**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 MARCH 31, 2007**





**[
      ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934**





*COMMISSION
      FILE NUMBER 0-10999*





**COMPOSITE
      TECHNOLOGY CORPORATION**


(Exact
      Name of Registrant as Specified in Its Charter)





NEVADA
            
            59-2025386(State
                or Other Jurisdiction of
              Incorporation
                or Organization)
            
            (I.R.S.
                Employer Identification No.)2026
                McGaw Avenue, Irvine, CA
              (Address
                of Principal Executive Offices)
            
            92614
              (Zip
                Code)





(949)
      428-8500


(Registrant's
      Telephone Number, Including Area Code)





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. YES x NO o





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





Large
                accelerated filer o
            Accelerated
                filer x
            Non-accelerated
                filer o





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





APPLICABLE
      ONLY TO ISSUERS INVOLVED IN BANKRUPTCY


PROCEEDING
      DURING THE PRECEDING FIVE YEARS:





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





APPLICABLE
      ONLY TO CORPORATE ISSUERS:





Indicate
      the number of shares outstanding of each of the issuer's classes of common
      stock
      as of: May 8, 2007














CLASS
            
            NUMBER
                OF SHARES OUTSTANDINGCommon
                Stock, par value
              $0.001
                per share
            
            179,860,419
                shares














**COMPOSITE
      TECHNOLOGY CORPORATION**


Form
      10-Q
      for the Quarter ended March 31, 2007


Table
      of
      Contents








PagePART
                I - FINANCIAL INFORMATIONItem
                1 Financial Statements
            3Item
                2 Management's Discussion and Analysis of Financial Condition and
                Results
                of Operations
            27Item
                3 Quantitative and Qualitative Disclosures About Market
                Risk
            38Item
                4 Controls and Procedures
            38PART
                II - OTHER INFORMATIONItem
                1 Legal Proceedings
            41Item
                1A Risk Factors
            41Item
                2 Unregistered Sales of Equity Securities and the Use of
                Proceeds
            43Item
                3 Defaults Upon Senior Securities
            43Item
                4 Submission of Matters to a Vote of Security Holders
            43Item
                5 Other Information
            43Item
                6 Exhibits
            44SIGNATURE
            46INDEX
                TO EXHIBITS
            44




2





**ITEM
      1**





**PART
      1 - FINANCIAL STATEMENTS**


**COMPOSITE
      TECHNOLOGY CORPORATION**


**AND
      SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**





March
                31, 2007
            
            September
                30, 2006UnauditedASSETSCURRENT
                ASSETSCash
                and Cash Equivalents
            
            $
            5,823,532
            
            $
            2,578,347Accounts
                Receivable, net
            
            
            12,675,539
            
            
            9,473,863Inventory,
                net
            
            
            21,855,287
            
            
            23,891,867Prepaid
                expenses and other current assets
            
            
            3,333,511
            
            
            3,433,936Total
                current assets
            
            
            43,687,869
            
            
            39,378,013Investment
                in unconsolidated subsidiary
            
            
            1,835,750
            
            
            --Long
                Term Trade Receivables
            
            
            --
            
            
            2,028,927Property
                and Equipment, net
            
            
            7,243,494
            
            
            4,714,084Goodwill
                and Intangible Assets
            
            
            49,206,940
            
            
            49,616,000Other
                Assets
            
            
            949,521
            
            
            515,800TOTAL
                ASSETS
            
            $
            102,923,574
            
            $
            96,252,824LIABILITIES
                AND SHAREHOLDERS’ EQUITYCURRENT
                LIABILITIESAccounts
                Payable and Other Accrued Liabilities
            
            $
            17,652,981
            
            $
            12,965,468Deferred
                Revenues and Customer Advances
            
            
            16,627,445
            
            
            17,808,209Warranty
                Provision
            
            
            11,771,834
            
            
            11,594,876Convertible
                Notes and Capital Leases, current
            
            
            6,133,539
            
            
            6,309,900Total
                Current Liabilities
            
            
            52,185,799
            
            
            48,678,453LONG
                TERM LIABILITIESLong
                Term Portion of Warranty Provision
            
            
            1,150,266
            
            
            3,059,328Long-Term
                Portion of Deferred Revenues
            
            
            1,223,664
            
            
            2,304,492Convertible
                Notes
            
            
            16,522,482
            
            
            111,038Total
                Long-Term Liabilities
            
            
            18,896,412
            
            
            5,474,858Total
                Liabilities
            
            $
            71,082,211
            
            $
            54,153,311COMMITMENTS
                AND CONTINGENCIESSHAREHOLDERS’
                EQUITYCommon
                Stock, $.001 par value 300,000,000 shares authorized 178,884,848
                and
                178,635,325 issued and outstanding
            
            
            178,885
            
            
            178,635Additional
                Paid-in Capital
            
            
            145,218,040
            
            
            137,461,330Subscription
                Receivable
            
            
            (378,000
            )
            
            (378,000
            )Accumulated
                Deficit
            
            
            (113,148,486
            )
            
            (95,125,955
            )Accumulated
                Other Comprehensive Income (Loss)
            
            
            (29,076
            )
            
            (36,497
            )Total
                Shareholders’ Equity
            
            
            31,841,363
            
            
            42,099,513TOTAL
                LIABILITIES AND SHAREHOLDERS’ EQUITY
            
            $
            102,923,574
            
            $
            96,252,824








The
      accompanying notes are an integral part of these financial statements





3





**COMPOSITE
      TECHNOLOGY CORPORATION**


**AND
      SUBSIDIARIES**


CONSOLIDATED
      STATEMENTS OF OPERATIONS


FOR
      THE
      THREE MONTHS ENDED MARCH 31, 2007 AND 2006


(UNAUDITED)


AND
      FOR
      THE SIX MONTHS ENDED MARCH 31, 2007 AND 2006


(UNAUDITED)




Three
                Months endedMarch 31, 2007
            
            Three
                Months endedMarch 31, 2006
            
            Six
                Months endedMarch 31, 2007
            
            Six
                Months endedMarch 31, 2006Revenue:Product
                Sales
            
            $
            8,191,091
            
            $
            1,030,528
            
            $
            16,461,238
            
            $
            1,053,420Service
                Revenue
            
            
            217,342
            
            
            --
            
            
            4,979,923
            
            
            --Consulting
                Revenue
            
            
            --
            
            
            --
            
            
            --
            
            
            550,000Total
                Revenue
            
            $
            8,408,433
            
            $
            1,030,528
            
            $
            21,441,161
            
            $
            1,603,420Cost
                of Product Sold
            
            
            8,324,001
            
            
            977,112
            
            
            15,926,133
            
            
            993,792Cost
                of Service Revenue
            
            
            298,167
            
            
            --
            
            
            4,475,025
            
            
            --Cost
                of Consulting Revenue
            
            
            --
            
            
            --
            
            
            --
            
            
            304,787Gross
                margin
            
            $
            (213,735
            )
            $
            53,416
            
            $
            1,040,003
            
            $
            304,841OPERATING
                EXPENSESOfficer
                compensation
            
            
            250,002
            
            
            112,364
            
            
            497,696
            
            
            214,494General
                and administrative
            
            
            2,064,915
            
            
            993,742
            
            
            5,489,883
            
            
            1,900,906Legal,
                professional, & consulting
            
            
            381,437
            
            
            607,407
            
            
            624,527
            
            
            1,668,027Research
                and development
            
            
            1,339,951
            
            
            1,261,587
            
            
            2,777,022
            
            
            2,606,457Sales
                and Marketing
            
            
            2,326,963
            
            
            381,528
            
            
            4,184,390
            
            
            764,363Depreciation
                & Amortization
            
            
            653,977
            
            
            200,408
            
            
            1,432,173
            
            
            392,053Reorganization
                Expense - Bankruptcy legal fees
            
            
            --
            
            
            289,860
            
            
            --
            
            
            573,229Total
                operating expenses
            
            $
            7,017,245
            
            $
            3,846,896
            
            $
            15,005,690
            
            $
            8,119,529LOSS
                FROM OPERATIONS
            
            $
            (7,230,980
            )
            $
            (3,793,480
            )
            $
            (13,965,687
            )
            $
            (7,814,688
            )OTHER
                INCOME /(EXPENSE)Interest
                expense
            
            
            (1,598,518
            )
            
            (479,106
            )
            
            (2,014,071
            )
            
            (697,772
            )Interest
                income
            
            
            27,242
            
            
            1,466
            
            
            60,410
            
            
            15,711Other
                income (expense)
            
            
            1,408
            
            
            3,528
            
            
            209,409
            
            
            7,057Expense
                related to modification of warrants
            
            
            (285,588
            )
            
            --
            
            
            (285,588
            )
            
            (388,962
            )Expense
                related to inducement of convertible debt
            
            
            --
            
            
            (2,250,005
            )
            
            --
            
            
            (2,250,005
            )Litigation
                settlement expense
            
            
            (1,902,967
            )
            
            --
            
            
            (1,902,967
            )
            
            --Loss
                in Unconsolidated subsidiary
            
            
            (82,200
            )
            
            --
            
            
            (82,200
            )
            
            --Reorganization
                item - adjustment to carrying value - Convertible Debt
            
            
            --
            
            
            --
            
            
            --
            
            
            (2,622,240
            )Total
                other income/(expense)
            
            $
            (3,840,623
            )
            $
            (2,724,117
            )
            $
            (4,015,124
            )
            $
            (5,936,211
            )Loss
                before Income Taxes
            
            $
            (11,071,603
            )
            $
            (6,517,597
            )
            $
            (17,980,813
            )
            $
            (13,750,899
            )Income
                Taxes
            
            $
            1,600
            
            $
            1,056
            
            $
            52,433
            
            $
            2,656NET
                LOSS before Minority Interest
            
            
            (11,073,203
            )
            
            (6,518,653
            )
            
            (18,033,246
            )
            
            (13,753,555
            )Minority
                Interest in Consolidated Entity
            
            
            --
            
            
            --
            
            
            10,720
            
            
            --NET
                LOSS
            
            
            (11,073,203
            )
            
            (6,518,653
            )
            
            (18,022,527
            )
            
            (13,753,555
            )OTHER
                COMPREHENSIVE LOSSForeign
                Currency Translation Adjustment net of tax of $0 , $0, $0, and
                $0
            
            
            (69,235
            )
            
            --
            
            
            7,421
            
            
            --COMPREHENSIVE
                LOSS
            
            
            (11,142,438
            )
            
            (6,518,653
            )
            
            (18,015,106
            )
            
            (13,753,555
            )BASIC
                AND DILUTED LOSS PER SHARE
            
            $
            (0.06
            )
            
            (0.05
            )
            
            (0.10
            )
            
            (0.11
            )TOTAL
                BASIC AND DILUTED LOSS PER SHARE AVAILABLE TO COMMON
                SHAREHOLDERS
            
            $
            (0.06
            )
            
            (0.05
            )
            
            (0.10
            )
            
            (0.11
            )WEIGHTED-AVERAGE
                COMMON SHARES OUTSTANDING
            
            
            **178,880,937**
            
            
            **133,487,380**
            
            
            **178,824,838**
            
            
            **128,950,131**





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




4








**COMPOSITE
      TECHNOLOGY CORPORATION**


**AND
      SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**FOR
      THE SIX MONTHS ENDED MARCH 31, 2007 AND 2006**








