | )          | 1,210                  |       | (389 | ) | 1,410 |   |
| Net  loss                                         |       | $                      | (4,944     | )                      | $          | (7,499 | ) | $ | (17,520 | ) | $ | (12,915 | ) |

 

Effectivetax rates differ from federal statutory income tax rates primarily due tochanges in valuation allowance, permanent differences and provisions for stateand local income taxes. As of September 30, 2009, the Company had a netdeferred tax liability of $1,580 primarily related to temporary differences inindefinite-lived assets. These indefinite-lived assets consist of taxdeductible goodwill from business acquisitions completed during 2007 and 2008.During the three and nine months ended September 30, 2009, the Companyrecorded a benefit for income taxes of $116 and $389, respectively, compared toa provision for income taxes for the three and nine months ended September 30,2008 of $1,210 and $1,410, respectively. The decrease in income taxes wasprimarily attributable to higher net losses during the nine months ended September 30,2009, a full income tax valuation allowance for federal income tax reportingpurposes as a result of the Company’s net operating loss carryforwards, and adecrease in state income taxes and deferred state income tax liabilitiesresulting from a favorable change in the state of Wisconsin’s method ofcalculating state income taxes on a prospective basis.

 

**NOTE12 — SHARE-BASED COMPENSATION**

 

The Company grantsincentive stock options and other equity awards pursuant to the BroadwindEnergy, Inc. 2007 Equity Incentive Plan (the “EIP”), which was approved bythe Company’s Board of Directors in October 2007 and by the Company’s

 

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stockholders in June 2008.The EIP was subsequently amended in August 2008 by the Company’s Board ofDirectors to include certain non-material amendments to clarify the terms andconditions of restricted stock awards and to provide that the administrator ofthe EIP has the authority to authorize future amendments to the EIP. The EIPwas further amended by the Company’s stockholders in June 2009 to increasethe number of shares of common stock authorized for issuance under the EIP. Asamended, the EIP reserves 5,500,000 shares of our common stock for grants toofficers, directors, employees, consultants and advisors upon whose efforts thesuccess of the Company and its affiliates will depend to a large degree. As of September 30,2009, the Company had reserved 1,553,193 shares for the exercise of stockoptions outstanding, 324,552 shares for restricted stock unit awardsoutstanding and 3,470,888 additional shares for future stock awards under theEIP. As of September 30, 2009, 151,367 shares of common stock reserved forstock options and restricted stock unit awards under the EIP have been issuedin the form of common stock.

 

*StockOptions.* Theexercise price of stock options granted under the EIP is equal to the closingprice of our common stock on the date of grant. Stock options generally becomeexercisable on the anniversary of the grant date, with vesting terms that mayrange from one to five years from the date of grant. Additionally, stockoptions expire ten years after the date of grant. If a plan participant’semployment is terminated during the vesting period, he or she forfeits theright to unvested stock option awards.

 

Stock optionactivity during the nine months ended September 30, 2009 was as follows:

 
| ** **                                 | ** ** | **Options** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|--------------------------------------------|------------|-------------|------------|--------------------------------------|------------|
| Outstanding  as of December 31, 2008  |       | 2,030,000   |       | $                                    | 11.60      |   |
| Granted                                    |       | 194,193     |       | 7.58                                 |       |
| Exercised                                  |       | (67,500     | )          | 8.10                                 |       |
| Forfeited                                  |       | (588,167    | )          | 10.03                                |       |
| Cancelled                                  |       | (15,333     | )          | 9.32                                 |       |
| Outstanding  as of September 30, 2009 |       | 1,553,193   |       | $                                    | 11.87      |   |
|                                       |       |        |       |                                 |       |
| Exercisable  as of September 30, 2009 |       | 283,600     |       | $                                    | 11.91      |   |

 

*RestrictedStock.* Thegranting of restricted stock units is provided for under the EIP. Restrictedstock units generally vest on the anniversary of the grant date; with vestingterms that range from immediate vesting to five years from the date of grant.The fair value of each unit granted is equal to the closing price of our commonstock on the date of grant and is expensed ratably over the vesting term of therestricted stock award. If a plan participant’s employment is terminated duringthe vesting period, he or she forfeits the right to any unvested portion of therestricted stock units.

 

Activity relatedto restricted stock unit awards during the nine months ended September 30,2009 was as follows:

 
| ** **                                 | ** ** | **Number of Units** | ** ** | **Weighted Average  Grant-Date Fair Value   Per Unit** | ** ** |
|--------------------------------------------|------------|---------------------|------------|--------------------------------------------------------|------------|
| Outstanding  as of December 31, 2008  |       | 127,500             |       | $                                                      | 10.71      |   |
| Granted                                    |       | 275,919             |       | 6.85                                                   |       |
| Vested                                     |       | (76,367             | )          | 3.31                                                   |       |
| Forfeited                                  |       | (2,500              | )          | 3.10                                                   |       |
| Outstanding  as of September 30, 2009 |       | 324,552             |       | $                                                      | 9.10       |   |

 

The fair value ofeach stock option award is estimated on the date of grant using theBlack-Scholes option pricing model. Our determination of the fair value of eachstock option is affected by our stock price on the date of grant, as well asassumptions regarding a number of highly complex and subjective variables.These variables include, but are not limited to, our expected stock pricevolatility over the expected life of the awards and projected stock optionexercise behavior. The weighted average fair value per share of stock optionawards granted during the nine months ended September 30, 2009 and 2008,and assumptions used to value stock options, are as follows:

 

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| ** **                                                           | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                           | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| Dividend  yield                                                      |       | —                                   |       | — |   |
| Risk-free  interest rate                                             |       | 2.6                                      | %          | 3.1 | % |
| Weighted  average volatility                                         |       | 85.0                                     | %          | 64.9 | % |
| Expected  life (in years)                                            |       | 6.5                                      |       | 6.5 |   |
| Weighted  average grant date fair value per share of options granted |       | $                                        | 5.58       |   | $ | 9.88 |   |
|                                                                      |            |                                          |            |  |  |  |  |

 

Dividend yield iszero as the Company currently does not pay a dividend.

 

Risk-free interestrate is based on the implied yield currently available on U.S. Treasury zerocoupon issues with a remaining term equal to the expected life of the award.

 

Volatility isestimated based on comparable volatility averages for the energy related sectorat the time of grant.

 

The expected lifeof each stock option award granted during the nine months ended September 30,2009 was derived using the simplified method for estimating the expectedterm.  The expected life of each stockoption award granted during the nine months ended September 30, 2008 wasestimated based on the service period of the stock option award.

 

The fair value ofeach unit of restricted stock is equal to the fair market value per share ofour common stock on the date of grant.

 

The following tablesummarizes share-based compensation expense included in our condensedconsolidated statements of operations for the nine months ended September 30,2009 and 2008:

 
| ** **                                                  | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                  | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| **Share-based compensation expense:**                       |       |                                     |       |   |   |
| Selling,  general and administrative                        |       | $                                        | 2,042      |   | $ | 1,128 |   |
| Income  tax benefit (1)                                     |       | —                                   |       | — |   |
| Net  effect of share-based compensation expense on net loss |       | $                                        | 2,042      |   | $ | 1,128 |   |
|                                                        |       |                                     |       |   |   |
| **Reduction in earnings per share:**                        |       |                                     |       |   |   |
| Basic  and diluted earnings per share (2)                   |       | $                                        | 0.02       |   | $ | 0.01 |   |

 

----

| (1)    | Income tax benefit is not illustrated because the  Company is currently operating at a loss and an actual income tax benefit may  not be realized for the nine months ended September 30, 2009 and 2008,  respectively. The result of the loss situation creates a timing difference,  resulting in a deferred tax asset, which is reserved for in the valuation  allowance. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                              |
| (2)    | Diluted earnings per  share for the nine months ended September 30, 2009 and 2008 does not  include common stock equivalents due to its anti-dilutive nature as a result  of the Company’s net losses for these respective periods. Accordingly, basic  earnings per share and diluted earnings per share are identical for all  periods presented.                     |

 

As of September 30,2009, we estimate that pre-tax compensation expense for all unvestedshare-based awards, including both stock options and restricted stock units, inthe amount of approximately $9,772 will be recognized in our results ofoperations through the year 2014. We expect that the exercising of stockoptions and future vesting of restricted stock units will be satisfied byissuing new shares of our common stock.

 

**NOTE13 — RECENT ACCOUNTING PRONOUNCEMENTS**

 

The FinancialAccounting Standards Board (“FASB”) implemented the FASB Accounting StandardsCodification (the “Codification”) effective July 1, 2009. The Codificationwill become the source of authoritative GAAP recognized by FASB to be appliedto nongovernmental entities. Rules and interpretive releases of the Securitiesand Exchange Commission (“SEC”) under authority of federal securities laws arealso sources of authoritative GAAP for SEC registrants. On the effective dateof the Codification, the Codification will supersede all then-existing non-SECaccounting and reporting standards. All other non-grandfathered non-SECaccounting literature not included in the Codification will becomenon-authoritative.

 

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Following theeffective date of the Codification, FASB will not release new standards in theform of Statements, FASB Staff Positions or Emerging Issues Task Forceabstracts, but instead will issue Accounting Standards Updates (“ASU’s”). ASU’swill not be considered authoritative in their own right, but will serve only toupdate the Codification, provide background information about the guidance andprovide the basis for conclusions on the changes in the Codification. The ASU’sissued by FASB that would be applicable to the Company are as follows:

 

In June 2009,FASB issued ASU 2009-01 *Topic 105 —**Generally Accepted Accounting Principles*. ASU 2009-01identifies the sources of accounting principles and the framework for selectingthe principles used in the preparation of financial statements ofnongovernmental entities that are presented in conformity with GAAP. ASU2009-01 is effective for financial statements issued for interim and annualperiods ending after September 15, 2009. The adoption of this ASU did nothave a material impact on the Company’s financial position or results ofoperations.

 

In June 2009,FASB issued ASU 2009-02 *Omnibus Update*.ASU 2009-02 provides amendments to various topics for technical corrections tothe Codification. The adoption of this ASU did not have a material impact onthe Company’s financial position or results of operations.

 

In August 2009,FASB issued ASU 2009-05 *Fair Value Measurementsand Disclosure (Topic 820)*. ASU 2009-05 provides amendments for thefair value measurement of liabilities and clarification on fair value measuringtechniques. ASU 2009-05 is effective for the first reporting period, includinginterim periods, beginning after the issuance. The adoption of this ASU did nothave a material impact on the Company’s financial position or results ofoperations.

 

In September 2009,FASB issued ASU 2009-07 *Accounting for VariousTopics*. ASU 2009-07 provides certain technical corrections tocertain SEC paragraphs. The adoption of this ASU did not have a material impacton the Company’s financial position or results of operations.

 

In October 2009,FASB issued ASU 2009-13 *Revenue Recognition (Topic605)*. ASU 2009-05 provides accounting and financial reportingdisclosure amendments for multiple-deliverable revenue arrangements. ASU2009-13 is effective prospectively for revenue arrangements entered into ormaterially modified in fiscal years beginning on or after June 15, 2010.The adoption of this ASU is not anticipated to have a material impact on theCompany’s financial position or results of operations.

 

**NOTE 14— SEGMENT REPORTING**

 

During the secondquarter of 2008, management changed the Company’s reportable segments toreflect changes in the management reporting structure of the organization andthe manner in which our chief operating decision maker assesses information fordecision-making purposes, including the allocation of resources. The revisedreporting structure includes two reportable segments: “Products” (formerly “Productsand Components”) and “Services” (formerly “Service, Transportation andMaintenance”). Accordingly, all prior period segment information has beenreclassified to properly reflect our current reportable segments.