For
                the Six Months ending Mar. 31, 2007
            
            For
                the Six Months ending Mar. 31, 2006(unaudited)
            
            (unaudited)CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                loss
            
            $
            (18,022,527
            )
            $
            (13,753,555
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                & Amortization
            
            
            1,432,173
            
            
            392,053Amortization
                of prepaid expenses paid in stock
            
            
            258,738
            
            
            --Interest
                related to detachable warrants and fixed conversion
                features
            
            
            1,380,744
            
            
            294,331Inventory
                reserve expense
            
            
            --
            
            
            725,616Expense
                related to fair value of vested options
            
            
            723,601
            
            
            408,031Issuance
                of common stock for services
            
            
            248,500
            
            
            629,330Issuance
                of common stock for inducement of debt conversion
            
            
            --
            
            
            2,250,005Issuance
                of warrants for services
            
            
            --
            
            
            180,416Compensation
                expense related to modification of stock warrants
            
            
            478,984
            
            
            388,691Reorganization
                item - adjustment to carrying value of convertible debt
            
            
            --
            
            
            2,622,240Loss
                in unconsolidated subsidiary
            
            
            82,200Other
            
            
            --
            
            
            (27,015
            )(Increase)
                Decrease in Assets:Accounts
                Receivable
            
            
            (3,555,541
            )
            
            (88,635
            )Inventory
            
            
            (1,276,505
            )
            
            (2,249,763
            )Prepaid
                expenses
            
            
            (195,042
            )
            
            271,845Capitalized
                construction costs
            
            
            --
            
            
            304,787Other
                assets
            
            
            163,734
            
            
            (69,169
            )Increase
                (Decrease) in LiabilitiesAccounts
                Payable and Accrued expenses
            
            
            6,788,148
            
            
            (1,453,479
            )Accrued
                Warranty Liability
            
            
            119,527
            
            
            --Deferred
                revenue
            
            
            (2,089,875
            )
            
            (507,365
            )Net
                cash used in operating activities
            
            $
            (13,463,141
            )
            $
            (9,681,636
            )CASH
                FLOW FROM INVESTING ACTIVITIESPurchase
                of property and equipment
            
            
            (4,129,602
            )
            
            (263,226
            )Cash
                investment in unconsolidated subsidiary
            
            
            (401,921
            )
            
            --Net
                cash provided by (used in) investing activities
            
            $
            (4,531,523
            )
            $
            (263,226
            )CASH
                FLOW FROM FINANCING ACTIVITIESProceeds
                from issuance of convertible debentures
            
            
            21,455,500
            
            
            9,300,000Proceeds
                from exercise of warrants
            
            
            --
            
            
            506,908Proceeds
                from Factoring Arrangements
            
            
            1,800,000
            
            
            --Proceeds
                from Notes Payable
            
            
            500,000
            
            
            200,000Proceeds
                from exercise of options
            
            
            5,500
            
            
            --Payments
                on capital lease assets
            
            
            (221,151
            )
            
            (197,805
            )Repayments
                of Notes Payable and Factoring Arrangements
            
            
            (2,300,000
            )
            
            --Net
                cash provided by financing activities
            
            $
            21,239,849
            
            $
            9,809,103Net
                increase/(decrease) in cash and cash equivalents
            
            
            3,245,185
            
            
            (135,759
            )CASH
                AND CASH EQUIVALENTS, BEGINNING OF PERIOD
            
            
            2,578,347
            
            
            807,115CASH
                AND CASH EQUIVALENTS, END OF PERIOD
            
            $
            5,823,532
            
            $
            671,356SUPPLEMENTAL
                DISCLOSURES OF CASH FLOW INFORMATIONCASH
                PAID FOR BANKRUPTCY ITEMS
            
            $
            316,592
            
            $
            184,575INTEREST
                PAID
            
            $
            166,928
            
            $
            346,592INCOME
                TAX PAID
            
            $
            1,600
            
            $
            2,656




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




5





**Supplemental
      Schedule for Non Cash Financing Activities**


During
      the first six months of fiscal 2007, the Company issued:


50,000
      shares of common stock for the settlement of accounts payable related to
      marketing consulting services valued at $55,000;


177,523
      shares of common stock for settlement of accounts payable related to product
      development services valued at $193,500;


220,000
      warrants valued at the fair value at the issuance date as described in note
      8 of
      $164,208 were issued to a note holder in lieu of interest and recorded as
      interest expense during the quarter at the fair value of the warrants
      issued;


10,973,585
      warrants valued at $0.4711 per warrant and incorporated into the beneficial
      conversion feature of $4,681,714 as described in Note 4.


1,316,827
      warrants valued at the fair value of $610,613 at the issuance date as described
      in Note 8 were issued as fees related to the February, 2007 Senior Convertible
      Note transaction.


1,800,000
      warrants valued at the fair value of $843,840 at the issuance date as described
      in Note 8 were issued in conjunction with the factored receivable arrangement.


629,128
      warrants valued at the fair value of $194,573 at the issuance date as described
      in Note 8 were issued pursuant to anti-dilution protection provisions of our
      2005 DIP financing.


152,341
      warrants value at the fair value of $61,868 at the issuance date as described
      in
      Note 8 were issued pursuant to anti-dilution protection provisions of our 2006
      Bridge Notes financing.





The
      Company had the following balances consolidated with the September 30, 2006
      balance sheet figures that related to the assets and liabilities of the Service
      business that was subsequently contributed into the Variable Interest Entity
      as
      discussed in Note 9. The cash balance at September 30, 2006 is included in
      the
      statement of cash flows as a cash investment in unconsolidated subsidiary for
      the six months ending March 31, 2007:


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




6





**COMPOSITE
      TECHNOLOGY CORPORATION**


**AND
      SUBSIDIARIES**


**NOTES
      TO FINANCIAL STATEMENTS**





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





*Company*


Composite
      Technology Corporation (“we”, “our”, “us,” “CTC” or the “Company”) originally incorporated
      in Florida and reincorporated in Nevada, is an Irvine, California based company
      focusing on manufacturing and marketing products that provide efficient and
      environmentally friendly transmission and generation of electricity. CTC
      operates in two segments: CTC Cable “Cable” and DeWind, “Wind”. The Cable
      Segment sells advanced composite core conductor ("ACCC") cables for electric
      transmission and distribution lines both as replacement for less efficient
      older
      technology steel cored cables and for new high capacity transmission lines.
      Our
      cable has a higher weight to electrical conductivity ratio than current industry
      standard transmission cables and we believe that it is a more efficient
      electrical conductor than current industry standards. We market our cable
      through distributor relationships in the US, China, and elsewhere in the world
      along with direct sales to public, private, and governmentally owned utilities
      and transmission line operators. In July, 2006 we acquired EU Energy, Ltd.
      and
      which has been operated as DeWind since the acquisition. The Wind segment sells
      wind powered electric generators under the brand name DeWind at 1.25 and 2.0
      megawatts of rated power output per turbine unit. We market our wind turbines
      directly to wind farm operators in Europe, North America, and worldwide.




On
      May 5,
      2005, Composite Technology Corporation filed a voluntary reorganization plan
      and
      disclosure statement under the provisions of Title 11 of the Federal Bankruptcy
      Code in the United States Bankruptcy Court for the Central District of
      California under case number SA 05-13107 JR. Our bankruptcy plan was confirmed
      on October 31, 2005. We exited Title 11 Bankruptcy on November 18, 2005 and
      received a formal decree which released us from Bankruptcy Court oversight
      on
      August 2, 2006.





*Accounting*


The
      accompanying unaudited consolidated financial statements of Composite Technology
      Corporation have been prepared in accordance with accounting principles
      generally accepted in the United States of America for interim financial
      information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
      S-X. Accordingly, they do not contain all of the information and footnotes
      required for complete financial statements. Interim information is unaudited;
      however, in the opinion of the Company's management, the accompanying unaudited,
      consolidated financial statements reflect all adjustments (consisting of normal,
      recurring adjustments) considered necessary for a fair presentation of the
      Company's interim financial information. These financial statements and notes
      should be read in conjunction with the audited financial statements of the
      Company included in the Company's Annual Report on Form 10-K for the fiscal
      year
      ended September 30, 2006 filed with the Securities and Exchange Commission
      on
      December 26, 2006.





On
      October 1, 2006 and as described in the Form 8-K filed on October 3, 2006 the
      Company’s wholly owned subsidiary, EU Energy Service GmbH (EUES) entered into a
      recapitalization arrangement whereby 50% of the voting stock of EUES was sold
      to
      Enertrag AG, a turbine service customer of EUES and a new entity was created,
      called E Service. The new entity was operated under joint control of both
      Enertrag and DeWind executives during the quarter ended December 31, 2006.




7




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





As
      further discussed in Note 9, on January 19, 2007 we agreed to amend our
      agreement between Enertrag AG that formed our E Services venture. This resulted
      in a decrease in our share of E Services share capital to 24.9%. Upon review
      of
      the new arrangement, the Company determined that E Services no longer met the
      reporting requirements for Variable Interest Entities under FIN 46R. As a
      result, effective with the fiscal quarter ending March, 31, 2007, Company will
      record its interest in E Service as an investment using the equity reporting
      method rather than consolidate the assets, liabilities, and operations of E
      Service with those of the Company.





*Estimates*


Our
      consolidated financial statements are prepared in accordance with U.S. generally
      accepted accounting principles (GAAP). These accounting principles require
      us to
      make certain estimates, judgments and assumptions. We believe that the
      estimates, judgments and assumption upon which we rely are reasonable based
      upon
      information available to us at the time that these estimates, judgments and
      assumptions are made. These estimates, judgments and assumptions can affect
      the
      reported amounts of assets and liabilities as of the date of the financial
      statements as we as the reported amounts of revenues and expenses during the
      period presented. To the extent there are material differences between these
      estimates, judgments or assumptions and actual results, our financial statements
      will be affected. In many cases, the accounting treatment of a particular
      transaction is specifically dictated by GAAP and does not require management's
      judgment in its application. There are also many areas in which management's
      judgment in selecting among available alternatives would not produce a
      materially different result. Our key estimates we use that rely upon management
      judgment includes:


-
            the
                estimates pertaining to the likelihood of our accounts receivable
                collectibility-
            the
                estimates pertaining to the valuation of our
                inventories,-
            the
                assumptions used to calculate fair value of our stocked based
                compensation, primarily the volatility component of the
                Black-Scholes-Merton option pricing model used to value our warrants
                and
                our employee and non-employee options-
            the
                warranty, retrofit and availability provisions for our wind
                turbines.-
            goodwill
                and intangible valuation.





Except
      as
      noted in this document, the methodology and assumptions used for the estimates
      pertaining to the activity during the quarter ended and six months ended March
      31, 2007 is consistent with the estimates included in our Form 10-K filed on
      December 26, 2006.




8





*Recent
      Pronouncements*




**Statement
      No. 159, “The Fair Value Option for Financial Assets and Financial
      Liabilities” (SFAS 159)** In
      February 2007, the FASB issued Statement No. 159 “The Fair Value
      Option for Financial Assets and Financial Liabilities” (SFAS 159).
      SFAS 159.permits entities to choose to measure certain financial
      instruments and certain other items at fair value for those financial assets
      and
      liabilities not currently required to be measured at fair value. SFAS 159
      is effective for financial statements issued for fiscal years beginning after
      November 15, 2007, and interim periods within those fiscal years. We are
      currently evaluating the impact of adopting SFAS 159 on our consolidated
      financial statements.




**Statement
      No. 157, “Fair Value Measurements” (SFAS 157)** In
      September 2006, the FASB issued Statement No. 157, “Fair Value
      Measurements” (SFAS 157). SFAS 157 defines fair value, establishes a
      framework and gives guidance regarding the methods used for measuring fair
      value, and expands disclosures about fair value measurements. SFAS 157 is
      effective for financial statements issued for fiscal years beginning after
      November 15, 2007, and interim periods within those fiscal years. We are
      currently evaluating the impact of adopting SFAS 157 on our consolidated
      financial statements.




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


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





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


In
      November, 2006 the Emerging Issues Task Force (EITF) approved EITF Issue No.
      06-7. EITF 06-7 provides clarification and guidance for bifurcated conversion
      options in convertible debt instruments where the bifurcation criteria of SFAS
      133 are no longer met. EITF 06-7 is effective for changes to such criteria
      after
      November 29, 2006. We will use the guidance provided in EITF 06-7 on a
      prospective basis. The adoption of EITF 06-7 had no impact to our financial
      statements for the period ending March 31, 2007.




In
        December 2006, the FASB issued FASB Staff Position EITF 00-19-2 ,*Accounting
        for Registration Payment Arrangements*(“FSP
        00-19-2”). FSP 00-19-2 specifies that the contingent obligation to make future
        payments or otherwise transfer consideration under a registration payment
        arrangement, whether issued as a separate agreement or included as a provision
        of a financial instrument or other agreement, should be separately recognized
        and measured in accordance with FASB Statement No. 5,*Accounting
        for Contingencies*.
        For
        registration payment arrangements and financial instruments subject to those
        arrangements that were entered into prior to the issuance of EITF 00-19-2,this
        guidance is effective for financial statements issued for fiscal years beginning
        after December 15, 2006. We have elected to reflect early adoption of FSP
        00-19-2 in our 2007 financial statements, and the adoption did not have an
        effect on our financial statements.





**NOTE
      2 BANKRUPTCY**





We
      emerged from Chapter 11 bankruptcy on November 18, 2005. We received a formal
      decree that we were no longer subject to Bankruptcy Court supervision on August
      2, 2006.





As
      discussed in Note 1, for financial reporting purposes, the consolidated
      financial statements have been prepared on a going concern basis.





The
      associated costs and related issuance of securities in settlement of the
      bankruptcy are more fully discussed in the SEC Form 10-K for the fiscal year
      ending September 30, 2006.





9





**NOTE
      3 - GOING CONCERN**





The
      Company has received a report from its independent auditors for the year ended
      September 30, 2006 that includes an explanatory paragraph describing the
      uncertainty as to the Company's ability to continue as a going concern. These
      consolidated financial statements contemplate the ability to continue as such
      and do not include any adjustments that might result from this uncertainty.





During
      the year ended September 30, 2006, the Company incurred a net loss of
      $(28,523,192) and negative cash flows from operations of $(6,263,703). In
      addition, the Company had an accumulated deficit of $(95,125,955) at September
      30, 2006. For the six month period March 31, 2007, the Company incurred a net
      loss of $(18,022,527) and had an accumulated deficit of $(113,148,486). The
      Company's ability to continue as a going concern is dependent upon its ability
      to generate profitable operations in the future and/or to obtain the necessary
      financing to meet its obligations and repay its liabilities arising from normal
      business operations when they come due. The outcome of these matters cannot
      be
      predicted with any certainty at this time.


Commercial
      orders - cable: In January, 2007 we announced a minimum stocking order from
      Jiang-su Far East in China for 600 kilometers of cable valued between $7 million
      and $12 million per calendar quarter for twelve months at the minimum order
      levels. At the minimum order quantities anticipated from China under the
      stocking order, we anticipate that our sales under this contract alone at the
      minimum order levels will generate positive cash flows. We further expect that
      our ACCC products will continue to gain acceptance in the marketplace resulting
      in additional sales orders and positive cash flows from operations. Through
      May
      9, 2007 we have firm orders representing revenues of approximately $11.5 million
      which are expected to be recognized within the next two fiscal
      quarters.





Commercial
      orders - wind turbines: Through May 9, 2007, we have received firm orders
      totaling 13.4 million Euros ($17.4 million US) for expected delivery of wind
      turbines in late fiscal 2007 or fiscal 2008 and an additional $40 million order
      from XRG projected to be delivered in fiscal 2008. The
      XRG
      contract called for a payment of $5.9 million as a deposit in April, 2007.
      To
      date, XRG has not made this initial payment and we continue to work with XRG
      management to secure this payment. Under the terms of the contract, upon notice
      by the Company of a payment default, XRG has 30 days to make the payment before
      the contract is in default. To date, the Company has not issued this notice.Due to the capital required to produce our wind turbines related to
      required advance payments on turbine parts, we have attempted to provide for
      cash advances from our customers in our turbine supply agreements upon reaching
      certain milestones prior to delivery of the turbines to the customer. We may,
      however, require additional investment capital or use cash provided by our
      other
      business segments to source our turbine parts and produce the turbines.




In
        August, 2007 the remaining balance of our August, 2004 Debentures will mature.
        The current balance remaining at May 9, 2007 is $5,013,200. As a result of
        this
        maturity, we may be required to refinance the debt or use existing cash balances
        in the event that future conversions of this debt are not made. The current
        conversion price of the remaining debt is $1.47 per share.





Due
      to
      the increased demand for working capital in our turbine division, we believe
      our
      cash position as of March 31, 2007 of $5.8 million and expected cash flows
      from
      revenue orders may not be sufficient to fund operations for the next four
      calendar quarters. To the extent required the Company may issue stock, debt
      or
      other financial instruments for cash or for payment of services until our cash
      flows from the sales of our primary products is sufficient to provide cash
      from
      operations or if we believe such a financing event would be a sound business
      strategy.





10





**NOTE
      4 - BALANCE SHEET DETAILS**





*Accounts
      Receivable*




Accounts
      Receivable consisted of the following at March 31, 2007:




Turbine
                products and service receivables
            
            $
            10,854,694Cable
                products receivables
            
            
            4,320,846Reserves
            
            
            (2,500,000
            )Net
                Receivables
            
            $
            12,675,539





*Inventories*




Inventories
      consisted of the following at March
      31,
      2007:




Raw
                Materials and Turbine Parts
            
            $
            13,442,018Work-in-Progress
            
            
            5,031,565ACCC
                Finished Core, Cable, & Related Hardware
            
            
            3,638,336Gross
                Inventory
            
            
            22,111,919Reserves
            
            
            (256,632
            )Net
                Inventory
            
            $
            21,855,287







*Deferred
      Revenues and Customer Deposits*




Deferred
      Revenues and Customer Deposits represent balances billed or cash advanced to
      the
      Company in advance of completion of the revenue cycle.




The
      following table sets forth an analysis of deferred revenues and customer
      deposits as of March
      31,
      2007 :


Customer
                  advances on turbines and turbine parts sales
              
              $
              11,678,105Deferred
                  revenues - Other Turbine related
              
              
              3,659,088Deferred
                  revenues - Cable Sales
              
              
              2,513,916Total,
                  Deferred revenues & customer advances at March 31,
                  2007
              
              $
              17,851,109Balance
                  included in current liabilities
              
              
              (16,627,445
              )Long
                  Term Deferred Revenues at March 31, 2007
              
              $
              1,223,664





11





*Warranty
      Reserve*




Warranties
      relate to the product warranty, retrofit accruals, and availability guarantees
      for our wind turbines. We accrue for our product warranty costs at the time
      of
      shipment. These product warranty costs are estimated based upon our historical
      experience and specific identification of product requirements.




The
      following table sets forth an analysis of warranty reserve activity




Balance
                at September 30, 2006
            
            $
            14,654,204Additional
                reserves recorded to expense
            
            
            2,584,952Reserves
                utilized
            
            
            (4,317,056
            )Balance
                at March 31, 2007
            
            $
            12,922,100Less
                Amount classified as current liabilities
            
            
            (11,771,834
            )Long
                Term Warranty Liability at March 31, 2007
            
            $
            1,150,266






*Convertible
      Debt, Notes Payable, and Capital Leases*




The
      following table sets forth an analysis of the company’s debt structure as of March
      31,
      2007 :




Convertible
                Debentures due August, 2007 net of discount
            
            $
            5,990,189Senior
                Convertible Debentures due January, 2010 net discount
            
            
            16,489,295Capital
                Leases
            
            
            176,537Total
                Debt
            
            
            22,656,021Balance
                included in current liabilities
            
            
            (6,133,539
            )Long
                Term Debt at March 31, 2007
            
            $
            16,522,482







In
      November, 2006 we converted a $500,000 cash advance received on a cable order
      to
      a short term note payable due December 31, 2006. The note had no cash interest
      component. We issued 220,000 warrants in lieu of interest and recorded the
      fair
      value of the warrants to interest expense as described in Note 8. The note
      was
      repaid during the quarter ended March 31, 2007.




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





12





In
      February, 2007 we sold $22,825,000 of Senior Convertible Notes to a group of
      private investors. The notes are convertible into common stock of the Company
      at
      a price of $1.04 per share which was greater than the market price of $0.87
      on
      the day of the close of the transaction. The notes bear interest at the rate
      of
      8% per year. The following discount was recorded:




Cash
                financing fee of 6% of face value of Senior Convertible
                Notes
            
            $
            1,369,500Warrants
                issued for financing fees
            
            
            610,613Cash
                legal fees relating to financing
            
            
            46,574Detachable
                warrants and beneficial conversion features of Senior
                Notes
            
            
            4,681,714Total
                discount recorded
            
            $
            6,708,401




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




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




The
      note
      discount recorded will be amortized to interest expense over the expected life
      of the Notes, currently three years. During the three and six months ended
      March
      31, 2007 the company recognized $372,696 in amortization expense against the
      discount.




As
      a
      result of the anti-dilutive price reset related to our August, 2004 Debenture
      warrants we recorded $49,951 in additional discount to the Debentures as
      described in Note 7. We will amortize this discount to interest expense over
      the
      remaining life of the Debentures which are due August, 2007.




**5.
      GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS**




All
      of
      our goodwill and intangibles is related to our DeWind segment. Information
      regarding our goodwill is as follows:




****
            
            **Dewind**SegmentBalance
                as of September 30, 2006
            
            $
            25,469,000Adjustment
                to DeWind pre-acquisition inventory
            
            
            242,940Balance
                as of March 31, 2007
            
            $
            25,711,940




13




We
      recorded an adjustment of $242,940 to goodwill to reflect a decrease in the
      recoverable value of the turbine inventory acquired during the EU acquisition
      dated July 3, 2006. As of September 30, 2006 we had made estimates of the
      liquidation value of the remaining turbine inventory and during the 6 months
      ending March 31, 2007, certain turbines required additional costs to refurbish
      and we revalued the estimated recovery value of the remaining turbines. As
      of
      April 30, 2007, we have one turbine nacelle remaining in inventory that is
      not
      identified as sold. All remaining turbines are expected to be shipped by the
      end
      of our fiscal year ending September 30, 2007. We will continue to revalue the
      turbines acquired under SFAS 141 through our one year anniversary of the EU
      acquisition and to the extent that the values of these assets change, we intend
      to adjust goodwill accordingly through the quarter ending June 30,
      2007.