 

The Company’ssegments and their product and service offerings are summarized below:

 

***Products***

 

We manufacture high precision gearing systems andstructural towers for wind turbines. We also manufacture custom-engineeredgearing systems, and fabrications and weldments for the mining, energy andother industrial sectors.

 

*Wind Turbine Gearing Systems*

 

We manufacture precision gearing systems for the windindustry in North America, with plants in Illinois and Pennsylvania. We use anintegrated manufacturing process, which includes our machining process inCicero, Illinois, our heat treatment process in Neville Island, Pennsylvaniaand our finishing process in our Cicero factory.

 

*Wind Turbine Structural Towers*

 

We manufacture wind towers, specifically the large andheavier wind towers that are designed for 2 MW and larger wind turbines. Ourproduction facilities are strategically located in close proximity to theprimary U.S. wind resource regions, sited in Wisconsin and Texas, with a thirdwind tower manufacturing facility currently under construction in Brandon,South Dakota.

 

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*Industrial Products*

 

We manufacture products for industrial marketsincluding mining and oilfield equipment and cranes. Our industrial productsinclude gearing, gear drives and custom weldments. These products are producedin Illinois and Wisconsin and serve to diversify our customer and productportfolio and balance our plant loadings.

 

***Services***

 

We offer a variety of services to our customers,including technical services, precision repair and engineering and logistics.Our service locations are in Illinois, California, South Dakota, Texas andColorado.

 

*Technical Services*

 

We are an independent service provider of constructionsupport and operations and maintenance services to the wind industry. Ourspecialty services include oil change-out, up-tower tooling for gearingsystems, drive-train and blade repairs and component replacement. Ourconstruction support capabilities include assembly of towers, nacelles, bladesand other components. We also provide customer support, preventive maintenanceand wind technician training. Our technicians utilize our regional servicecenters for storage and repair of parts as well as our training offerings.

 

*Precision Repair &Engineering Services*

 

Through our precision repair and engineering services,we repair and refurbish complex wind components, including control systems,gearboxes and blades. We also conduct warranty inspections, commission turbinesand provide technical assistance. Additionally, we build replacement controlpanels for kW class wind turbines and repair both kW and MW blades.

 

*Logistics*

 

We offer specialized transportation, permitting andlogistics management to the wind industry for oversize and overweight machineryand equipment. We deliver complete turbines to the installation site, includingblades, nacelles and tower sections for final erection. We focus on the projectmanagement of the delivery of complete wind turbine farms.

 

***Corporate and Other***

 

The Company hascombined all operating segments that do not individually meet the aggregationcriteria or quantitative thresholds to form the “Corporate and Other” segmentfor segment reporting. The “Corporate and Other” segment is comprised ofadjustments to reconcile segment results to consolidated results, whichprimarily includes corporate administrative expenses and intercompanyeliminations.

 

Below is a summaryof segment operations as of September 30, 2009 and December 31, 2008and for the three and nine months ended September 30, 2009 and 2008.Segment information related to the three and nine months ended September 30,2008 has been reclassified to conform to our current segment presentation.

 

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| ** **               | ** ** | **Revenues**                              | ** **    | **Operating Profit (Loss)**               | ** ** |
|--------------------------|------------|-------------------------------------------|---------------|-------------------------------------------|------------|
| ** **               | ** ** | **Three Months Ended September 30,** | ** **    | **Three Months Ended September 30,** | ** ** |
| **Segments:**            | ** ** | **2009**                                  | ** **    | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
|                     |       |                                      |          |                                      |       |   |   |   |   |
| Products  segment        |       | $                                         | 47,890        |                                      | $          | 51,042 |   | $ | (678 | ) | $ | (1,018 | ) |
| Services  segment        |       | 11,788                                    |          | 13,501                                    |       | 28 |   | (358 | ) |
| Corporate  and Other (1) |       | (171                                      | )             | (855                                      | )          | (3,921 | ) | (4,684 | ) |
|                     |       | $                                         |  59,507  |                                      | $          | 63,688 |   | $ | (4,571 | ) | $ | (6,060 | ) |
|                     |       |                                      |          |                                      |       |   |   |   |   |
| ** **               | ** ** | **Revenues**                              | ** **    | **Operating Profit (Loss)**               |       |
| ** **               | ** ** | **Nine Months Ended September 30,**  | ** **    | **Nine Months Ended September 30,**  |       |
| **Segments:**            | ** ** | **2009**                                  | ** **    | **2008**                                  | ** ** | **2009** | ** ** | **2008** |   |
|                     |       |                                      |          |                                      |       |   |   |   |   |
| Products  segment        |       | $                                         | 130,916       |                                      | $          | 115,331 |   | $ | (10,205 | ) | $ | 2,024 |   |
| Services  segment        |       | 34,502                                    |          | 25,205                                    |       | (756 | ) | (1,121 | ) |
| Corporate  and Other (1) |       | (536                                      | )             | (854                                      | )          | (11,027 | ) | (10,544 | ) |
|                     |       | $                                         |  164,882 |                                      | $          | 139,682 |   | $ | (21,988 | ) | $ | (9,641 | ) |
|                     |       |                                      |          |                                      |       |   |   |   |   |
| ** **               | ** ** | **Total Assets as of**                    | ** **    |                                      |       |   |   |
| ** **               | ** ** | **September 30,**                    | ** **    | **December 31,**                     | ** ** |   |   |   |   |
| **Segments:**            | ** ** | **2009**                                  | ** **    | **2008**                                  | ** ** |   |   |   |   |
|                     |       |                                      |          |                                      |       |   |   |   |   |
| Products  segment        |       | $                                         | 265,243       |                                      | $          | 308,044 |   |   |   |   |   |   |
| Services  segment        |       | 59,184                                    |          | 65,795                                    |       |   |   |   |   |   |
| Corporate  and Other (2) |       | 3,902                                     |          | 5,909                                     |       |   |   |   |   |   |
|                     |       | $                                         | 328,329       |                                      | $          | 379,748 |   |   |   |   |   |   |

 

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| (1) | “Corporate and Other”  includes corporate selling, general and administrative expenses and  intercompany eliminations. Corporate selling, general and administrative  expenses includes corporate salaries and benefits, share-based compensation,  and professional fees. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | “Corporate and Other”  includes assets of the corporate headquarters and intercompany eliminations.                                                                                                                                                                        |

 

**NOTE15 — COMMITMENTS AND CONTINGENCIES**

 

*CustomerDisputes*

 

During the third quarter of 2009, the Company was involved in acontract dispute with a customer. The Company and the customer have reached atentative resolution on this matter. Based on the discussions that occurred,the Company has reserved $1,500, of which $1,200 relates to a settlement ofthis contract dispute and $300 for a warranty reserve associated with thismatter.

 

During 2008, theCompany was involved in a pricing dispute with a customer, which includedaccumulated unpaid accounts receivable balances totaling approximately $2,249.In the fourth quarter of 2008, the Company and the customer reached a tentativeresolution on this matter, which is still being finalized. Based on thediscussions that occurred in 2008, the Company wrote-off accounts receivablebalances in the amount of $2,249 during the fourth quarter of 2008.

 

*PurchaseCommitments*

 

We have issuedbuilding and equipment purchase commitments associated with the construction ofa new wind tower manufacturing facility located in Brandon, South Dakotatotaling approximately $3,300 as of September 30, 2009.

 

During 2007, weentered into a purchase contract for equipment with a foreign vendor, which wassubsequently modified on December 31, 2008. Under the terms of thisamended purchase agreement, we agreed to equipment purchases totaling $3,674,of which $978 was paid as a down payment and the remaining $2,784 in principalplus accrued interest at 6% per annum is to be paid in twelve equal monthlyinstallments through December 2009. We have accounted for this purchaseagreement as a promissory note and the outstanding balances of $696 and $2,784are included in lines of credit and notes payable in the current liabilitiessection of the Company’s condensed consolidated balance sheets as of September 30,2009 and December 31, 2008, respectively.

 

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During 2008, weentered into two purchase agreements for equipment totaling $4,888. Under theterms of the purchase agreements, we were required to make a $1,324 deposit andmust purchase the stated equipment in the purchase agreement or equipment ofequal or lesser value. If the equipment is not purchased prior to theexpiration of the purchase agreement on December 31, 2010, we would berequired to surrender its deposit for the equipment to the vendor. As of September 30,2009, the deposit balance was $1,324 and is included in other assets in of ourcondensed consolidated balance sheets as of September 30, 2009.

 

*LegalProceedings*

 

The Company issubject to legal proceedings in the normal course of business. We periodicallyevaluate the need to record liabilities in connection with loss contingencies,including, but not limited to, settlement of legal proceedings and regulatorycompliance matters. The Company accrues for costs related to loss contingencieswhen such costs are probable and reasonably estimable.

 

*EnvironmentalCompliance and Remediation Liabilities*

 

Our operations andproducts are subject to a variety of environmental laws and regulations in thejurisdictions in which we operate and sell products governing, among otherthings, air emissions, wastewater discharges, the use, handling and disposal ofhazardous materials, soil and groundwater contamination, employee health andsafety, and product content, performance and packaging. Also, certainenvironmental laws can impose the entire cost or a portion of the cost ofinvestigating and cleaning up a contaminated site, regardless of fault, uponany one or more of a number of parties, including the current or previous owneror operator of the site. These environmental laws also impose liability on anyperson who arranges for the disposal or treatment of hazardous substances at acontaminated site. Third parties may also make claims against owners oroperators of sites and users of disposal sites for personal injuries andproperty damage associated with releases of hazardous substances from thosesites.

 

In September 2007, Tower Tech received a notice of violation fromthe Wisconsin Department of Natural Resources (“WDNR”) stating that Tower Techwas in violation of several provisions of the state’s air pollution laws andregulations in connection with the construction and operation of two new paintbooths at its Manitowoc, Wisconsin facility. During the third quarter of 2009,Tower Tech and the WDNR entered into a settlement agreement to resolve thisalleged violation which provided for a payment by Tower Tech of $95,000 to theWDNR and the installation of certain equipment that could result in thepotential reduction of certain emissions related to paints and thinners used byTower Tech.

 

*WarrantyLiability*

 

Within ourProducts segment, we provide warranty terms that generally range from two toseven years for various products relating to workmanship and materials suppliedby the Company. We reserve for warranty claims based on industry experience andestimates made by management. From time to time, customers may submit warrantyclaims against the Company. In certain contracts, we have recourse provisionsfor items that would enable recovery from third parties for amounts paid tocustomers under warranty provisions. As of September 30, 2009 and December 31,2008, our estimated product warranty liability was $1,477 and $890,respectively, and is recorded within accrued liabilities in our condensedconsolidated balance sheets.

 

*Sale-LeasebackTransactions*

 

We have entered intosale-leaseback agreements whereby certain owned equipment is sold to a thirdparty financing company in exchange for cash and the subsidiary then leasesback the equipment from the purchaser. The primary purpose of thesearrangements is to provide additional liquidity to meet working capitalrequirements. Depending on the terms of the lease agreement, the lease may beclassified as an operating or capital lease. In addition, the sale of theassets may result in a gain or loss, which must be amortized to other income orloss in our statement of operations over the life of the operating lease. As ofSeptember 30, 2009, the minimum monthly payments due under these leaseagreements totaled $98.

 

*Other*

 

As of September 30,2009, approximately 24.5% of our employees were covered by two collectivebargaining agreements with local unions. These agreements are scheduled toexpire in October 2009 and February 2010. We have reached a tentativeagreement on new terms for the agreement set to expire in October 2009that would result in a three year extension.

 

**NOTE16 — EARNINGS PER SHARE**

 

The Companycomputes earnings per share under the basic and diluted methodology andpresents per share data for all periods in which statements of operations arepresented. Basic earnings per share is computed by dividing net income or lossby the

 

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weighted average numberof shares of common stock outstanding. Diluted earnings per share is computedby dividing net income or loss by the weighted average number of shares ofcommon stock and common stock equivalents outstanding.