There
      were no additions to our acquisition-related intangible assets during the 6
      month period ending March 31, 2007. Information regarding our other
      acquisition-related intangible assets is as follows:




**Gross
                Carrying Amount**
            
            **Accumulated
                Amortization**
            
            **Net
                Carrying Amount****December
                31,**
            
            **Sept 30,**
            
            ****
            
            **March
                31,**
            
            **March
                31,******
            
            **2006**
            
            **2006**
            
            **Amortized**
            
            **2007**
            
            **2007**Supply
                Agreements
            
            $
            12,347,000
            
            $
            --
            
            $
            --
            
            $
            --
            
            $
            12,347,000Tech
                Transfer Agreements
            
            
            3,131,000
            
            
            --
            
            
            --
            
            
            --
            
            
            3,131,000Tradename
            
            
            7,553,000
            
            
            (94,400
            )
            
            (188,800
            )
            
            (283,200
            )
            
            7,269,800Service
                Contracts
            
            
            1,442,000
            
            
            (231,600
            )
            
            (463,200
            )
            
            (694,800
            )
            
            747,200$
            24,473,000
            
            $
            (326,000
            )
            $
            (652,000
            )
            $
            (978,000
            )
            $
            23,495,000







Amortization
      expense of other acquisition-related intangible assets was $652,000 and $0
      for
      the six months
      ended March 31, 2007 and 2006, respectively. Our acquisition-related intangible
      assets are amortized on a per turbine unit shipped basis for the Supply and
      Technology Transfer Agreements, over the life of the underlying service
      contracts expiring through 2009, and on a 20 year straight line basis for the
      tradename.




Estimated
      amortization expense for other acquisition-related intangible assets on our
      March 31, 2007 balance sheet for the fiscal years ending September 30, is
      as follows:




Remainder
                of 2007
            
            $
            1,533,0002008
            
            
            3,872,0002009
            
            
            4,379,0002010
            
            
            4,546,0002011
            
            
            3,595,000Thereafter
            
            
            5,570,000$
            23,495,000




14





**6.
      OPERATING SEGMENTS**




During
      the periods presented, our current Chief Executive Officer was identified as
      our
      Chief Operating Decision Maker (CODM) as defined by SFAS No. 131,
“Disclosures About Segments of an Enterprise and Related Information”
(SFAS 131).




Our
      CODM
      manages our company based primarily on broad functional categories of sales,
      services, manufacturing, product development and engineering and marketing
      and
      strategy. Our CODM reviews consolidated financial information on revenues and
      gross margins for products and services and also reviews operating expenses,
      certain of which has been allocated to our two operating segments.




CTC
      conducts its operations in the following two business segments: CTC Cable
      Division and DeWind Turbine Division. The segments have been organized on the
      basis of products. All of each segment’s product revenues relate to external
      customers. See also the analysis in Item 2 Management Discussion and
      Analysis.




ACCC
      Cable Division


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




DeWind
      Turbine Division


The
      Wind
      division operates under the brand name DeWind. Located in Lubeck Germany with
      sales operations in Dallas, TX, the DeWind Division produces, services, and
      sells DeWind turbines in the 1.25 and 2.0 Megawatt range. Prior to the
      acquisition of EU Energy on July 3, 2006, the DeWind Division had been inactive
      with no fiscal 2005 operating activity. For the quarter ending December 31,
      2006, the DeWind segment consolidated the operations of the E Services VIE.
      For
      the quarter ending March 31, 2007 DeWind did not consolidate the operations
      of
      the E Services VIE as described in Note 9. Revenues and Operating Income for
      the
      E Services VIE for the quarter ending December 31, 2006 were $3,890,000 and
      $51,000 respectively.




During
        the quarter ended March 31, 2007, the geographical allocation of revenues
        was:
 
 CTC
                  Cable
              
              DeWind
              
              ConsolidatedEurope
              
              
              0
              %
              
              3.8
              %
              
              2.6
              %China
              
              
              40.7
              %
              
              96.2
              %
              
              78.3
              %North
                  America
              
              
              59.3
              %
              
              0
              %
              
              19.1
              %
 
 During
        the quarter, one CTC Cable customer in North America represented 16.5% and
        one
        customer in China represented 13.1% of consolidated revenues. Also during
        the
        quarter, two DeWind customers in China represented 45.1% and 20.1% of
        consolidated revenues respectively. No other customer represented greater
        than
        5% of consolidated revenues.





The
      following table presents revenues, interdivision revenues and operating income
      (loss) for our segments:


Three
                Months Ending March 31
            
            Six
                Months Ending March 312007
            
            2006
            
            2007
            
            2006Cable
                SegmentRevenues
            
            $
            2,703,094
            
            $
            1,030,528
            
            $
            4,347,002
            
            $
            1,603,420Interdivision
                Revenues
            
            
            --
            
            
            --
            
            
            --
            
            
            --Operating
                Loss
            
            
            (2,527,123
            )
            
            (3,793,480
            )
            $
            (5,655,102
            )
            $
            (7,814,688
            )DeWind
                SegmentRevenues
            
            $
            5,705,339
            
            $
            --
            
            $
            17,094,159
            
            $
            --Interdivision
                Revenues
            
            
            --
            
            
            --
            
            
            --
            
            
            --Operating
                Loss
            
            
            (4,703,857
            )
            
            --
            
            
            (8,310,586
            )
            
            --TotalRevenues
            
            $
            8,408,433
            
            $
            1,030,528
            
            $
            21,441,161
            
            $
            1,603,420Interdivision
                Revenues
            
            
            --
            
            
            --
            
            
            --
            
            
            --Operating
                Income Loss
            
            
            (7,230,980
            )
            
            (3,793,480
            )
            
            (13,965,688
            )
            
            (7,814,688
            )


The
        following table presents supplemental information for fiscal year 2006 revenues,
        Net Income, and Earnings per Share on a pro forma basis, assuming that the
        acquisition of DeWind had occurred at the beginning of the fiscal year ending
        September 30, 2006:
  Three
                  months ending
                March
                  31
              
              Six
                  months ending
                March
                  312006
              
              2006Revenues
              
              $
              18,134,000
              
              $
              23,126,000Net
                  Loss
              
              
              4,677,000
              
              
              17,335,000Net
                  Loss per Share
              
              $
              (0.03
              )
              $
              (0.10
              )


15




**NOTE
      7.  EQUITY BASED COMPENSATION**





The
      Company issues equity based compensation in the form of stock options to its
      employees and consultants and historically via share grants. The company uses
      the guidelines of SFAS 123R which requires fair value calculation of the grant
      and and recognition of the cost of employee services received in exchange for
      the award over the period the employee is required to perform the services.





The
      values of the derivative financial instruments are estimated using the
      Black-Scholes-Merton (Black-Scholes) option pricing model. Key assumptions
      used
      during the three months ended March 31, 2007 and 2006 to value options and
      warrants granted are as follows:


**Three
                Months Ended March 31,****2007**
            
            **2006**Risk
                Free Rate of Return
            
            
            4.7-4.85
            %
            
            3.33-4.73
            %Volatility
            
            
            83%-98
            %
            
            107
            %Dividend
                yield
            
            
            0
            %
            
            0
            %





Our
      computation of expected volatility for the quarter ended March 31, 2007 is
      based
      on historical and expected volatility over the expected life of the options
      granted. Our computation of expected life is based on historical exercise
      patterns. The interest rate for periods within the contractual life of the
      award
      is based on the U.S. Treasury yield curve in effect at the time of grant.




On
      March
      29, 2005, the Securities and Exchange Commission published Staff Accounting
      Bulletin No. 107 (SAB 107), which provides the Staff’s views on a variety of
      matters relating to stock-based payments. SAB 107 requires stock-based
      compensation to be classified in the same expense line items as cash
      compensation. Information about stock-based compensation included in the results
      of operations for the quarters ending March 31, 2007 and 2006 is as
      follows:




**Three
                Months Ended March 31,**
            
            **Six
                Months Ended March 31****2007**
            
            **2006**
            
            **2007**
            
            **2006**Cost
                of Product Sold
            
            $
            15,761
            
            $
            --
            
            $
            46,795
            
            $
            --Officer
                Compensation
            
            
            --
            
            
            36,848
            
            
            --
            
            
            73,695Selling
                and marketing
            
            
            149,989
            
            
            3,158
            
            
            198,826
            
            
            6,317Research
                and development
            
            
            56,405
            
            
            23,553
            
            
            90,296
            
            
            38,806General
                and administrative
            
            
            369,027
            
            
            108,043
            
            
            387,684
            
            
            174,963Totals
            
            $
            591,182
            
            $
            171,602
            
            $
            723,601
            
            $
            293,781





As
      of
      March 31, 2007, there was $7.0 million of total unrecognized compensation cost
      related to non-vested share-based compensation arrangements related to stock
      options consisting of $5.2 million related to employee grants and $1.8 million
      related to consultant and director grants. The costs are expected to be
      recognized over a weighted-average period of 2.4 years.





Our
      stock
      options vest on an annual or a quarterly basis. For the remainder of fiscal
      2007, we expect stock based compensation expense related to employee stock
      options of approximately $1,270,000 before income taxes and compensation expense
      related to consultants and directors of approximately $500,000 before income
      taxes. Such amounts may change as a result of additional grants, forfeitures,
      modifications in assumptions and other factors.




16





The
      following table summarizes the Stock Plan stock option activity as of March
      31,
      2007.





Number
              of
                Options
            
            Average
              Exercise
              PriceOutstanding,
                September 30, 2006
            
            
            15,965,336
            
            $
            0.82Granted
            
            
            1,850,000
            
            $
            1.00Exercised
            
            
            22,000
            
            $
            0.25Cancelled
            
            
            2,264,000
            
            $
            1.07OUTSTANDING,
                March 31, 2007
            
            
            15,529,336
            
            $
            0.82EXERCISABLE,
                March 31, 2007
            
            
            6,034,778
            
            $
            0.52








The
      weighted-average remaining contractual life of the options outstanding at March
      31, 2007 was 4.5 years. The exercise prices of the options outstanding at March
      31, 2007 ranged from $0.25 to $1.16, and information relating to these options
      is as follows:





Range
                of Exercise Prices
            
            Stock
                Options Outstanding
            
            Stock
                Options Exercisable
            
            Weighted
                Average Remaining Contractual Life in years
            
            Weighted
                Average Exercise Price of Options Outstanding
            
            Weighted
                Average Exercise Price of Options Exercisable$0.25-0.49
            
            
            2,698,432
            
            
            2,670,432
            
            
            4.51
            
            $
            0.30
            
            $
            0.30$0.50-$0.99
            
            
            2,775,000
            
            
            2,336,666
            
            
            4.51
            
            $
            0.59
            
            $
            0.55$1.00-$1.49
            
            
            10,055,904
            
            
            1,027,680
            
            
            4.50
            
            $
            1.02
            
            $
            1.02Total
            
            
            15,529,336
            
            
            6,034,778




17




**NOTE
      8 EQUITY**




**COMMON
      STOCK**





During
      the three months ended March 31, 2007, one employee exercised 22,000 options
      for
      gross proceeds of $5,500.





**WARRANTS**





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





The
      following table summarizes the Warrant activity for the six months ending March
      31 ,
      2007:


Number
              of
                Warrants
            
            Weighted-Average
                Exercise PriceOutstanding,
                September 30, 2006
            
            
            11,488,393
            
            $
            1.58Granted
            
            
            15,091,882
            
            $
            1.04Exercised
            
            
            --
            
            $
            --Cancelled
            
            
            --
            
            $
            --OUTSTANDING,
                March 31, 2007
            
            
            26,580,275
            
            $
            1.28EXERCISABLE,
                March 31, 2007
            
            
            26,580,275
            
            $
            1.28





During
      the six months ended March 31, 2007 we issued the following warrants exercisable
      to purchase an equal number of shares of common stock of the
      Company:





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





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




In
        connection with the February, 2007 Convertible Note financing, the Company
        entered into a registration rights agreement with the purchasers of its
        convertible notes and warrants, which provides among other things, for cash
        penalties in the event that the Company were unable to initially register,
        or
        maintain the effective registration of the securities. The Company initially
        evaluated the penalty provisions in light of EITF 00-19, *Accounting
        for Derivative Financial Instruments Indexed To, and Potentially Settled
        In a
        Company’s Own Stock,* and
        determined that the maximum penalty does not exceed the difference between
        the
        fair value of a registered share of Composite Technology Corporation common
        stock and unregistered share of Composite Technology Corporation common stock
        on
        the date of the transaction. The Company then evaluated the provisions of
        FASB
        Staff Position No. EITF 00-19-2 *,
        Accounting for Registration Payment Arrangements*,
        which
        specifies that the contingent obligation to make future payments or otherwise
        transfer consideration under a registration payment arrangement should be
        separately recognized and measured in accordance with FASB Statement No. 5,*Accounting
        for Contingencies*,
        pursuant to which a contingent obligation must be accrued only if it is more
        likely than not to occur. In management’s estimation, the contingent payments
        related to the registration payment arrangement are not likely to occur,
        and
        thus no amount need be accrued. The Company has elected to reflect early
        adoption of FSP 00-19-2 in its 2006 financial statements, and the adoption
        did
        not have an effect on its financial statements.




18




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





Volatility
      82.9% - 91.4%


Risk
      free
      rate 4.6%-4.85%


Life
      -
      remaining life of warrant series ranging between 1.5 and 2.8 years


Dividend
      rate of 0%


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





The
      following warrant modifications were triggered by the February, 2007 convertible
      debt issuance:





The
      August 2004 Debenture warrants and the Debenture Amendment warrants previously
      exercisable for $1.55 had their price reset to $1.47 per warrant. The difference
      in fair value of $49,591 for these warrants was recorded as additional debt
      discount and will be amortized to interest expense through August, 2007, the
      due
      date of the convertible debentures.





We
      issued
      additional October, 2005 Debtor in Possession Series 1 and 2 warrants. A total
      of 310,946 Series 1 and 318,182 of Series 2 were issued at $1.22 and $1.32
      exercise prices respectively and 677,419 of the October, 2005 DIP Series 2
      warrants were repriced from $1.33 to $1.32 per warrant. We recorded $195,769
      to
      other expense during the quarter and six months ended March 31, 2007
      representing the fair value of the warrants issued at $0.3187 per warrant and
      $0.3001 per warrant for the Series 1 and 2 warrants issued respectively and
      $0.0018 per warrant for the re-pricing of the 677,419 Series 2
      warrants.





We
      issued
      additional 2006 Series A2 warrants and reset the price of previously existing
      Series A1 and Series A2 warrants. We recorded $89,819 to other expense during
      the quarter and six months ended March 31, 2007 representing the fair value
      of
      the following: 283,929 warrants had their exercise price reset from $1.55 per
      warrant to $1.04 per warrant at a fair value difference of $0.0882 per warrant;
      681,523 warrants had their price reset from $1.06 to $1.04 per warrant at a
      fair
      value difference of $0.0043 per warrant; and 152,341 additional warrants were
      issued at $1.04 per warrant at a fair value of $0.4061 per warrant.





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





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





19





The
      following table summarizes the warrants issued, outstanding, and exercisable
      as
      of March 31, 2007:





Warrant
                Series
            
            Grant
                Date
            
            Strike
                Price
            
            
            
            Expiration
                Date
            
            Warrants
                remaining
            
            Proceeds
                if Exercised
            
            Call
                feature“December
                2003”
            
            
            Dec.,
                2003
            
            $
            2.04
            
            
            
            
            
            December,
                2008
            
            
            120,000
            
            $
            244,800
            
            
            (6)August,
                2004 Debenture warrants
            
            
            Aug,
                2004
            
            $
            1.47
            
            
            (1)
            
            
            August,
                2008
            
            
            3,223,683
            
            
            4,738,814
            
            
            NoneDebenture
                Amend
            
            
            Nov,
                2004
            
            $
            1.47
            
            
            (1)
            
            
            November,
                2008
            
            
            1,083,592
            
            
            1,592,880
            
            
            NoneSeries
                S
            
            
            Sept,
                2004
            
            $
            1.00
            
            
            
            
            
            July,
                2007
            
            
            1,127,000
            
            
            1,127,000
            
            
            (7)Series
                T
            
            
            Sept,
                2004
            
            $
            1.00
            
            
            
            
            
            July,
                2008
            
            
            160,000
            
            
            160,000
            
            
            NoneSeries
                U
            
            
            Sept,
                2004
            
            $
            1.83
            
            
            
            
            
            August,
                2008
            
            
            512,362
            
            
            937,622
            
            
            (8)October,
                2005 DIP Series 1
            
            
            Oct,
                2005
            
            $
            1.22
            
            
            (2)
            
            
            October,
                2008
            
            
            988,365
            
            
            1,205,806
            
            
            NoneOctober,
                2005 DIP Series 2
            
            
            Oct,
                2005
            
            $
            1.32
            
            
            (3)
            
            
            October,
                2008
            
            
            995,601
            
            
            1,314,193
            
            
            None2006
                Series A1
            
            
            Mar,
                2006
            
            $
            1.55
            
            
            
            
            
            March,
                2009
            
            
            150,000
            
            
            232,500
            
            
            None2006
                Series A2
            
            
            Mar,
                2006
            
            $
            1.04
            
            
            (4)
            
            
            March,
                2009
            
            
            1,117,793
            
            
            1,162,505
            
            
            None2006
                Series B
            
            
            Various
                2006
            
            $
            2.00
            
            
            
            
            
            May,
                2009
            
            
            2,191,466
            
            
            4,382,932
            
            
            (9)2006
                Series C
            
            
            May,
                2006
            
            $
            1.25
            
            
            
            
            
            December,
                2009
            
            
            200,000
            
            
            250,000
            
            
            None2006
                Series D
            
            
            May,
                2006
            
            $
            1.50
            
            
            
            
            
            December,
                2009
            
            
            200,000
            
            
            300,000
            
            
            None2006
                Series E
            
            
            May,
                2006
            
            $
            1.75
            
            
            
            
            
            December,
                2009
            
            
            200,000
            
            
            350,000
            
            
            None2007
                Series F
            
            
            Nov,
                2006
            
            $
            1.10
            
            
            
            
            
            November,
                2009
            
            
            220,000
            
            
            242,000
            
            
            None2007
                Convertible Debt
            
            
            Feb,
                2007
            
            $
            1.13
            
            
            (5)
            
            
            February,
                2010
            
            
            10,973,585
            
            
            12,400,151
            
            
            None2007
                Convertible Debt Fees
            
            
            Mar,
                2007
            
            $
            1.04
            
            
            
            
            
            February,
                2010
            
            
            1,316,827
            
            
            1,369,500
            
            
            None2007
                Factoring
            
            
            Mar,
                2007
            
            $
            1.06
            
            
            
            
            
            February,
                2009
            
            
            1,800,000
            
            
            1,908,000
            
            
            NoneTotal
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            26,580,275
            
            $
            33,918,704








(1)
      Subject to anti-dilution provisions. Price reset under a 100% of “new issue
      price” price reset in October, 2005 that converted to a weighted average formula
      in August, 2006. Certain future equity or equity equivalent issuances below
      $1.47 per share may result in additional price resets.





(2)
      Subject to anti-dilution provisions. Price reset under a weighted average 115%
      of “new issue price” reset in February, 2007. Certain future warrant issuances
      with exercise prices below $1.04 per warrant may result in weighted average
      price re-set and additional issuances of warrants.





(3)
      Subject to anti-dilution provisions. Price reset under a weighted average 125%
      of “new issue price” reset in February, 2007. Certain future warrant issuances
      with exercise prices below $1.04 per warrant may result in weighted average
      price re-set and additional issuances of warrants.




20





(4)
      Subject anti-dilution provisions. Certain future equity or equity equivalent
      issuances below $1.04 per share may result in a price reset of 100% of the
      new
      issue price and additional issuances of warrants.





(5)
      Subject to anti-dilution provision. Certain future equity or equity equivalent
      issuances below $1.04 per share may result in a weighted average price reset
      of
      the exercise price.





(6)
      Callable if closing market price is 200% of strike price for 20 consecutive
      trading days





(7)
      Callable if closing market price is 200% of strike price for 5 consecutive
      trading days





(87)
      Callable if closing market price is 200% of strike price for one trading day





(9)
      Callable if trading price is greater than $2.50 for 10 consecutive
      days





**LOSS
      PER SHARE**





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





The
      following common stock equivalents were excluded from the calculation of diluted
      loss per share for the three months ended March 31, 2007 and 2006 since their
      effect would have been anti-dilutive:


March
                312007
            
            2006Options
                for common stock
            
            
            15,529,336
            
            
            7,569,936Warrants
            
            
            26,580,274
            
            
            12,462,469Convertible
                Debentures, if converted
            
            
            26,044,565
            
            
            6,374,35568,154,175
            
            
            26,406,760





21





**NOTE
      9- VARIABLE INTEREST ENTITY (VIE)**





On
      October 1, 2006 and as described in the Form 8-K filed on October 3, 2006 the
      Company’s wholly owned subsidiary, EU Energy Service GmbH (EUES) entered into a
      recapitalization arrangement whereby 50% of the voting stock of EUES was sold
      to
      Enertrag Ag, a turbine service customer of EUES and a new entity was created,
      called E Service. The new entity will function to service and maintain the
      combined installed turbines of DeWind in Europe and the turbine farms operated
      by Enertrag in Europe, primarily in Germany and Austria. The resulting combined
      operations doubled the number of turbines serviced by EUES prior to the
      agreement to approximately 900 turbines and was undertaken to increase the
      profitability of the turbine servicing of EUES and reduce the turbine service
      costs of Enertrag. The new entity was operated under joint control of both
      Enertrag and DeWind executives during the quarter ended December 31, 2006.
      Since
      the Company was considered to be the primary beneficiary of the VIE, during
      the
      quarter ended December 31, 2006, we had consolidated the assets and liabilities
      in our December 31, 2006 balance sheet and included the revenues and expenses
      in
      our statement of operations from October 1, 2006 through January 19,
      2007.