 

The following tableprovides a reconciliation of the numerators and denominators used incalculating basic and diluted earnings per share for the three and nine monthsended September 30, 2009 and 2008:

 
| ** **                                            | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                            | ** ** | **September 30**  | ** ** | **September 30** | ** ** |
| ** **                                            | ** ** | **2009**               | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Basic earnings per share  calculation:**            |       |                   |       |                  |       |   |   |   |   |
|                                                  |       |                   |       |                  |       |   |   |   |   |
| Net  loss to common stockholders                      |       | $                      | (4,944     | )                     | $          | (7,499 | ) | $ | (17,520 | ) | $ | (12,915 | ) |
|                                                  |       |                   |       |                  |       |   |   |   |   |
| Weighted  average number of common shares outstanding |       | 96,608,575             |       | 96,470,415            |       | 96,549,710 |   | 87,692,295 |   |
| Basic  net loss per share                             |       | $                      | (0.05      | )                     | $          | (0.08 | ) | $ | (0.18 | ) | $ | (0.15 | ) |
|                                                  |       |                   |       |                  |       |   |   |   |   |
| **Diluted earnings per share  calculation:**          |       |                   |       |                  |       |   |   |   |   |
|                                                  |       |                   |       |                  |       |   |   |   |   |
| Net  loss to common stockholders                      |       | $                      | (4,944     | )                     | $          | (7,499 | ) | $ | (17,520 | ) | $ | (12,915 | ) |
|                                                  |       |                   |       |                  |       |   |   |   |   |
| Weighted  average number of common shares outstanding |       | 96,608,575             |       | 96,470,415            |       | 96,549,710 |   | 87,692,295 |   |
| Common  stock equivalents:                            |       |                   |       |                  |       |   |   |   |   |
| Stock  options and restricted stock units (1)         |       | —                 |       | —                |       | — |   | — |   |
| Weighted  average number of common shares outstanding |       | 96,608,575             |       | 96,470,415            |       | 96,549,710 |   | 87,692,295 |   |
| Diluted  net loss per share                           |       | $                      | (0.05      | )                     | $          | (0.08 | ) | $ | (0.18 | ) | $ | (0.15 | ) |

 

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(1) Stock options and restricted stock unitsgranted and outstanding of 1,877,745 and 1,903,000 as of September 30,2009 and 2008, respectively, are excluded from the computation of dilutedearnings due to the anti-dilutive effect as a result of the Company’s net lossfor these respective periods.

 

**NOTE17 — SUBSEQUENT EVENTS**

 

On October 30,2009, the Company filed a registration statement with the SEC related to aproposed public offering of 15,000,000 shares of its common stock. Included inthis offering, the Company proposes to sell 10,000,000 shares and TontineCapital Partners, L.P., and certain of its affiliated funds (collectively“Tontine”), propose to sell 5,000,000 shares. In addition, the underwriter hasthe option to purchase from Tontine and J. Cameron Drecoll, the Company’s ChiefExecutive Officer, up to an additional 2,250,000 shares of its common stockunder the same terms and conditions to cover over-allotments, if any.

 

**Item2.****   ****Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

*Thefollowing discussion and analysis of our financial condition and results ofoperations should be read in conjunction with our condensed consolidated financialstatements and related notes thereto in Item 1, “Financial Statements” of thisQuarterly Report and the audited consolidated financial statements and relatednotes and Management’s Discussion and Analysis of Financial Condition andResults of Operations contained in our Annual Report on Form 10-K for theyear ended December 31, 2008. The discussion below containsforward-looking statements that are based upon our current expectations and aresubject to uncertainty and changes in circumstances including, but not limitedto, those identified in “Cautionary Note Regarding Forward-Looking Statements”at the end of this Item 2. Actual results may differ materially from theseexpectations due to inaccurate assumptions and known or unknown risks anduncertainties.*

 

***(Dollars are presented in thousands unless otherwise stated)***

 

**INTRODUCTION**

 

Management’s Discussion and Analysis of Financial Condition and Resultsof Operations (“MD&A”) is intended to assist the reader in betterunderstanding our business, results of operations, financial condition, changesin financial condition, critical accounting policies and estimates, andsignificant developments. MD&A is provided as a supplement to, and shouldbe read in conjunction with, our condensed consolidated financial statementsand the accompanying notes thereto appearing elsewhere herein. This section isorganized as follows:

 

·      ***Our Business***— an overview of our business, a discussionof current business and industry opportunities, challenges and risks, and adiscussion of significant developments affecting our business.

 

·      ***Results of Operations***— an analysis and comparisonof our condensed consolidated results of operations for the three and ninemonths ended September 30, 2009 and 2008, as reflected in our condensedconsolidated statements of operations.

 

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·      ***Selected Financial Data***— an analysis and comparisonof selected non-GAAP financial measures for the three and nine months ended September 30,2009 and 2008.

 

·      ***Summary of Critical Accounting Policies and Estimates***— a discussionof accounting policies and estimates that we believe require management’s mostsubjective or complex judgments.

 

·      ***Liquidity, Financial Position and Capital Resources***— a discussionof our primary sources and uses of cash for the three and nine months ended September 30,2009 and 2008, a discussion of selected changes in our financial position, andany changes to our future contractual obligations.

 

**OURBUSINESS**

 

**Business Overview**

 

We are an independent, horizontally integratedsupplier of customized products and services to the U.S. wind industry. Ourproduct and service portfolio provides our customers, including wind turbinemanufacturers, wind farm developers and wind farm operators, with access to abroad array of wind component and service offerings. We are a manufacturer ofgearing systems and wind tower for the wind industry. We also provide technicalservice and precision repair and engineering and specialized logistics to thewind industry in the United States.

 

Our businesses are currently organized in twooperating segments, Products and Services.

 

***Products***

 

We manufacture high precision gearing systems andstructural towers for wind turbines. We also manufacture custom-engineeredgearing systems, and fabrications and weldments for the mining, energy andother industrial sectors.

 

*Wind Turbine Gearing Systems*

 

We manufacture precision gearing systems for the windindustry in North America, with plants in Illinois and Pennsylvania. We use anintegrated manufacturing process, which includes our machining process inCicero, Illinois, our heat treatment process in Neville Island, Pennsylvaniaand our finishing process in our Cicero factory.

 

*Wind Turbine Structural Towers*

 

We manufacture wind towers, specifically the large andheavier wind towers that are designed for 2 MW and larger wind turbines. Ourproduction facilities are strategically located in close proximity to theprimary U.S. wind resource regions, sited in Wisconsin and Texas, with a thirdwind tower manufacturing facility currently under construction in Brandon,South Dakota.

 

*Industrial Products*

 

We manufacture products for industrial marketsincluding mining and oilfield equipment and cranes. Our industrial productsinclude gearing, gear drives and custom weldments. These products are producedin Illinois and Wisconsin and serve to diversify our customer and productportfolio and balance our plant loadings.

 

***Services***

 

We offer a variety of services to our customers,including technical services, precision repair and engineering and logistics.Our service locations are in Illinois, California, South Dakota, Texas andColorado.

 

*Technical Services*

 

We are an independent service provider of constructionsupport and operations and maintenance services to the wind industry. Ourspecialty services include oil change-out, up-tower tooling for gearingsystems, drive-train and blade repairs and component replacement. Ourconstruction support capabilities include assembly of towers, nacelles, bladesand other components. We also provide customer support, preventive maintenanceand wind technician training. Our technicians utilize our regional servicecenters for storage and repair of parts as well as our training offerings.

 

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*Precision Repair & EngineeringServices*

 

Through our precision repair and engineering services,we repair and refurbish complex wind components, including control systems,gearboxes and blades. We also conduct warranty inspections, commission turbinesand provide technical assistance. Additionally, we build replacement controlpanels for kW class wind turbines and repair both kW and MW blades.

 

*Logistics*

 

We offer specialized transportation, permitting andlogistics management to the wind industry for oversize and overweight machineryand equipment. We deliver complete turbines to the installation site, includingblades, nacelles and tower sections for final erection. We focus on the projectmanagement of the delivery of complete wind turbine farms.

 

***Third Quarter Overview***

 

Duringthe third quarter of 2009, the Company continued to be affected by the globaleconomic downturn, particularly with respect to the economic impact thatcontinues to affect our customers. The majority of our revenues are highlyconcentrated with a limited number of customers. During the first nine monthsof this year, several of our customers within the Products segment expressedtheir intent to scale back, delay or restructure existing customer agreements.As a result, our operating profits and gross margins have been negativelyaffected by the decline in production levels, which has created productionvolume inefficiencies in our operations and cost structures. In response, theCompany has implemented initiatives to mitigate the effects of this decline inproduction volume through cost-cutting measures throughout our operations aswell as reducing our capital spending in 2009. While our Products segmentcontinues to be affected by the current economic downturn, our Services segmenthas been less affected as a result of service contracts entered into during thecurrent year and the inclusion of Badger in our results of operations.

 

**Business and Operating Strategy**

 

Our business strategy is to capitalize on theanticipated growth of the wind sector in the United States and Canada byproviding our value-added products and components and customized servicesacross the wind supply chain to expand our market share. Our strategicobjectives include the following:

 

·      ***Utilize ourestablished platform to increase market share and satisfy customer demand.***During 2008, we took steps toenhance our manufacturing capabilities byincreasing gearing production capacity and constructing a new state-of-the-arttower manufacturing plant in Abilene, Texas. We are also constructing an additionaltower manufacturing plant in Brandon, South Dakota. We increased specializedheavy-haul capacity by over 20% and increased our service capacity throughstrategic hiring and the addition of a new facility capable of supportingMW-class blade repair. We believe our presence in key wind resource statesprovides us with an advantage on cost, efficiency and speed to market bylimiting exchange rate risk and importation and customs duties (compared tointernational competitors) and substantially reducing transportation andworking capital costs for our customers. As a result, we believe that we arewell positioned with our existing infrastructure to take advantage of projectedimprovements in market conditions.

 

·      ***Continueto develop and grow our service businesses.***Wehave established a network of service centers strategically located near keywind farm sites with precision repair and engineering capabilities and skilledpersonnel. We believe that there is a significant opportunity to continue todevelop this network to provide more comprehensive support to additionalbusinesses in the wind industry. Wind turbine components are initially servicedby wind turbine manufacturers under applicable warranties, which have generallybeen shortening over time. We believe that, as the size of the installed basegrows and ages, manufacturer warranties expire and as the complexity and sizeof wind turbines increase, wind farm operators will increasingly seek thirdparty service providers to maintain their assets. We intend to support ourcustomers’ service strategies, to further develop our own service channels andto capture a share of the expanding service and aftermarket support businessthrough relationships with wind turbine manufacturers, wind farm operators andindependent service providers. Consistent with this strategy, we continuallyevaluate potential acquisition opportunities, some of which may be material.

 

·      ***Leverageour success in North America to pursue international business opportunities.***We have begun to expand our focus beyond the North American wind energymarket to develop an international presence as a long-term strategic objective.We believe that there has been a rapid migration of turbine manufacturers tothe United States, which has allowed us to develop relationships with leadingglobal turbine assembly companies and increases our opportunity to leveragethese relationships into global markets. We have recently restructured ourmanagement team

 

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to provide the framework for pursuing internationalbusiness opportunities, which we believe will expand our revenue opportunitiesand enable us to better serve our customers, enhance our supply chain anddevelop additional synergies across our operating units.

 

·      ***Continueto improve production technology and operational efficiency.***We believe that the proper coordination and integration of the supplychain are key factors that enable high operating efficiencies, increasedreliability and lower costs. Our manufacturing facilities includestate-of-the-art equipment and lean processes to help enhance our operationalefficiency and flexibility. We will continue to pursue strategies to furtheroptimize our production processes to generate increased output, leverage ourscale and lower our costs while maintaining product quality.