On
      January 19, 2007 and as described in a Form 8-K filed on January 25, 2007,
      an
      amendment was ratified on the original agreement dated October 1, 2006. The
      January 19, 2007 amendment called for an immediate need to invest additional
      cash into E Service of 4,950,000 Euros ($6,600,000 at March 31, 2007 exchange
      rates). During this recapitalization, the share capital of the Company’s
      investment in E Service decreased from 50% to 24.9% and under the January,
      2007
      amendment we were required to invest 1,232,550 Euros ($1,595,782 at January
      19,
      2007 exchange rates). Subsequent to January 25, 2007 we amended the
      recapitalization agreement to require only the investment of 224,000 Euros
      ($298,704 at March 31, 2007 exchange rates). The Company has concluded that
      accounting for E Service as a VIE is no longer required since the Company is
      no
      longer the primary beneficiary. As a result, for the quarter ending March 31,
      2007 we have not included the revenues and expenses in our statement of
      operations and we have not included the assets and liabilities in our balance
      sheet. The Company has accounted for our investment in E Service for the quarter
      ended March 31, 2007 under the equity method of accounting, which requires
      us to
      recognize to adjust our investment each quarter to reflect our ownership share
      of the operating income or loss of the investment. We have eliminated all
      intercompany profits related to our investment in this entity for the quarter
      ended March 31, 2007 and we have shown the carrying value of our investment
      of
      $1,835,750 as an asset on our balance sheet as of March 31, 2007.





As
      of
      March 31, 2007, the Company’s maximum exposure to loss is limited to the
      investment balance of $1,835,750. We have amounts payable to the entity of
      approximately $955,000 and which are included in Accounts Payable in the March
      31, 2007 balance sheet. Excluding the March, 2007 balance due to the entity,
      no
      creditors or beneficial interest holders have any recourse to the general credit
      of the Company as a result of this variable interest entity.





**NOTE
      10- COMMITMENT AND CONTINGENCIES**





Please
      refer to the Commitment and Contingencies Note number 17 on page 87 of our
      Form
      10-K filed on December 26, 2006 for a detailed listing of our commitments and
      contingencies. There were no material changes other than in the ordinary course
      of business and as updated in the Off Balance Sheet disclosure in Item 2
      below.




22




**NOTE
      11 - LITIGATION**





On
      May 3,
      2007,  the Company and certain of its wind division subsidiaries (here
      referred to as “DeWind”) entered into a settlement agreement with FKI
      Engineering Ltd., FKI plc, and Brush Electrical Machines Ltd (collectively
      “FKI”). Under the terms of the agreement, the DeWind and FKI agreed to take all
      necessary steps to effect a stay of all of the disputes listed below in A and
      B.
      effective until September 15, 2007 or other such date as the parties agree
      to in
      writing in order to allow sufficient time to effect the settlement
      agreement.  As part of the settlement agreement, the parties have agreed to
      use their best efforts to cause or procure the auditors of a German subsidiary
      of the Company to complete their audit of such German subsidiary’s statutory
      accounts for the fiscal years ending March 31, 2003, 2004, and 2005. It is
      expected that as part of the process of the completion of such audits, the
      auditors will identify any issues relating to the capital reserve accounts
      of
      the German subsidiary that are the subject of the disputes listed in A.2 below
      and the counterclaim listed in A.1.b&c below.  The De Wind and FKI
      parties have further agreed as part of the settlement agreement that if further
      assurance is required on possible legal issues regarding the German subsidiary’s
      capital structure and / or in relation to payments made into and / or out of
      the
      capital reserve account, then, the legal counsel of DeWind and FKI shall meet
      with a view to preparing a mutually acceptable statement regarding the capital
      account or hire an independent reputable and suitably experienced German law
      firm to prepare the statement that sets out the capital reserve accounts
      issues.  The resolution of the capital reserve accounts issues is not
      reasonably estimable at this time and no contingent asset has been recorded
      to
      date for any future funds potentially receivable from FKI, if any, to resolve
      the capital reserve account issues.   Assuming De Wind’s satisfaction
      with the statement referred to above, then,DeWind has agreed to make payments
      totaling 1,500,000 Euros ($2,000,000 at March 31, 2007 exchange rates) in two
      equal installments, one within seven days after the agreed upon capital account
      statements have been issued and one 90 days after the first
      installment.   These payments shall serve to settle all remaining
      claims currently existing between FKI and DeWind.  In the event that the
      auditors cannot complete their audit due to issues relating to the capital
      account of the German subsidiary or in the event that no statement as referred
      to above, and if required, is forthcoming, then the payments referred to above
      will not be made and the German subsidiary will have to pursue litigation to
      correct discrepancies in its capital reserve accounts. During the quarter ended
      March 31, 2007, since the balance due was probable and reasonably estimable,
      the
      Company recorded a litigation settlement accrual under the guidance of SFAS
      5
      and expensed the accrual to other expense in the statement of operations
 of 1,452,000 Euros ($1,936,000 at March 31, 2007 exchange rates) to
      properly accrue for the settlement balance of 1,500,000 Euros as of March 31,
      2007.




23




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





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





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





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


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


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


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


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





In
      respect of this claim, the Company had previously accrued 100% of the FKI
      Engineering Ltd. claim for $1,662,900 or $2,092,900 net of the $430,000
      counterclaim and had recorded a deferred purchase consideration asset of
      $2,537,300.





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





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




24




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





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





2.
      DeWind GmbH v. FKI Engineering Ltd.





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





The
      claim
      was filed based on a review of DeWind GmbH’s March 31, 2006 year end audit which
      indicated that FKI Engineering Ltd. as a former shareholder of DeWind GmbH
      had
      not duly paid capital reserves in the amount of the claim. The Company asserts
      that FKI either did not pay the capital reserves as in accordance with the
      Capital Reserve Agreement signed pursuant to the acquisition of DeWind by EU
      Energy in July, 2005 or had, after receipt of money by DeWind GmbH, immediately
      claimed the funds back on the grounds of undefined loans. Such practices are
      illegal under German law. The Company further asserts that loan contracts of
      this magnitude were never concluded between DeWind GmbH and FKI Engineering
      Ltd.
      On September 12, 2006 FKI Engineering Ltd. filed its acknowledgement of defense
      and filed its detailed statement of defense during the quarter ended March
      31,
      2007. All hearings under this case have been delayed or adjourned pending the
      settlement and capital accounts statement described above.




25




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





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




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





On
      January 06, 2006 Zephyr filed a suit against DeWind GmbH with the District
      Court
      of Düsseldorf, Germany for payment of an amount of $1,300,533 plus interest
      based on the argument that DeWind GmbH had allegedly failed to comply with
      a
      guarantee of availability under a turbine sales contract. Furthermore, Zephyr
      sought a declarative judgment that DeWind GmbH had to come up for a potential
      purchase tax obligation in an amount of $208,085. On August 08, 2006, the
      District Court rendered a judgment by default against Zephyr dismissing the
      case. Zephyr filed an objection against this judgment on August 29, 2006. DeWind
      GmbH responded by filing a written pleading on October 04, 2006. The Company
      is
      expecting to hear an update from the Court in May, 2007. The Company has fully
      reserved net receivables of $914,690 in respect of this dispute and has assumed
      that the $720,590 cash paid to Zephyr as a result of their calling of
      performance bonds will not be recovered. We have incorporated the fair value
      of
      these assets as $0 in our acquisition date balance sheet and to the extent
      that
      any of these funds are recovered, we intend to adjust the fair value of our
      assets and our goodwill acquired under the guidance of SFAS 141.




26




**NOTE
      12 - RELATED PARTIES**





The
      Company currently has contracts with two companies owned by its director,
      Michael McIntosh: a legal services agreement with The McIntosh Group (TMG)
      for
      legal and intellectual property services and a consulting agreement with
      Technology Management Advisors, LLC (TMA) for strategic business advisory
      services related to technology and international patent and intellectual
      property filings.





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





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





For
      the
      three and six months ended March 31, 2007, we recorded consulting fees of
      $187,500 and $375,000, respectively. In addition, we paid $79,036 and $97,000
      of
      reimburseable expenses for the three and six months ended March 31, 2007,
      representing pass-through expenses for incidental expenses as well as patent
      and
      intellectual property related fees. All balances were expensed to Research
      and
      Development expenses. As of March 31, 2007 we had a balance due of $54,773
      to
      TMA and TMG combined.





**NOTE
      13 - SUBSEQUENT EVENTS**





As
      discussed in Note 11, on May 3, 2007 we entered into a settlement agreement
      relating to our litigation between DeWind, and FKI.




27




**ITEM
      2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF
      OPERATIONS**





You
      should read the following discussion and analysis of our financial condition
      and
      results of operations together with our interim financial statements and the
      related notes appearing at the beginning of this report. The interim financial
      statements and this Management's Discussion and Analysis of Financial Condition
      and Results of Operations should be read in conjunction with the financial
      statements and notes thereto for the year ended September 30, 2006 and the
      related Management's Discussion and Analysis of Financial Condition and Results
      of Operations, both of which are contained in our Annual Report on Form 10-K
      filed with the Securities and Exchange Commission on December 26, 2006.





The
      following discussion and other parts of this Form 10-Q contain forward-looking
      statements that involve risks and uncertainties. Forward-looking statements
      can
      be identified by words such as "anticipates," "expects," "believes," "plans,"
      and similar terms. Our actual results could differ materially from any future
      performance suggested in this report as a result of factors, including those
      discussed in "Factors That May Affect Future Operating Results" and elsewhere
      in
      this report and in our Annual Report on Form 10-K for the fiscal year ended
      September 30, 2006. All forward-looking statements are based on information
      currently available to Composite Technology Corporation and we assume no
      obligation to update such forward-looking statements, except as required by
      law.
      Service marks, trademarks and trade names referred to in this Form 10-Q are
      the
      property of their respective owners.





**OVERVIEW**




During
        the quarter ended March 31, 2007 the Company had key successes in the execution
        of our growth strategies for both of our business segments. Highlights
        during the quarter include the execution of a significant three year minimum
        stocking order for ACCC cable for annual purchase commitments of approximately
        $35 million and the closing of our first model D8.2 order for US delivery
        of 18
        turbines worth approximately $40 million.





The
      Company also made some key management changes during and immediately subsequent
      to the quarter. In
      February, 2007 Mr. Kevin Smith resigned as our Chief Financial Officer after
      a
      brief employment period of three weeks. In April, 2007 Michael Porter,
      the Company’s President and formerly the majority owner of DeWind retired and
      the Company promoted Marv Sepe to Chief Operating Officer of the Company .
      Mr.
      Sepe joined the Company in 2006 and was formerly President of CTC Cable. In
      April, the Company promoted Domonic J. Carney as Chief Financial Officer. Mr.
      Carney joined the Company in 2005 and was formerly VP of Finance. Finally,
      in
      March, 2007 the Company’s DeWind subsidiary hired Emil Moroz as Executive Vice
      President of Engineering, formerly Chief Engineer at Garrad Hassan America
      and
      System Integration Leader at GE Wind Energy to provide technical direction
      and
      experience to the growing DeWind turbine business.





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





**CTC
      Cable Division**


Located
      in Irvine, California with sales operations in Dallas, Atlanta, Lubeck, Germany,
      and Shanghai, China, the CTC Cable Division produces and sells ACCC electrical
      transmission cable and related ACCC hardware products. ACCC cable production
      is
      a two step process. The Irvine operations produce the high strength, light
      weight composite “core” (ACCC core) which is then shipped to one of three cable
      manufacturers in Canada, Belgium, or Bahrain where the core is wrapped with
      conductive aluminum to become ACCC cable. ACCC cable is sold both through a
      distribution agreement with General Cable in the US and Canada as well as
      directly by CTC Cable to utility customers. ACCC cable is sold outside the
      US
      directly to utilities. ACCC cable has been sold commercially since 2005 and
      is
      currently marketed worldwide to electrical utilities and transmission companies.