 

·      ***Broadenour product offerings.***Webelieve that we offer one of the most complete sets of product offeringsaddressing the needs of customers across the North American wind supply chain.******We are dedicated tothe identification, development and commercialization of new products that takeadvantage of our scale in order to provide comprehensive solutions for ourcustomers. Since a turbine often contains more than 8,000 components, we planto take advantage of our extensive expertise and technological capabilities todevelop the complex product offerings required to compete in the North Americanwind market. As the North American wind industry matures and the complexity ofwind turbines increases, complex product offerings, advanced supply chain managementand specialized services will be critical for wind turbine manufacturers andwind farm developers and owners, and we intend to pursue our businessstrategies and maintain and enhance our established platform to more deeplypenetrate our target markets and further diversify our customer base.

 

***Risks Related to Market Conditions***

 

The recent disruption in the global credit markets, the repricing ofcredit risk and the deterioration of the financial and real estate marketsgenerally, particularly in the U.S. and Europe, have all contributed to areduction in consumer spending and a decline in the overall U.S. economy.Although the recent disruptions were initially in the housing, financial andinsurance sectors, this deterioration has further expanded to the generaleconomy and other sectors, including the wind energy sector. Tight credit,increased unemployment and reduced consumer confidence have had negativeeffects on demand for development of alternative sources of energy andconsequently for our product and service offerings. The timing and pattern ofan economic recovery remain highly uncertain. A prolonged downturn in the U.S.or global economy could have a material adverse effect on our business in anumber of ways, including lower sales and renewal cycles if there is areduction in demand for wind energy and could have a material adverse effect onour liquidity, results of operations and financial condition.

 

If these conditions continue or worsen, they may result in reducedworldwide demand for energy and additional difficulties in obtaining financing,which may adversely affect our business. Risks we might face include potentialdeclines in revenues in our business segments due to reduced orders or otherfactors caused by economic challenges faced by our customers and prospectivecustomers, potential adverse impacts on our ability to access credit and otherfinancing sources beyond the approved credit lines we currently have, andincreased costs associated with accessing additional credit and financing sources.Further, if these conditions continue or worsen, our ability to finance futureacquisitions or significant capital expenditures relating to new projects andlines of business may be adversely affected.

 

Additionally, a continued economic slowdown may result in impairment toour fixed assets, goodwill and intangible assets. We perform an annual goodwillimpairment test during the fourth quarter of each year, or more frequently whenevents or circumstances indicate that the carrying value of our assets may notbe recovered. The recession that has occurred during 2008 and 2009 has impactedour financial results and has reduced purchases from certain of our keycustomers. We may determine that our expectations of future financial resultsand cash flows from one or more of our businesses has decreased or a decreasein stock valuation may occur, which could result in a review of our goodwilland intangible assets associated with these businesses. Since a large portionof the value of our intangibles has been ascribed to projected revenues fromcertain key customers, a change in our expectation of future cash from one ormore of these customers could indicate potential impairment to the carryingvalue of our assets.

 

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**RESULTSOF OPERATIONS**

 

**ThreeMonths Ended September 30, 2009, Compared to Three Months Ended September 30,2008**

 

The summary of selectedfinancial data table below should be referenced in conjunction with a review ofthe following discussion of our results of operations for the three monthsended September 30, 2009 compared to the three months ended September 30,2008.

 
| ** **                                            | ** ** | **Three Months Ended September 30,** | ** ** | **2009 vs. 2008**       | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------|------------|
| ** **                                            | ** ** | **2009**                                  | ** ** | **% of Total  Revenue** | ** ** | **2008** | ** ** | **% of Total  Revenue** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
|                                                  |       |                                      |       |                    |       |   |   |   |   |   |   |   |   |
| Revenues                                              |       | $                                         | 59,507     |                    | 100.0      | % | $ | 63,688 |   | 100.0 | % | $ | (4,181 | ) | -6.6 | % |
| Cost  of sales                                        |       | 52,925                                    |       | 88.9                    | %          | 54,706 |   | 85.9 | % | (1,781 | ) | -3.3 | % |
|                                                  |       |                                      |       |                    |       |   |   |   |   |   |   |   |   |
| Gross  profit                                         |       | 6,582                                     |       | 11.1                    | %          | 8,982 |   | 14.1 | % | (2,400 | ) | -26.7 | % |
|                                                  |       |                                      |       |                    |       |   |   |   |   |   |   |   |   |
| Operating  expenses                                   |       |                                      |       |                    |       |   |   |   |   |   |   |   |   |
| Selling,  general and administrative expenses         |       | 8,247                                     |       | 13.9                    | %          | 12,110 |   | 19.0 | % | (3,863 | ) | -31.9 | % |
| Intangible  amortization                              |       | 2,906                                     |       | 4.9                     | %          | 2,932 |   | 4.6 | % | (26 | ) | -0.9 | % |
| Total  operating expenses                             |       | 11,153                                    |       | 18.8                    | %          | 15,042 |   | 23.6 | % | (3,889 | ) | -25.9 | % |
|                                                  |       |                                      |       |                    |       |   |   |   |   |   |   |   |   |
| Operating  loss                                       |       | (4,571                                    | )          | -7.7                    | %          | (6,060 | ) | -9.5 | % | 1,489 |   | -24.6 | % |
|                                                  |       |                                      |       |                    |       |   |   |   |   |   |   |   |   |
| Other  income (expense)                               |       |                                      |       |                    |       |   |   |   |   |   |   |   |   |
| Interest  (expense) income, net                       |       | (732                                      | )          | -1.2                    | %          | 90 |   | 0.1 | % | (822 | ) | -913.3 | % |
| Other,  net                                           |       | 243                                       |       | 0.4                     | %          | (319 | ) | -0.5 | % | 562 |   | -176.2 | % |
| Other  expense, net                                   |       | (489                                      | )          | -0.8                    | %          | (229 | ) | -0.4 | % | (260 | ) | 113.5 | % |
|                                                  |       |                                      |       |                    |       |   |   |   |   |   |   |   |   |
| Net  loss before (benefit) provision for income taxes |       | (5,060                                    | )          | -8.5                    | %          | (6,289 | ) | -9.9 | % | 1,229 |   | -19.5 | % |
| (Benefit)  provision for income taxes                 |       | (116                                      | )          | -0.2                    | %          | 1,210 |   | 1.9 | % | (1,326 | ) | 109.6 | % |
| Net  loss                                             |       | $                                         | (4,944     | )                       | -8.3       | % | $ | (7,499 | ) | -11.8 | % | $ | 2,555 |   | -34.1 | % |

 

The following table presentsour results of operations by reportable segment for the three months ended September 30,2009:

 
| ** **                                    | ** ** | **Three Months Ended September 30, 2009** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                    | ** ** | **Products**                                   | ** ** | **Services** | ** ** | **Corporate  and Other****(1)** | ** ** | **Total** | ** ** |
| ** **                                    | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                      |       | $                                              | 47,890     |   | $ | 11,788 |   | $ | (171 | ) | $ | 59,507 |   |
| Cost  of sales                                |       | 43,906                                         |       | 9,127 |   | (108 | ) | 52,925 |   |
|                                          |       |                                           |       |   |   |   |   |   |   |
| Gross  profit (deficit)                       |       | 3,984                                          |       | 2,661 |   | (63 | ) | 6,582 |   |
|                                          |       |                                           |       |   |   |   |   |   |   |
| Operating  expenses                           |       |                                           |       |   |   |   |   |   |   |
| Selling,  general and administrative expenses |       | 2,616                                          |       | 1,773 |   | 3,858 |   | 8,247 |   |
| Intangible  amortization                      |       | 2,046                                          |       | 860 |   | — |   | 2,906 |   |
| Total  operating expenses                     |       | 4,662                                          |       | 2,633 |   | 3,858 |   | 11,153 |   |
|                                          |       |                                           |       |   |   |   |   |   |   |
| Operating  (loss) income                      |       | (678                                           | )          | 28 |   | (3,921 | ) | (4,571 | ) |
|                                               |            |                                                |            |  |  |  |  |  |  |  |  |  |  |

 

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(1) “Corporate and Other” includes corporateselling, general and administrative expenses and intercompany eliminations.Corporate selling, general and administrative expenses includes corporatesalaries and benefits, share-based compensation and professional fees.

 

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The following tablepresents our results of operations by reportable segment for the three monthsended September 30, 2008:

 
| ** **                                    | ** ** | **Three Months Ended September 30, 2008** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                    | ** ** | **Products**                              | ** ** | **Services** | ** ** | **Corporate  and Other****(1)** | ** ** | **Total** | ** ** |
|                                          |       |                                      |       |   |   |   |   |   |   |
| Revenues                                      |       | $                                         | 51,042     |   | $ | 13,501 |   | $ | (855 | ) | $ | 63,688 |   |
| Cost of sales                                 |       | 46,309                                    |       | 8,341 |   | 56 |   | 54,706 |   |
|                                          |       |                                      |       |   |   |   |   |   |   |
| Gross profit  (deficit)                       |       | 4,733                                     |       | 5,160 |   | (911 | ) | 8,982 |   |
|                                          |       |                                      |       |   |   |   |   |   |   |
| Operating  expenses                           |       |                                      |       |   |   |   |   |   |   |
| Selling, general  and administrative expenses |       | 3,768                                     |       | 4,569 |   | 3,773 |   | 12,110 |   |
| Intangible  amortization                      |       | 1,983                                     |       | 949 |   | — |   | 2,932 |   |
| Total operating  expenses                     |       | 5,751                                     |       | 5,518 |   | 3,773 |   | 15,042 |   |
|                                          |       |                                      |       |   |   |   |   |   |   |
| Operating loss                                |       | (1,018                                    | )          | (358 | ) | (4,684 | ) | (6,060 | ) |
|                                               |            |                                           |            |  |  |  |  |  |  |  |  |  |  |

 

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(1) “Corporateand Other” includes corporate selling, general and administrative expenses andintercompany eliminations. Corporate selling, general and administrativeexpenses includes corporate salaries and benefits, share-based compensation andprofessional fees.

 

***Revenues***

 

Total revenues decreased $4,181 or 6.6%, from$63,688 during the three months ended September 30, 2008, to $59,507 duringthe three months ended September 30, 2009. The decrease in revenues wasprimarily attributable to a decline in wind turbine gearing and logisticsrevenues, which was partially offset by an increase in wind turbine structuraltower revenues.

 

Products segment revenues decreased $3,152 from$51,042 during the three months ended September 30, 2008, to $47,890during the three months ended September 30, 2009. The decrease in revenueswithin our Products segment was primarily attributable to a decline in gearingorders and specialty welding services, which was partially offset by anincrease in wind tower units sold during the third quarter. The manufacture ofgearing for the wind industry during the third quarter of 2009 continued to benegatively affected by reduced or delayed production orders from our key windenergy customers. However, higher revenues related to custom-engineered gearingorders for non-wind related sectors continued to remain strong relative to theprior year in addition to Brad Foote’s ability to fulfill backlog productionorders for the wind related markets. Revenues related to wind towersmanufactured increased during the third quarter of 2009 primarily as a resultof production at our new wind tower manufacturing facility in Abilene, Texasand an increase in wind tower sections manufactured at our Manitowoc, Wisconsinfacility as compared to the prior year.

 

Services segment revenues decreased $1,713 from$13,501 during the three months ended September 30, 2008, to $11,788during the three months ended September 30, 2009. The decrease in revenueswithin our Services segment was primarily attributable to a decline intechnical service contracts received during the current quarter as compared tothe prior year. The decline in logistics revenues primarily related to ageneral decline in services contracts entered into in addition to changes instart dates of contracts that were bid on during the current quarter.