28




**RECENT
      DEVELOPMENTS**





During
      the quarter, we recognized ACCC cable revenues of $2.7 million representing
      an
      increase of 64% sequentially over the December, 2006 quarter and an increase
      of
      162% over the March, 2006 quarter. The $2.7 million of revenues consisted of
      $1.1 million under the China agreement and $1.6 million in the United States.
      At
      the end of the quarter at March 31, 2007, we had a non-cancelable order backlog
      for our cable products of $9.6 million compared to a non-cancelable order
      backlog of $6.3 million at the end of the quarter on December 31, 2006.





We
      continue to refine our marketing message to focus on the inherent efficiency
      of
      our ACCC conductor product as compared to traditional aluminum conductor steel
      reinforced (ACSR) conductor as one of the key competitive factors in the cable
      business is the ability to transmit more power with less line losses, i.e.
      electricity dissipated to the environment as heat.





The
      Cable
      division’s focuses continue to be on obtaining new and repeat orders from our US
      cable customers, developing new relationships in targeted markets including
      Europe and the Middle East and on fulfilling our long term supply agreement
      with
      our Chinese cable distributor Jiang-Su Far East. We believe that our October,
      2006 ISO 9001:2000 certification has opened exciting new possibilities for
      our
      cable products and was a key factor in our increased business in China. In
      January, 2007 we announced a three year distribution agreement with Jiang-Su
      Far
      East where it agreed to purchase of a minimum of 600 kilometers of ACCC cable
      per quarter for year one with increases to 900 kilometers and 1,200 kilometers
      per quarter in years two and three. During the first three months, the partner
      ordered over 680 kilometers of ACCC cable and exceeded their minimum order
      required under the contract We expect the minimum value of this contract to
      represent approximately $35.0 million of orders for the first calendar year
      beginning in February, 2007. Expected revenues per quarter under the contract
      are dependent on the size of the cable ordered and the timing of delivery but
      we
      expect revenues between $7 and 12 million per quarter for the first year of
      this
      arrangement. This contract is a significant milestone for the Cable division
      in
      that the contract allows for more efficient planning and operations of our
      ACCC
      core manufacturing facilities and allows for longer production lead time
      commitments for our cable wrapping partners, in addition to providing us with
      a
      more reliable revenue stream and cash flows. The term of the agreement is for
      one year from January 30, 2007 with options to extend the agreement for an
      additional two years as described above so long as Far East meets certain
      conditions including the requirement for Far East to become qualified to strand
      ACCC Conductor cable. We expect gross margins to be approximately 28-30% for
      the
      initial orders on this contract with the opportunity for additional cost savings
      captured through operational efficiencies.





In
      the
      United States, we are encouraged by our US business due to the repeat orders
      of
      our two initial commercial US customers and we continue to aggressively sell
      and
      market our ACCC products in the US. In March, 2007 we continued to leverage
      our
      internal sales efforts by announcing that we had signed sales representation
      agreements with three separate sales organizations who focus on selling products
      into the US transmission market. These agreements add an additional 21 sales
      people across 17 states and allow us to sell our product in areas that we
      previously had little or no sales coverage.





We
      continue to focus on the engineering and design firms often responsible for
      the
      overall line design and components for transmission and electrical distribution
      projects. These firms are usually engaged by smaller utilities and providers
      that do not possess extensive engineering groups. We believe their understanding
      of the uses and benefits of ACCC conductor will provide a number of design-in
      opportunities. In April, 2007 we announced that our ACCC conductor’s design
      polynomials will be installed in the next version of PLS CADD transmission
      design software. This software is used by transmission design engineers during
      the design phase of transmission projects. The inclusion of ACCC will allow
      our
      cable to be compared directly with other transmission cable products during
      transmission line design.




29




Elsewhere
      in the world, we are developing relationships that we expect will begin to
      turn
      into cable orders late in fiscal 2007 and beyond. Midal, our wrapping partner
      in
      the Middle East, became qualified to wrap ACCC core, in April, 2007. We believe
      that this relationship will eventually result in additional ACCC transmission
      line sales in Middle East hot climates due to ACCC’s ability to operate
      efficiently and at much higher temperatures than the ACSR alternative. In May,
      2007 we announced that our ACCC cable was successfully installed at the United
      Kingdom’s National Grid test facility in Nottingham, UK. We have had ACCC
      conductor under evaluation by the National Grid since 2005 and this installation
      represents an important milestone in the approval process in the UK. We are
      also
      actively marketing ACCC in France, Indonesia, India and Australia, with several
      projects quoted throughout the regions, as part of our strategy of partnering
      with key suppliers and engineering organizations that enjoy substantial market
      positions for bare overhead cable.





The
      focus
      of our cable operations during the three and six month period ending March
      31,
      2007 has been to increase production to manage the large influx of orders from
      our China agreement and to continue to manage our key materials suppliers.
      We
      continue to work with our key carbon supplier and actively improve our
      relationship with that supplier. In April, 2007, we certified Midal in Bahrain
      as a certified cable wrapper as our third supplier and successfully shipped
      ACCC
      in April, 2007 with this supplier. We currently have three wrapping suppliers
      available and are we are working with our distribution partner in China to
      begin
      the procedures required for that partner to become a certified wrapper for
      additional wrapping capacity.





In
      March,
      2007 we continued our success in the protection of our intellectual property
      rights when we received notification that we were granted US Patent 7,179,522
      by
      the United States Patent and Trademark Office. This patent covers key aspects
      surrounding the use of CTC Cable’s ACCC core and ACCC conductor
      products.




**DeWind
      Division**


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





**RECENT
      DEVELOPMENTS**





In
      March,
      2007 we signed our first order for D8.2 turbines for delivery in the United
      States with XRG Development Partners LLC. The order was for 18 D8.2 turbines
      at
      $2.2 million per turbine for a total order of approximately $40 million and
      the
      contract required XRG to make a payment of $5.9 million as a deposit in April,
      2007. To date, XRG has not made this initial payment and we are continuing
      to
      work with XRG management to secure this payment. Under the terms of the
      contract, upon notice by the Company of a payment default, XRG has 30 days
      to
      make payment before the contract is in default. To date, we have not noticed
      XRG
      of such a payment default. The contract calls for the turbines to be delivered
      in early fiscal 2008. In January, 2007, we signed an order that included five
      1.25 megawatt D6 turbines representing 8.5 million Euros ($11.3 million US
      at
      current exchange rates) that we will produce and expect to deliver in late
      fiscal 2007 or early fiscal 2008. With these two orders, we have approximately
      $51.3 million in turbine order backlog.




30





Our
      revenues during the quarter ended March 31, 2007 and expected revenues for
      the
      quarter ended June 30, 2007 consisted primarily of sales of our turbine
      inventory acquired as part of the acquisition of EU Energy, now known as DeWind.
      Under US GAAP accounting rules, we are required to revalue this inventory to
      “liquidation” value which approximates sales value and which results in little
      or no income statement profit margin. We expect that significantly all turbine
      sales through the third fiscal quarter ending June 30, 2007 will therefore
      be
      sold at liquidation values and are not reflective of expected turbine profit
      margins for turbines produced after the acquisition.





Our
      operational focus for the DeWind division during the quarter was to position
      ourselves to demonstrate and produce our next generation D8.2 wind turbine
      in
      anticipation of the XRG order and additional expected orders from other wind
      farm operators and utilities for delivery in 2008 and beyond. The effort
      consisted of commissioning our D8.2 prototype at the Cuxhaven, Germany test
      site
      of the DEWI-Offshore Certification Centre and working with our TECO Westinghouse
      production partner as well as our supply chain vendors to secure adequate
      turbine parts for our D8.2 and D6 turbines.





In
      January, 2007 our D8.2 prototype was commissioned at our test site in Cuxhaven,
      Germany and to date has passed all of the technical tests required. It is now
      undergoing the wind generation availability curve tests which are required
      prior
      to type certification. The certification is important since it is often required
      by the financial backers of our potential wind turbine customers prior to
      obtaining financing for their wind farms. We are currently building a prototype
      for the United States and expect that it will be completed and commissioned
      in
      the last fiscal quarter of 2007.





We
      continue to develop our supply chain and are moving to ramp our production
      of
      the D8.2 model. In November, 2006, we announced an agreement with TECO
      Westinghouse Motor Company (TECO) in Round Rock, Texas to assist us in the
      assembly, supply, and servicing of our turbines. The agreement consists of
      three
      parts: a) TECO will assemble our turbine units at their plant in Texas. At
      full
      production, we expect that this plant will be able to produce two production
      lines of 4 turbine units per week for an estimated capacity of approximately
      400
      turbines per year; b) TECO will assist us in servicing our D8.2 units by
      leveraging their existing service teams. TECO services large electrical
      generators worldwide and already has the infrastructure to service similar
      wind
      generators in the US; c) TECO will assist us in developing and optimizing our
      turbine supply chain. TECO already has relationships with common parts suppliers
      and we expect that by the middle of 2008, TECO will manage a significant portion
      of our supply chain requirements. We expect to leverage their in place
      infrastructure and that this will allow for turbine parts cost savings and
      improved purchasing terms. During the quarter, we worked actively to organize
      our supply chain to allow for an efficient hand-off to TECO once we receive
      our
      initial turbine orders.





In
      April,
      2007 we began discussions with FKI to resolve all remaining litigation relating
      to the sale of DeWind by FKI and its related subsidiaries in addition to the
      German capital account issues that were in litigation. In May, 2007 we agreed
      to
      a settlement agreement as described in Note 11 of the financial statements.
      Included in the agreement is a stay of all remaining litigation until September,
      2007 to allow time to resolve the capital account issues. With this settlement
      and assuming the capital account issues are resolved, all remaining significant
      litigation issues would be resolved.





**RESULTS
      OF OPERATIONS**





Revenues,
      Cost of Revenues, and Gross Margins:


During
      the quarter ended March 31, 2007, the geographical allocation of consolidated
      revenues was:


Europe
              
              
              2.6
              %China
              
              
              78.3
              %North
                  America
              
              
              19.1
              %


During
      the quarter, one customer in China represented 45.1% of revenues, one customer
      in North America with 16.5% of revenues, one customer in China with 20.1% of
      revenues and one customer in China with 13.1% of revenues. No other customer
      represented greater than 5% of consolidated revenues.




31











Our
      revenues and gross margin analysis are listed in the table below. All of the
      revenues and margins for the quarter ended March 31, 2006 relate to cable sales
      since our DeWind segment was acquired from EU Energy in July, 2006.