 

***Cost of Sales***

 

Total cost of sales decreased $1,781 from $54,706during the three months ended September 30, 2008, to $52,925 during thethree months ended September 30, 2009. The decrease in cost of salesprimarily attributable to a reduction in manufacturing costs associated with adecline in wind turbine gearing revenues, which was partially offset by anincrease in production costs related to higher production levels of windturbine structural towers manufactured in the current quarter and higher directlabor costs associated with our precision repair and engineering services.

 

Products segment cost of sales decreased from$46,309 during the three months ended September 30, 2008, to $43,906during the three months ended September 30, 2009. The decrease in cost ofsales within our Products segment was primarily attributable to the decline inthe sales of wind gearing, which resulted in a corresponding reduction inmanufacturing costs. The decline in cost of sales was partially offset byhigher wind tower production costs as a result of an increase in wind towersections manufactured as compared to the prior year.

 

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Services segment cost of sales increased from$8,341 during the three months ended September 30, 2008, to $9,127 duringthe three months ended September 30, 2009. The increase in cost of saleswithin our Services segment was primarily attributable to higher direct laborcosts as a result of an increase in field technicians in our maintenance andrepair services as compared to the prior year.

 

***Selling, General and Administrative Expenses***

 

Selling, general and administrative expensesdecreased from $12,110 during the three months ended September 30, 2008,to $8,247 during the three months ended September 30, 2009. The decreasewas primarily attributable to a reduction in professional expenses and costreduction initiatives implemented during the third quarter as compared to thesame period during the prior year. The decrease in selling, general andadministrative expense was partially offset by a $1,200 expense related to the tentative settlement of a customer dispute recorded during the current quarter.Additionally, selling, general and administrative expenses were higher in thecomparable period of the prior year as a result of professional fees associatedwith the integration of acquisitions of the Company and related toSarbanes-Oxley compliance initiatives.

 

***Intangible Amortization***

 

Intangible amortization expense decreased from $2,932during the three months ended September 30, 2008, to $2,906 during thethree months ended September 30, 2009. The decrease was primarilyattributable to reduction in amortization expense of non-compete agreements ascertain of these agreements have been fully amortized during the third quarterof 2009.

 

***Other Expense, net***

 

Total other expense, net was $229 during the threemonths ended September 30, 2008, compared to other expense, net of $489during the three months ended September 30, 2009. The increase wasprimarily attributable to higher interest expense as a result of an increase inborrowings outstanding as compared to the prior year and due to higher interestexpense at Brad Foote as a result of the amendment to its Debt Facilities in August 2009,which, among other things, increased the interest rate on outstandingborrowings. The increase in interest expense was partially offset by $262 inunrealized gains associated with our interest rate derivatives as a result of afavorable change in the fair market value of these derivative instruments.

 

***Provision for Income Taxes***

 

During the three months ended September 30,2008, the Company reported a provision for income taxes of $1,210 compared to abenefit for income taxes of $116 during the three months ended September 30,2009. The decrease in income taxes was primarily attributable to a reduction inthe income tax valuation allowance for federal income tax reporting purposes asa result of the Company’s net operating loss carryforwards, which was partiallyoffset by an increase in the provision for state income taxes during thecurrent quarter.

 

***Net Loss***

 

Net loss decreased from $7,499 during the threemonths ended September 30, 2008, to $4,944 during the three months ended September 30,2009, primarily as a result of the factors as described above.

 

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**NineMonths Ended September 30, 2009, Compared to Nine Months Ended September 30,2008**

 

The summary of selectedfinancial data table below should be referenced in conjunction with a review ofthe following discussion of our results of operations for the nine months endedSeptember 30, 2009 compared to the nine months ended September 30,2008.

 
| ** **                                            | ** ** | **Nine Months Ended September 30,** | ** ** | **2009 vs. 2008**       | ** ** |
|-------------------------------------------------------|------------|------------------------------------------|------------|-------------------------|------------|
| ** **                                            | ** ** | **2009**                                 | ** ** | **% of Total  Revenue** | ** ** | **2008** | ** ** | **% of Total  Revenue** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
|                                                  |       |                                     |       |                    |       |   |   |   |   |   |   |   |   |
| Revenues                                              |       | $                                        | 164,882    |                    | 100.0      | % | $ | 139,682 |   | 100.0 | % | $ | 25,200 |   | 18.0 | % |
| Cost  of sales                                        |       | 150,464                                  |       | 91.2                    | %          | 112,599 |   | 80.6 | % | 37,865 |   | 33.6 | % |
|                                                  |       |                                     |       |                    |       |   |   |   |   |   |   |   |   |
| Gross  profit                                         |       | 14,418                                   |       | 8.8                     | %          | 27,083 |   | 19.4 | % | (12,665 | ) | -46.8 | % |
|                                                  |       |                                     |       |                    |       |   |   |   |   |   |   |   |   |
| Operating  expenses                                   |       |                                     |       |                    |       |   |   |   |   |   |   |   |   |
| Selling,  general and administrative expenses         |       | 27,688                                   |       | 16.8                    | %          | 28,475 |   | 20.4 | % | (787 | ) | -2.8 | % |
| Intangible  amortization                              |       | 8,718                                    |       | 5.3                     | %          | 8,249 |   | 5.9 | % | 469 |   | 5.7 | % |
| Total  operating expenses                             |       | 36,406                                   |       | 22.1                    | %          | 36,724 |   | 26.3 | % | (318 | ) | -0.9 | % |
|                                                  |       |                                     |       |                    |       |   |   |   |   |   |   |   |   |
| Operating  loss                                       |       | (21,988                                  | )          | -13.3                   | %          | (9,641 | ) | -6.9 | % | (12,347 | ) | 128.1 | % |
|                                                  |       |                                     |       |                    |       |   |   |   |   |   |   |   |   |
| Other  income (expense)                               |       |                                     |       |                    |       |   |   |   |   |   |   |   |   |
| Interest  (expense) income, net                       |       | (1,831                                   | )          | -1.1                    | %          | (1,921 | ) | -1.3 | % | 90 |   | -4.7 | % |
| Other,  net                                           |       | 5,910                                    |       | 3.6                     | %          | 57 |   | 0.0 | % | 5,853 |   | 10268.4 | % |
| Other  income (expense), net                          |       | 4,079                                    |       | 2.5                     | %          | (1,864 | ) | -1.3 | % | 5,943 |   | -318.8 | % |
|                                                  |       |                                     |       |                    |       |   |   |   |   |   |   |   |   |
| Net  loss before (benefit) provision for income taxes |       | (17,909                                  | )          | -10.8                   | %          | (11,505 | ) | -8.2 | % | (6,404 | ) | 55.7 | % |
| (Benefit)  provision for income taxes                 |       | (389                                     | )          | -0.2                    | %          | 1,410 |   | 1.0 | % | (1,799 | ) | 127.6 | % |
| Net  loss                                             |       | $                                        | (17,520    | )                       | -10.6      | % | $ | (12,915 | ) | -9.2 | % | $ | (4,605 | ) | 35.7 | % |

 

The following tablepresents our results of operations by reportable segment for the nine monthsended September 30, 2009:

 
| ** **                                    | ** ** | **Nine Months Ended September 30, 2009** | ** ** |
|-----------------------------------------------|------------|------------------------------------------|------------|
| ** **                                    | ** ** | **Products**                             | ** ** | **Services** | ** ** | **Corporate  and Other****(1)** | ** ** | **Total** | ** ** |
| ** **                                    | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                      |       | $                                        | 130,916    |   | $ | 34,502 |   | $ | (536 | ) | $ | 164,882 |   |
| Cost of sales                                 |       | 124,492                                  |       | 26,300 |   | (328 | ) | 150,464 |   |
|                                          |       |                                     |       |   |   |   |   |   |   |
| Gross profit  (deficit)                       |       | 6,424                                    |       | 8,202 |   | (208 | ) | 14,418 |   |
|                                          |       |                                     |       |   |   |   |   |   |   |
| Operating  expenses                           |       |                                     |       |   |   |   |   |   |   |
| Selling, general  and administrative expenses |       | 10,491                                   |       | 6,378 |   | 10,819 |   | 27,688 |   |
| Intangible amortization                       |       | 6,138                                    |       | 2,580 |   | — |   | 8,718 |   |
| Total operating  expenses                     |       | 16,629                                   |       | 8,958 |   | 10,819 |   | 36,406 |   |
|                                          |       |                                     |       |   |   |   |   |   |   |
| Operating loss                                |       | (10,205                                  | )          | (756 | ) | (11,027 | ) | (21,988 | ) |
|                                               |            |                                          |            |  |  |  |  |  |  |  |  |  |  |

 

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(1) “Corporate and Other” includes corporateselling, general and administrative expenses and intercompany eliminations.Corporate selling, general and administrative expenses includes corporatesalaries and benefits, share-based compensation and professional fees.

 

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The following tablepresents our results of operations by reportable segment for the nine monthsended September 30, 2008:

 
| ** **                                    | ** ** | **Nine Months Ended September 30, 2008** | ** ** |
|-----------------------------------------------|------------|------------------------------------------|------------|
| ** **                                    | ** ** | **Products**                             | ** ** | **Services****(1)** | ** ** | **Corporate  and Other****(2)** | ** ** | **Total** | ** ** |
| ** **                                    | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                      |       | $                                        | 115,331    |   | $ | 25,205 |   | $ | (854 | ) | $ | 139,682 |   |
| Cost of sales                                 |       | 98,111                                   |       | 14,531 |   | (43 | ) | 112,599 |   |
|                                          |       |                                     |       |   |   |   |   |   |   |
| Gross profit  (deficit)                       |       | 17,220                                   |       | 10,674 |   | (811 | ) | 27,083 |   |
|                                          |       |                                     |       |   |   |   |   |   |   |
| Operating  expenses                           |       |                                     |       |   |   |   |   |   |   |
| Selling, general  and administrative expenses |       | 9,068                                    |       | 9,674 |   | 9,733 |   | 28,475 |   |
| Intangible  amortization                      |       | 6,128                                    |       | 2,121 |   | — |   | 8,249 |   |
| Total operating  expenses                     |       | 15,196                                   |       | 11,795 |   | 9,733 |   | 36,724 |   |
|                                          |       |                                     |       |   |   |   |   |   |   |
| Operating income  (loss)                      |       | 2,024                                    |       | (1,121 | ) | (10,544 | ) | (9,641 | ) |
|                                               |            |                                          |            |  |  |  |  |  |  |  |  |  |  |

 

----

(1) For the nine months ended September 30,2008, the “Services” segment includes the results of operations of EMS for theperiod of January 16, 2008 through September 30, 2008 and the resultsof operations of Badger for the period of June 4, 2008 through September 30,2008. EMS and Badger were acquired by the Company on January 16, 2008 and June 4,2008, respectively.

 

(2) “Corporateand Other” includes corporate selling, general and administrative expenses andintercompany eliminations. Corporate selling, general and administrativeexpenses includes corporate salaries and benefits, share-based compensation andprofessional fees.

 

***Revenues***

 

Total revenues increased $25,200 or 18%, from$139,682 during the nine months ended September 30, 2008, to $164,882during the nine months ended September 30, 2009. The increase in revenues was primarilyattributable to an increase in wind turbine structural tower revenues andprecision repair and engineering services, which was partially offset by adecline in revenues attributable to wind gearing revenues.

 

Products segment revenues increased $15,585 from$115,331 during the nine months ended September 30, 2008, to $130,916during the nine months ended September 30, 2009. The increase in revenueswithin our Products segment was primarily attributable to the inclusion ofmaterials in the selling price of a higher proportion of wind towersmanufactured and an increase in wind tower revenues as a result of productionat our new wind tower manufacturing facility in Abilene, Texas, which waspartially offset by the decline in gearing orders for the wind industry.

 

Services segment revenues increased $9,297 from$25,205 during the nine months ended September 30, 2008, to $34,502 duringthe nine months ended September 30, 2009. The increase in revenues withinour Services segment was primarily attributable to full year financial resultsof Badger, which we acquired in June 2008. In addition, Services segmentrevenues increased as a result of an increase in maintenance and repair contractscompleted as compared to the prior year.

 

***Cost of Sales***

 

Total cost of sales increased $37,865 from $112,599during the nine months ended September 30, 2008, to $150,464 during thenine months ended September 30, 2009. The increase in cost of sales primarilyattributable to an increase in production costs associated higher productionlevels of wind turbine structural towers manufactured and higher direct laborcosts associated with our precision repair and engineering services, which waspartially offset by a decline in manufacturing costs of wind turbine gearingsystems as a result of a decline in production volume.

 

Products segment cost of sales increased from$98,111 during the nine months ended September 30, 2008, to $124,492during the nine months ended September 30, 2009. The increase in cost ofsales within our Products segment was primarily attributable to the inclusionof materials in the selling price of a higher proportion of wind towers, higherproduction costs related to the opening of the Abilene, Texas wind towermanufacturing facility, and volume inefficiencies at Brad Foote as a result ofa decline in manufacturing orders as compared to the same period during theprevious year.

 

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Services segment cost of sales increased from$14,531 during the nine months ended September 30, 2008, to $26,300 duringthe nine months ended September 30, 2009. The increase in cost of saleswithin our Services segment was primarily attributable to the inclusion of fullyear financial results of Badger, which we acquired in June 2008, andhigher direct labor costs as a result of an increase in field technicians inour maintenance and repair services.

 

***Selling, General and Administrative Expenses***

 

Selling, general and administrative expensesdecreased from $28,475 during the nine months ended September 30, 2008, to$27,688 during the nine months ended September 30, 2009. The decrease wasprimarily attributable to cost reduction initiatives implemented during thecurrent year to mitigate the effects of a decline in wind energy relatedrevenues. During the nine months ended September 30, 2009, the Companyreduced administrative headcount to offset this decline in production volumes.The cost reduction initiatives were partially offset by higher general andadministrative expenses during the first half of this year related to higherprofessional fees due to the finalization of audits related to prior yearacquisitions, severance payments made to a former executive, professional feesrelated to the filing of our registration statement, and professional fees anddue diligence expenses associated with a potential acquisition that the Companydid not complete during the current year.

 

***Intangible Amortization***

 

Intangible amortization expense increased from$8,249 during the nine months ended September 30, 2008, to $8,718 duringthe nine months ended September 30, 2009. The increase was primarilyattributable to an increase in intangible amortization expense related tocustomer relationships and trade name intangibles resulting from theacquisitions of EMS and Badger, which the Company acquired during January 2008and June 2008, respectively.

 

***Other Expense (Income), net***

 

Total other expense, net was $1,864 during the ninemonths ended September 30, 2008, compared to other income, net of $4,079during the nine months ended September 30, 2009. The increase wasprimarily attributable to the recognition of $5,082 in income related to anescrow agreement settlement with the former owners of Brad Foote during thesecond quarter of 2009.

 

***Provision for Income Taxes***

 

During the nine months ended September 30,2008, the Company reported a provision for income taxes of $1,410 compared to abenefit for income taxes of $389 during the nine months ended September 30,2009. The decrease in income taxes was primarily attributable to higher netlosses during the current year and a reduction in the income tax valuationallowance for federal income tax reporting purposes as a result of the Company’snet operating loss carryforwards, which was partially offset by an increase inthe provision for state income taxes during the current year.

 

***Net Loss***

 

Net loss increased from $12,915 during the ninemonths ended September 30, 2008, to $17,520 during the nine months ended September 30,2009, primarily as a result of the factors as described above.

 

**SELECTEDFINANCIAL DATA**

 

The following non-GAAP financial measure presentedbelow relates to earnings before interest, taxes, depreciation, amortizationand share-based payments (“EBITDA”) and is presented for illustrative purposesas an accompaniment to our unaudited financial results of operations for thethree and nine months ended September 30, 2009 and 2008. EDITDA should notbe considered an alternative to, nor is there any implication that it is moremeaningful than, any measure of performance or liquidity promulgated underGAAP. We believe that EBITDA is particularly meaningful due principally to therole acquisitions have played in the development of the Company. Historically,our growth through acquisitions has resulted in significant non-cashdepreciation and amortization expense, which was primarily attributable to asignificant portion of the purchase price of our acquired businesses beingallocated to depreciable fixed assets and definite-lived intangible assets. Thefollowing EBITDA calculation is derived from our unaudited condensedconsolidated financial results for the three and nine months ended September 30,2009 and 2008 as follows:

 

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| ** **                            | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|---------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                            | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                            | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                  |       |                   |       |                   |       |   |   |   |   |
| Net  loss                             |       | $                      | (4,944     | )                      | $          | (7,499 | ) | $ | (17,520 | ) | $ | (12,915 | ) |
| (Benefit)  provision for income taxes |       | (116                   | )          | 1,210                  |       | (389 | ) | 1,410 |   |
| Interest  expense (income), net       |       | 732                    |       | (90                    | )          | 1,831 |   | 1,921 |   |
| Depreciation  and amortization        |       | 6,698                  |       | 5,908                  |       | 20,131 |   | 15,706 |   |
| Share-based  compensation             |       | 677                    |       | 225                    |       | 2,042 |   | 1,128 |   |
| EBITDA                                |       | $                      | 3,047      |                   | $          | (246 | ) | $ | 6,095 |   | $ | 7,250 |   |

 

**SUMMARY OF CRITICAL ACCOUNTINGPOLICIES AND ESTIMATES**

 

The methods, estimates and judgments that we use inapplying our critical accounting policies have a significant impact on theresults that we report in our financial statements. Some of our accountingpolicies require us to make difficult and subjective judgments, often as aresult of the need to make estimates regarding matters that are inherentlyuncertain. We also have other policies that we consider key accountingpolicies, such as those for revenue recognition, however, these policiestypically do not require us to make estimates or judgments that are difficultor subjective.

 

We have identified the accounting policies andestimates listed below as those that we believe require management’s mostsubjective and complex judgments in estimating the effect of inherentuncertainties. This section should also be read in conjunction with Note 2“Summary of Significant Accounting Policies” in Part II, Item 8 of thenotes to our consolidated financial statements in our Annual Report on Form 10-Kfor the year ended December 31, 2008, which includes a discussion of theseand other significant accounting policies.

 

**Revenue Recognition**

 

We recognize revenue when the earnings process iscomplete and when persuasive evidence of an arrangement exists, transfer oftitle has occurred or services have been rendered, the selling price is fixedor determinable, collectability is reasonably assured, and delivery hasoccurred per the terms of the contract. Customer deposits and other receiptsare deferred and recognized when the revenue is realized and earned.

 

In some instances,products are sold under terms included in bill and hold sales arrangements thatresult in different timing for revenue recognition. Assuming all other revenuerecognition criteria are met, revenue is recognized upon completion of productmanufacture and customer acceptance.

 

**WarrantyLiability**

 

Within ourProducts segment, we typically provide a warranty with terms that generallyrange from two to seven years for various products relating to workmanship andmaterials supplied by the Company. We reserve for warranty claims based onindustry experience and estimates made by management. From time to time,customers may submit warranty claims against the Company. In certain contracts,we have recourse provisions for items that would enable recovery from thirdparties for amounts paid to customers under warranty provisions. As of September 30,2009 and December 31, 2008, our estimated product warranty liability was$1,477 and $890, respectively, and is recorded within accrued liabilities in ourcondensed consolidated balance sheets.

 

**Inventories**

 

Inventories arestated at the lower of cost or market. Any excess of cost over market value isincluded in the Company’s inventory allowance. Market value of inventory, andmanagement’s judgment of the need for reserves, encompasses consideration ofother business factors including physical condition, inventory holding period,contract terms, and usefulness. Inventories are valued based on an average costmethod that approximates the first-in, first-out (FIFO) basis.

 

Inventoriesconsist of raw materials, work-in-process, and finished goods. Raw materialsconsist of components and parts for general production use. Work-in-processconsists of labor and overhead, processing costs and materials purchased forspecific customer orders. Finished goods consist of components manufactured bythe Company that will be used to produce final customer products.

 

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**Goodwilland Intangible Assets**

 

Goodwillrepresents the excess of cost over fair market value of identifiable net assetsacquired through business purchases. The Company performs an annual goodwillimpairment test during October of each year, or more frequently whenevents or circumstances indicate that the carrying value of the Company’sassets may not be recovered. The Company tests intangible assets for impairmentonly when events or circumstances indicate that the carrying value of theCompany’s assets may not be recovered. In evaluating the recoverability of thecarrying value of goodwill and other intangible assets, we must makeassumptions regarding the fair value of our reporting units. Our method ofdetermining the fair value is based upon our estimate of the projected futurediscounted cash flows of our reporting units. If our fair value estimates orrelated assumptions change in the future, we may be required to recordadditional impairment charges related to goodwill and intangible assets.

 

**Long-LivedAssets**

 

We review propertyand equipment and other long-lived assets for impairment whenever events orcircumstances indicate that carrying amounts may not be recoverable. If suchevents or changes in circumstances occur, we will recognize an impairment lossif the undiscounted future cash flows expected to be generated by the asset areless than the carrying value of the related asset. The impairment loss wouldadjust the asset to its fair value.

 

In evaluating therecoverability of long-lived assets, we must make assumptions regardingestimated future cash flows and other factors to determine the fair value ofsuch assets. If our fair value estimates or related assumptions change in thefuture, we may be required to record impairment charges related to property andequipment and long-lived assets.

 

**IncomeTaxes**

 

TheCompany accounts for income taxes based upon an asset and liability approach.Deferred tax assets and liabilities represent the future tax consequences ofthe differences between the financial statement carrying amounts of assets andliabilities versus the tax basis of assets and liabilities. Under this method,deferred tax assets are recognized for deductible temporary differences, andoperating loss and tax credit carryforwards. Deferred tax liabilities arerecognized for taxable temporary differences. Deferred tax assets are reducedby a valuation allowance when, in the opinion of management, it is more likelythan not that some portion or all of the deferred tax assets will not berealized. The impact of tax rate changes on deferred tax assets and liabilitiesis recognized in the year that the change is enacted.

 

In connection withthe preparation of our consolidated financial statements, we are required toestimate our income tax liability for each of the tax jurisdictions in which weoperate. This process involves estimating our actual current income tax expenseand assessing temporary differences resulting from differing treatment ofcertain income or expense items for income tax reporting and financialreporting purposes. We also recognize as deferred income tax assets theexpected future income tax benefits of net operating loss carryforwards. Inevaluating the realizability of deferred income tax assets associated with netoperating loss carryforwards, we consider, among other things, expected futuretaxable income, the expected timing of the reversals of existing temporaryreporting differences, and the expected impact of tax planning strategies thatmay be implemented to prevent the potential loss of future income tax benefits.Changes in, among other things, income tax legislation, statutory income taxrates, or future taxable income levels could materially impact our valuation ofincome tax assets and liabilities and could cause our income tax provision tovary significantly among financial reporting periods.

 

The Company alsoaccounts for the uncertainty in income taxes related to the recognition andmeasurement of a tax position taken or expected to be taken in an income taxreturn. The Company follows the applicable pronouncement guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition related to the uncertainty in these income taxpositions.

 

**RecentAccounting Pronouncements**

 

SeeNote 13, “Recent Accounting Pronouncements” of the notes to our unauditedcondensed consolidated financial statements for a discussion of recentaccounting pronouncements that may affect the Company.

 

**LIQUIDITY,FINANCIAL POSITION AND CAPITAL RESOURCES**

 

As of September 30, 2009, cash and cashequivalents totaled $7,660 and remained relatively unchanged compared to ourcash and cash equivalents which totaled $7,834 as of June 30, 2009. Inlight of the current economic conditions and in particular with respect to thecurrent market conditions for the wind and energy related markets, we haveimplemented a number of initiatives to monitor and conserve our liquidity toensure that we have adequate cash on hand and cash available to meet currentand future

 

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operatingrequirements. Among these initiatives, we have continued to focus our effortson cash management, which has included more stringent controls on capitalspending, improvements in our collection of accounts receivable, renegotiatingor extending credit terms for firm purchase commitments and trade payables, andentering into new financing or debt arrangements. We have completed a series ofreduction in workforce initiatives throughout the organization to better alignour resources to the current production demands from our customers. We believethat the completion of these initiatives and the continuous monitoring of ourliquidity and financial position will enable us to continue to satisfy the cashrequirements for working capital, necessary capital expenditures and debt andlease commitments through at least the next 12 months primarily using availablecash balances, cash generated by operations and through additional financing orequity arrangements. While we anticipate being able to maintain adequateliquidity, there can be no assurance that our cash balances and cash flows willbe adequate to meet our liquidity and operating requirements.

 

Duringthe nine months ended September 30, 2009, we entered into additionalfinancing arrangements to improve our liquidity and cash balances. In April 2009,Tower Tech entered into a sale-leaseback agreement with Varilease Finance, Inc.(“Varilease”) under which Varilease agreed to provide equipment financing inthe amount of up to $3,000. Proceeds from this financing arrangement are beingused for working capital and other general operating needs. In addition, TowerTech obtained construction financing from Great Western in the amount of up to$10,000 under the Construction Loan Agreement. Proceeds from this debtarrangement will be used to complete construction of Tower Tech’s wind towermanufacturing facility in Brandon, South Dakota. We believe that by enteringinto these additional financing arrangements, we have strengthened ourfinancial position and have provided additional liquidity to meet current andfuture operating requirements. In August 2009, the BF Subsidiaries and BOAentered into the Third Omnibus Amendment further amending the Loan Agreement.Among other things, the Third Omnibus Amendment waived Brad Foote’s financialcovenant violations for the second quarter of 2009 and reset its financialcovenants on a prospective basis. In September 2009,Badger obtained from General Electric Capital Corporation a term loan in theprincipal amount of approximately $1,000. Proceeds from this loan will be usedfor working capital and other general operating needs.

 

Additionally, weintend to enhance our ability to fulfill our operating and liquidityrequirements through financing initiatives that may include the completion of apublic offering of our common stock. On October 30, 2009, we filed aregistration statement with the SEC related to a proposed public equityoffering of 15,000,000 shares of our common stock, of which we propose to sell10,000,000 shares and Tontine Capital Partners, L.P., and its affiliated funds proposeto sell 5,000,000 shares. If successful, we anticipate that a portion of theproceeds from this equity offering will be used to repay outstandingindebtedness, including our outstanding debt facilities with BOA and theremainder for general corporate operating purposes, including capitalexpenditures to grow our service businesses. Among other things, the repaymentof certain debt facilities will release us from significant subsidiary-specificfinancial covenant requirements and asset liens, reduce our debt servicerequirements and allow the free flow of funds throughout the organization. Wealso intend to pursue the establishment of a senior credit facility which wouldenable us to better manage our working capital and other short-term cashrequirements.

 

Ourability to make scheduled payments on our debt and other financial obligationswill depend on our future financial and operating performance. While we believethat we will continue to have sufficient cash flows to operate our businesses,there can be no assurances that our operations will generate sufficient cashflows or that we will be successful in our planned equity placement offering orthat credit facilities will be available to us in an amount sufficient toenable us to pay our indebtedness or to fund our other liquidity needs. If wecannot make scheduled payments on our debt, we will be in default and, as aresult, among other things, our debt holders could declare all outstandingprincipal and interest to be due and payable and we could be forced intobankruptcy, liquidation or required to substantially restructure or alter ourbusiness operations and debt obligations.

 

**Sourcesand Uses of Cash**

 

***Operating Cash Flows***

 

During the nine months ended September 30, 2008, net cash used inoperating activities was $5,812, compared to net cash provided by operatingactivities of $2,853 during the nine months ended September 30, 2009. Theincrease in net cash provided by operating activities was primarilyattributable to a decrease in our inventory balances and higher collections ofaccounts receivable, which were partially offset by a decrease in our accountspayable and customer deposits. Changes in our inventories during the ninemonths ended September 30, 2009 were primarily attributable to inventoryturnover at our Manitowoc, Wisconsin and Abilene, Texas wind towermanufacturing facilities related to the scheduled completion of wind towermanufacturing orders and a decrease in gearing inventory due to a decline ingearing sales for the wind related industry. Additionally, the conversion ofaccounts receivable into cash collections improved our net cash provided byoperating activities during the nine months ended September 30, 2009relative to the nine months ended September 30, 2008. Cash flows fromoperations increased primarily as a result of higher cash collections onaccounts receivable at Tower Tech and EMS. Accounts receivable balancesdecreased, but were partially offset by a decrease in customer deposits. Theincrease in net cash provided by operating activities also resulted in highercash outflows for trade payables.

 

***Investing Cash Flows***

 

During the nine months ended September 30, 2008, net cash used ininvesting activities totaled $84,646, compared to $11,710 during the ninemonths ended September 30, 2009. The decrease in net cash used ininvesting activities was primarily attributable to a significant reduction incapital expenditures as a result of the completion of a number of capitalprojects and due to the fact that no acquisitions were completed by the Companyduring the nine months ended September 30, 2009. During the nine monthsended September 30, 2008, the Company completed the acquisitions of EMSand Badger in January and September of 2008, respectively, forapproximately $24,955, net of cash received. Capital expenditures were $49,613during the nine months ended September 30, 2008 primarily as a result ofequipment purchases at Brad Foote and construction and equipment expendituresfor our new wind tower manufacturing facility in Abilene, Texas. During thenine months ended September 30, 2009, capital expenditures were $9,761 andprimarily related to construction and equipment purchases as part of thecompletion of Tower Tech’s wind tower

 

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manufacturingfacility in Abilene, Texas. Additionally, changes in restricted cash decreasedfrom $10,436 during the nine months ended September 30, 2008 to $2,003during the nine months ended September 30, 2009. The decrease inrestricted cash was primarily attributable to an agreement entered into byTower Tech with respect to the Bailment Materials during the third quarter of2008 whereby Tower Tech conveyed ownership of certain raw materials to acustomer in exchange for the release of a down payment of $9,936 that wasclassified by the Company as restricted cash. An offsetting increase inrestricted cash during the nine months ended September 30, 2009 related toa collateral assignment of a $2,000 deposit account in connection with theConstruction Loan.

 

Additionally, weanticipate that capital expenditures will continue to be significantly lowerduring 2009 as compared to 2008 as a result of the completion of a significantnumber of capital projects during 2008. These capital projects included, amongother things, significant investments in capacity through capital expendituresrelated to equipment, machinery and transport vehicles. As a result of thesecapital investments, the Company believes that it has adequate capacity to meetcurrent and foreseeable customer demand.

 

***Financing Cash Flows***

 

During the nine months ended September 30, 2008, net cash providedby financing activities totaled $119,068, compared to $1,264 during the ninemonths ended September 30, 2009. The decrease in net cash provided byfinancing activities as compared to the prior period was primarily attributableto the fact that the Company did not complete any equity offerings during thenine months ended September 30, 2009. During the nine months ended September 30,2008, the Company completed a private equity placement in two tranches toTontine Partners, L.P. (“TP”), Tontine Overseas Fund Ltd. (“TOF”), TontineCapital Partners L.P (“TCP”) and Tontine 25 Overseas Master Fund L.P. (“T25”)for an aggregate of $100,000 for 12,562,814 shares of unregistered common stockat $7.96 per share. In January 2008, the Company also completed a privateequity placement in the amount of $17,225 for 2,031,250 shares of unregisteredcommon stock at $8.48 per share to TP and T25. Additionally, net cash providedby financing activities during the nine months ended September 30, 2009decreased as a result of higher payments on lines of credit and notes payableas compared to the prior year. Payments on lines of credit and notes payableincreased from $4,849 during the nine months ended September 30, 2008, to$8,312 during the nine months ended September 30, 2009. This increase wasprimarily attributable to higher debt repayments made to BOA due to amendmentsto the Debt Facilities during 2008 and 2009.

 

**ContractualObligations**

 

As of September 30,2009, minimum future cash payments due under contractual obligations,including, among others, our debt and credit agreements, non-cancelableoperating and capital lease agreements, and other long-term arrangements, wereas follows:

 
| ** **                         | ** ** | **Remaining  2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **2014 &  Thereafter** | ** ** | **Total** | ** ** |
|------------------------------------|------------|---------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|---------------------------------|------------|-----------|------------|
|                               |       |                |       |     |       |     |       |     |       |     |       |                            |       |      |       |
| Debt and credit agreements (1)     |       | $                   | 3,776      |     | $          | 19,981   |       | $        | 10,898     |     | $          | 4,184                           |       | $         | 1,516      |   | $ | 294 |   | $ | 40,649 |   |
| Operating lease obligations        |       | 1,515               |       | 4,850    |       | 4,642    |       | 3,966    |       | 2,615    |       | 7,482                           |       | 25,070    |       |
| Capital lease obligations (1)      |       | 359                 |       | 1,425    |       | 1,377    |       | 1,211    |       | 955      |       | —                          |       | 5,327     |       |
| Purchase commitments               |       | 3,300               |       | 3,564    |       | —   |       | —   |       | —   |       | —                          |       | 6,864     |       |
| Total contractual cash obligations |       | $                   | 8,950      |     | $          | 29,820   |       | $        | 16,917     |     | $          | 9,361                           |       | $         | 5,086      |   | $ | 7,776 |   | $ | 77,910 |   |

 

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(1)                                  Debt and credit agreements and capitallease obligations include both the future principal payment amount and anamount calculated for expected future interest payments.

 

*Debtand Credit Agreements.*  Debt and credit agreementsinclude outstanding borrowings under our lines of credit, term notes related tovehicle and equipment purchases, and notes payable related to an escrowagreement settlement and a purchase agreement for manufacturing equipment. SeeNote 8, “Debt and Credit Agreements” of the notes to our unauditedconsolidated financial statements for further discussion of our outstandingindebtedness and credit agreements.

 

*OperatingLease Obligations.*  We lease the majority of our facilities andcertain equipment under operating leases expiring at various dates through2023. Lease terms generally range from two to 15 years with renewaloptions for extended terms. The amounts in the table above represent futureminimum lease payments for non-cancelable operating leases.

 

*CapitalLease Obligations.*  We have capital lease obligations related tocertain manufacturing equipment and vehicles expiring at various dates through2013. As of September 30, 2009, the balance of our outstanding capitallease obligations was approximately $5,327, which includes accrued interest ofapproximately $868.

 

*PurchaseCommitments.*  Purchase commitments represent building andequipment purchase contracts related to the construction of a new wind towermanufacturing facility and gearing equipment purchases.

 

**Off-BalanceSheet Arrangements**

 

During April 2009,Tower Tech entered into a sale-leaseback agreement with Varilease as describedabove, whereby Tower Tech sold certain equipment to Varilease in exchange for$2,935 in cash and agreed to lease the equipment back from Varilease for acertain period of time. The primary purpose of this arrangement was to provideadditional liquidity for meeting working capital requirements. The leaseagreement is for a three-year period with rental payments due monthly of $85.In addition, the sale of the assets resulted in a gain on disposition of $40,which will be amortized to other income in our statement of operations over thelife of the operating lease.

 

                During March 2009, Badgerentered into two sale-leaseback agreements, which consisted of one capital andone operating lease. As part of these agreements, Badger sold certain equipmentto a third party financing company in exchange for $570 in cash and agreed tolease the equipment back from the purchaser for a certain period of time. Aspart of these agreements, Badger has the ability to enter into additionalsale-leaseback transactions with the financing company involving otherequipment for a maximum aggregate amount of $1,700. The primary purpose ofthese arrangements was to provide additional liquidity for meeting workingcapital requirements. Each lease agreement is for a four-year period withrental payments due monthly. In addition, the sale of the assets resulted in again on disposition of $38, which will be amortized to other income in ourstatement of operations over the life of the operating lease.

 

**CautionaryNote Regarding Forward-Looking Statements**

 

The preceding discussionand analysis should be read in conjunction with our condensed consolidatedfinancial statements and related notes included in Item 1 of Part 1 ofthis Quarterly Report on Form 10-Q and the audited consolidated financialstatements and related notes and Management’s Discussion and Analysis ofFinancial Condition and Results of Operations contained in our Annual Report onForm 10-K for the year ended December 31, 2008. Portions of thisQuarterly Report on Form 10-Q, including the discussion and analysis inthis Item 2, contain forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended (the “Exchange Act”). Anystatements contained herein that are not historical fact may be deemedforward-looking statements. In some cases, forward-looking statements

 

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can be identified bywords such as “believe,” “expect,” “anticipate,” “plan,” “potential,” “continue,”“intend” or similar expressions. Forward-looking statements also include theassumptions underlying or relating to any of the foregoing statements. Suchforward-looking statements are based upon current expectations and beliefs andare subject to a number of factors and uncertainties that could cause actualresults to differ materially from those described in the forward-lookingstatements. Any forward-looking statements made herein are made pursuant to thesafe harbor provisions of the Private Securities Litigation Reform Act of 1995.Our forward-looking statements include or relate to the following: (i) ourplans to continue to grow our business through organic growth and integrationof previous and future acquisitions; (ii) our beliefs with respect to thesufficiency of our working capital and our plans to evaluate alternate sourcesof funding if necessary; (iii) our expectations relating to the extension,continuation or renewal of federal tax incentives and grants and staterenewable portfolio standards; (iv) our ability to comply with loancovenants; (v) our expectations relating to construction of newfacilities, expansion of existing facilities and sufficiency of our capacity tomeet the demands of our customers and support expectations regarding ourgrowth; (vi) our plans with respect to the use of proceeds from financingactivities; (vii) our beliefs and expectations relating to the recenteconomic downturn and the potential impact it may have on our plans withrespect to future remediation efforts; (viii) the anticipated benefits ofour remediation efforts on the strength of our internal control processes andour plans with respect to future remediation efforts; (ix) our beliefsregarding the state of the wind energy market generally. Forward-lookingstatements cannot be guaranteed and actual results may vary materially due tothe uncertainties and risks, known and unknown, associated with such statements.We caution investors that many important factors have affected, and in thefuture could affect our actual results of operations and cause such results todiffer materially from those anticipated in forward-looking statements made inthis report and elsewhere by us or on our behalf. It is not possible to foreseeor identify all factors that could cause actual results to differ from expectedor historic results; and (x) those risks described from time to time inour reports to the Securities and Exchange Commission (including in our AnnualReport on Form 10-K). As such, investors should not consider any list ofsuch factors to be an exhaustive statement of all of the risks, uncertaintiesor potentially inaccurate assumptions that investors should take into accountwhen making investment decisions. Stockholders and other readers are cautionednot to place undue reliance on forward-looking statements, which speak only asof the date on which they are made. We do not intend to update publicly orrevise any forward-looking statements.

 

**Item3.        Quantitative and QualitativeDisclosures About Market Risk**

 

There has been no significant change in our exposureto market risk during the first nine months of 2009. For discussion of ourexposure to market risk, refer to Part II, Item 7A, “Quantitative andQualitative Disclosures About Market Risk,” contained in our Annual Report on Form 10-Kfor the year ended December 31, 2008.

 

**Item 4.        Controls and Procedures**

 

**MaterialWeaknesses**

 

As discussed in Item 9Aof our Annual Report on Form 10-K for the year ended December 31,2008, as of December 31, 2008, we identified certain material weaknessesrelating to:

 

***Inventory and Cost Accounting***

 

A material weaknessexists at our gear manufacturing facilities relating to routine physicalinventory counts, the reconciliations of book to physical adjustments, theprocess for maintenance of perpetual inventory records and related accountingfor scrap and cost of goods sold. Management is continuing to enhance thecontrol structure to address these previously identified material weaknesses.

 

***IT Controls***

 

The Company did notmaintain effective internal control over information systems at its gearmanufacturing facilities. General computing controls were first implemented inthe fourth quarter of 2008. Such timing did not allow the Company to obtain asufficient sample size to test controls and as a result could not be assessedfor operating effectiveness. The lack of general computing controls combinedwith the errors previously noted in inventory constitutes an aggregatedmaterial weakness.

 

***Income Taxes***

 

In conjunction with ourfiling of Amendment No. 2 on Form 10-Q/A for the quarterly periodended September 30, 2008, we identified a material weakness associatedwith internal controls regarding income taxes. The Company did not maintaineffective controls over the completeness and accuracy of its income taxprovision and related balance sheet accounts. Specifically, the Company’scontrols over the processes and procedures related to the determination andreview of the quarterly tax provisions were not adequate to ensure that theincome tax provision was prepared in accordance with GAAP.

 

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***Non-routine Transactions***

 

In conjunction with ourfiling of Amendment No. 2 on Form 10-Q/A for the quarterly periodended September 30, 2008, we identified a material weakness associatedwith the controls over non-routine transactions, and the related accountingtreatment of those transactions was appropriately reviewed to ensure compliancewith GAAP.

 

***Remediation Activities***

 

Management has begunremediation efforts to reduce the risks presented by the existing materialweaknesses. Since year-end, we have added a cost accountant at our gearmanufacturing facility responsible for the tracking of inventory and havefurther enhanced management’s review of the inventory process. Standard costsfor inventory parts are reviewed by the new cost accountant and by managementon a quarterly basis. In the third quarter of 2008, management began performingquarterly physical inventories at this facility, a practice that managementanticipates will be performed throughout 2009.

 

Management will continueto work with the Company’s tax advisors to have more active and timely reviewof the Company’s tax provisions. Management has also implemented additionalcontrols over non-routine transactions.

 

On June 4, 2008, theCompany completed the acquisition of Badger. This acquired business has beenexcluded from management’s assessment of internal controls as of and for theperiod ended December 31, 2008. Badger’s assets and liabilities acquiredwere $18,122 and $6,127, respectively. Badger was a mid-year acquisition thatwas not significant to the overall operations of the Company and was notincluded in our evaluation of the effectiveness of disclosure controls andprocedures for 2008. Though management did not perform a complete assessment,from the date of acquisition through our fiscal year end, we have identifiedseveral items that represent material weaknesses or significant deficiencies inthe internal controls over financial reporting at Badger. These materialweaknesses are related to internal financial expertise, accounting policies andprocedures, information technology environment and segregation of duties. TheCompany has begun remediation efforts to mitigate the effects of thesedeficiencies.

 

The impact of theremediation efforts initiated by management will not be fully known until ourassessment of internal controls over financial reporting as of December 31,2009.

 

**Evaluation of Disclosure Controls andProcedures**

 

Our Chief ExecutiveOfficer and Chief Financial Officer evaluated the effectiveness of the Company’sdisclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)) as of the end of the period covered in this report. In light of thematerial weaknesses previously disclosed, which have not been completelyremediated as of the end of the period covered by this report, our ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures were not effective to provide reasonable assurance thatinformation required to be disclosed by the Company in the reports that itfiles or submits under the Exchange Act was recorded, processed, summarized andreported within the time periods specified by the SEC’s rules and formsand did not ensure that information required to be disclosed in the reportsthat we file or submit under the Exchange Act was accumulated and communicatedto our management, including our Chief Executive Officer and Chief FinancialOfficer, as appropriate to allow timely decisions regarding requireddisclosure. As a result of this conclusion, the financial statements for theperiod covered by this report were prepared with particular attention to thematerial weaknesses previously disclosed.

 

We anticipate the actionsto be taken to remediate the material weaknesses and the resulting improvementin controls will generally strengthen our disclosure controls and procedures,as well as our internal controls over financial reporting, and will, over time,address the material weaknesses that we identified in our internal controlsover financial reporting as of December 31, 2008. However, because many ofthe remediation actions we have undertaken are recent and because some of ourremediation actions will be designed to improve our internal controls overannual measures, management will not be able to conclude that the materialweaknesses have been eliminated until such time as it is able to complete itsassessment of the effectiveness of internal controls over financial reporting.While management is exercising its best efforts to remediate materialweaknesses and significant deficiencies identified and described above, itcannot provide any assurance as to when such material weaknesses and significantdeficiencies will be remediated, and other material weaknesses or significantdeficiencies may arise.

 

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**PART II.    OTHER INFORMATION**

 

**Item 1.        Legal Proceedings**

 

Occasionally, we are adefendant in litigation arising in the ordinary course of our business,including claims arising from personal injuries, contract claims, customerdisputes and employment-related claims. To date, none of these types oflitigation, most of which are typically covered by insurance, has had amaterial effect on the Company. We have insured and continue to insure againstmost of these types of claims. A judgment significantly in excess of ourinsurance coverage or involving punitive damages, which may not be covered byinsurance, could materially adversely affect our financial condition or resultsof operations.

 

**Item 1A.Risk Factors**

 

Fora discussion of risk factors affecting our company and businesses, see risksdiscussed in “Management’s Discussion and Analysis of Financial Condition andResults of Operations” and elsewhere in this report and included in our otherfilings with the Securities and Exchange Commission.

 

**Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds**

 

None

 

**Item 3.        Defaults Upon Senior Securities**

 

None

 

**Item 4.        Submission of Matters to a Vote of Security Holders**

 

None

 

**Item 5.        Other Information**

 

None

 

**Item 6.        Exhibits**

 

See the Exhibit Indexfollowing the signature page to this report.

 

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**SIGNATURES**

 

In accordance with therequirements of the Securities Exchange Act of 1934, the registrant caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|                  | BROADWIND ENERGY, INC. |
|-----------------------|------------------------|
|                  |                   |   |
|                  |                   |   |
| November 2, 2009 | By:                    | /s/ J. Cameron Drecoll |
|                  |                   | J. Cameron Drecoll |
|                  |                   | Chief Executive Officer |
|                  |                   | (principal executive  officer) |
|                  |                   |   |
| November 2, 2009 | By:                    | /s/ Stephanie Kushner |
|                  |                   | Stephanie Kushner |
|                  |                   | Chief Financial Officer |
|                  |                   | (principal financial  officer) |

 

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EXHIBIT INDEX

BROADWIND ENERGY,INC.

FORM 10-Q FORTHE QUARTER ENDED SEPTEMBER 30, 2009

 
| **Exhibit  Number** | ** ** | **Exhibit**                                                                                                                                                    |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1                |       | Rule 13a-14(a) Certification  of Chief Executive Officer*                                                                                            |
| 31.2                |       | Rule 13a-14(a) Certification  of Chief Financial Officer*                                                                                            |
| 32.1                |       | Certification Pursuant  to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002 of Chief Executive Officer* |
| 32.2                |       | Certification Pursuant  to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002 of Chief Financial Officer* |

 

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*                                         Filed herewith.

 

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