Three
                Months Ended March 31,
            
            Six
                Months Ended March 31,2007
            
            2006
            
            2007
            
            2006(unaudited)
            
            Cable
                Segment
            
            Wind
                Segment
            
            Total
            
            Total
            
            Cable
                Segment
            
            Wind
                Segment
            
            Total
            
            TotalProduct
                Sales -Cable
            
            $
            2,703,094
            
            $
            --
            
            $
            2,703,094
            
            $
            1,030,528
            
            $
            4,347,002
            
            $
            --
            
            $
            4,347,002
            
            $
            1,053,420Product
                Sales - Turbines
            
            
            --
            
            
            5,488,359
            
            
            5,488,359
            
            
            --
            
            
            --
            
            
            12,090,751
            
            
            12,090,751
            
            
            --Other
                Turbine Related Revenue
            
            
            --
            
            
            216,980
            
            
            216,980
            
            
            --
            
            
            --
            
            
            5,003,408
            
            
            5,003,408
            
            
            --Consulting
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            550,000Total
                Revenues
            
            
            2,703,094
            
            
            5,705,339
            
            
            8,408,433
            
            
            1,030,528
            
            
            4,347,002
            
            
            17,094,159
            
            
            21,441,161
            
            
            1,603,420Cost
                of Sales - Cable
            
            $
            1,820,817
            
            $
            --
            
            $
            1,820,817
            
            $
            977,112
            
            $
            3,165,375
            
            $
            --
            
            $
            3,165,375
            
            $
            993,792Cost
                of Sales - Turbines
            
            
            --
            
            
            6,503,184
            
            
            6,503,184
            
            
            --
            
            
            --
            
            
            12,760,758
            
            
            12,760,758
            
            
            --Cost
                of Sales - Turbine Service
            
            
            --
            
            
            298,167
            
            
            298,167
            
            
            --
            
            
            --
            
            
            4,475,025
            
            
            4,475,025
            
            
            --Cost
                of Sales - Consulting
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            304,787Total
                Cost of Sales
            
            
            1,820,817
            
            
            6,801,351
            
            
            8,622,168
            
            
            977,112
            
            
            3,165,375
            
            
            17,235,783
            
            
            20,401,159
            
            
            1,298,579Gross
                Margin - Cable
            
            
            882,277
            
            
            --
            
            
            882,277
            
            
            53,416
            
            
            1,181,627
            
            
            --
            
            
            1,181,627
            
            
            59,628Gross
                Margin % - Cable
            
            
            32.6
            %
            
            --
            
            
            32.6
            %
            
            5.2
            %
            
            27.2
            %
            
            --
            
            
            27.2
            %
            
            5.6
            %Gross
                Margin - Turbines
            
            
            --
            
            
            (1,014,825
            )
            
            (1,014,825
            )
            
            --
            
            
            --
            
            
            (670,007
            )
            
            (670,007
            )
            
            --Gross
                Margin % - Turbines
            
            
            --
            
            
            -18.5
            %
            
            -18.5
            %
            
            --
            
            
            --
            
            
            -5.5
            %
            
            -5.5
            %
            
            --Gross
                Margin - Turbine Service
            
            
            --
            
            
            (81,187
            )
            
            (81,187
            )
            
            --
            
            
            --
            
            
            528,383
            
            
            528,383
            
            
            --Gross
                Margin % - Turbine Service
            
            
            --
            
            
            -37.4
            %
            
            -37.4
            %
            
            --
            
            
            --
            
            
            10.6
            %
            
            10.6
            %
            
            --Gross
                Margin - Consulting
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            245,213Gross
                Margin % - Consulting
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            44.5
            %Total
                Gross Margin
            
            $
            882,277
            
            $
            (1,096,012
            )
            $
            (213,735
            )
            $
            53,416
            
            $
            1,181,627
            
            $
            (141,624
            )
            $
            1,040,003
            
            $
            304,841Total
                Gross Margin %
            
            
            32.6
            %
            
            -19.2
            %
            
            -2.5
            %
            
            5.2
            %
            
            27.2
            %
            
            -0.8
            %
            
            4.9
            %
            
            19.0
            %





CABLE
      REVENUES. Cable revenues increased $1,672,566 or 162% from $1,030,528 at the
      three months ended March 31, 2006 to $2,703,094 for the three months ended
      March
      31, 2007. Cable revenues increased $3,293,582 or 313 % from $1,053,420 for
      the
      six months ended March 31, 2006 to $4,347,002 for the six months ended March
      31,
      2007. This is primarily due to an increase in sales to China of $1.3 million
      for
      the quarter and $2.7 million for the six months ended March 31,
      2007.





Cost
      of
      Sales and resultant Gross Margin on cable revenues for the three and six months
      ended March 31, 2007 represent materials, labor, freight, and allocated overhead
      costs to produce ACCC cable and related hardware. For the three months ended
      March 31, 2007, cable cost of sales increased $843,705 or 86.4% from $977,112
      to
      $1,820,817 for the three months ended March 31, 2007. For the six months ended
      March 31, 2007 cable cost of sales increased $2,171,582 or 218% from $993,792
      to
$3,165,375.
      Costs of sales increases are reflective of increased revenue
      levels.





For
      the
      three months ended March 31, 2007, cable gross margin increased $828,861 or
      1,552% from $53,416 to $882,277. For the six months ended March 31, 2007, the
      cable gross margin increased $1,122,000 or 1882% from $59,628 to $1,181,627
      for
      the six months ended March 31, 2006. Margin percentages improved over the
      previous year due to improvements in production processes and since the 2006
      balances include the City of Kingman sale made under a bankruptcy settlement
      that carried very low profit margins.





TURBINE
      REVENUES For the three months ended March 31, 2007, turbine revenues and related
      services were $5,705,339 and were $17,094,159 for the six months ended March
      31,
      2007. There are no comparable sales for the same periods in 2006 as we did
      not
      acquire the turbine group until July, 2006. Turbine revenues for the quarter
      ended March 31, 2007 consisted of $1.7 million of turbine sales and $4.0 million
      of turbine parts sales to China.




32




Cost
      of
      revenues for the turbines and related revenues is determined under the guidance
      of SFAS 141 acquisition accounting which requires us to record cost of sales
      at
      liquidation value less a nominal profit margin. As a result, our gross profit
      for the quarter is largely this nominal profit margin in addition to the margin
      generated by the sale of other turbine parts and related services for the three
      months and six months ended March 31, 2007, respectively and reduced by
      approximately $0.5 million of additional availability provisions accrued for
      due
      to unexpected turbine downtime in January and February, 2007 caused by service
      outages and a writedown of unusable turbine parts of $0.7 million. We do not
      believe that these margin percentages are necessarily indicative of future
      profit margins of turbines produced by DeWind subsequent to the acquisition
      for
      our projected D6 or D8.2 sales.





There
      are
      no comparable cost of revenue numbers for the three and six month period ended
      March 31, 2006 as we did not acquire the turbine group until July,
      2006.








OTHER
      TURBINE RELATED REVENUE AND COST OF REVENUES for the quarter ended March, 2007
      represents only maintenance payments for those turbines remaining under warranty
      which were not transferred to the E Services entity and which typically are
      serviced at a loss. In January, 2007 we sold an additional share of E Services,
      reduced our ownership percentage to 24.9% and we no longer consolidate the
      revenues or cost of revenues as had occurred in the December, 2006 fiscal
      quarter. For the three months ended March 31, 2007, our share of the loss
      incurred by E Services, was $82,200. There are no comparable revenue or cost
      of
      revenue numbers for the three and six months ended March 31, 2006 since we
      acquired DeWind in July, 2006.





CONSULTING
      REVENUES. Consulting revenues for the six months ended March 31, 2006 consisted
      of consulting and technical services performed in fiscal 2004 and fiscal 2005
      to
      the City of Kingman but which were recognized in November, 2005 after the
      contract was modified in our Chapter 11 bankruptcy. We do not expect any
      significant future consulting revenues and there were no comparable revenues
      during the quarters ended March 31, 2007 and 2006 respectively.





OPERATING
      EXPENSES





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





Overall,
      operating expenses increased $3,170,349 or 82% from $3,846,896 in the three
      month period ended March 31, 2006 to $7,017,245 in the three months ended March
      31, 2007. The increase was due to the addition of DeWind operating expenses
      of
      $3,607,845 offset by decreases in CTC Cable and Corporate expenses of $437,496,
      primarily relating to decreased legal expenses, decreased bankruptcy expenses,
      and decreased quality control consulting which is now conducted
      internally.





Operating
      expenses increased $6,886,161 or 85% from $8,119,529 to $15,005,690 for the
      six
      month period ended March 31, 2007. Of this amount, DeWind had operating expenses
      of $7,701,868 during this period.




33




The
      following table provides a comparative analysis of operating expenses.







Three
                Months Ended March 31,
            
            Six
                Months Ended March 31,2007
            
            2006
            
            2007
            
            2006Cable
                and
              Corporate
            
            DeWind
            
            Total
            
            
            
            Cable
                and
              Corporate
            
            DeWind
            
            TotalOfficer
                Compensation
            
            $
            250,002
            
            $
            --
            
            $
            250,002
            
            $
            112,364
            
            $
            497,696
            
            $
            --
            
            $
            497,696
            
            $
            214,494General
                and Administrative
            
            
            1,382,343
            
            
            682,572
            
            
            2,064,915
            
            
            993,742
            
            
            2,787,613
            
            
            2,702,269
            
            
            5,489,882
            
            
            1,900,906Legal,
                professional & Consulting
            
            
            381,437
            
            
            --
            
            
            381,437
            
            
            607,407
            
            
            624,527
            
            
            --
            
            
            624,527
            
            
            1,668,027Research
                and Development
            
            
            606,608
            
            
            733,343
            
            
            1,339,951
            
            
            1,261,587
            
            
            1,451,815
            
            
            1,325,207
            
            
            2,777,022
            
            
            2,606,457Sales
                and Marketing
            
            
            586,065
            
            
            1,740,898
            
            
            2,326,963
            
            
            381,528
            
            
            1,069,448
            
            
            3,114,942
            
            
            4,184,390
            
            
            764,363Depreciation
                and Amortization
            
            
            202,945
            
            
            451,032
            
            
            653,977
            
            
            200,408
            
            
            405,630
            
            
            1,026,543
            
            
            1,432,173
            
            
            392,053Reorganization
                Expense and Fees
            
            
            --
            
            
            --
            
            
            --
            
            
            289,860
            
            
            --
            
            
            --
            
            
            --
            
            
            573,229Total
                Operating Expenses
            
            $
            3,409,400
            
            $
            3,607,845
            
            $
            7,017,245
            
            $
            3,846,896
            
            $
            6,836,729
            
            $
            8,168,961
            
            $
            15,005,690
            
            $
            8,119,529








OFFICER
      COMPENSATION. Officer compensation expense consists of salaries and SFAS 123R
      option expenses for our Chief Executive Officer, our President, and Secretary.
      Officer compensation expenses increased $137,638 or 123% from $112,364 for
      the
      three months ended March 31, 2006 to $250,002 for the three months ended March
      31, 2007 and increased $283,202 or 132% from $214,494 for the six months ended
      March 31, 2006 to $497,696 for the six months ended March 31, 2007 . The dollar
      increase was primarily due to cash compensation rate increases for our CEO
      and
      Secretary and the addition of the cash compensation for our President and Chief
      Financial Officer. There were no SFAS 123R expenses in Officer Compensation
      for
      the three or six months ending March 31, 2007 vs. $37,000 and $74,000 for the
      three and six months ending March 31, 2006. All officer compensation is
      considered to be corporate in nature.





GENERAL
      AND ADMINISTRATIVE EXPENSE. General and administrative expense consisted
      primarily of salaries and employee benefits for administrative personnel,
      facilities costs, stock exchange fees, audit and Sarbanes Oxley compliance
      fees,
      and insurance expenses. General and administrative increased approximately
      $1,071,173 or 108% from $993,742 for the three months ended March 31, 2006
      to
      $2,064,915 for the three months ended March 31, 2007. DeWind general and
      administrative costs were $682,572 for the three month period ended March 31,
      2007. General and administrative expenses increased approximately $3,588,977
      or
      189% from $1,900,906 for the six months ended March 31, 2006 to $5,489,883
      for
      the six months ended March 31, 2007. DeWind general and administrative expenses
      were $2,702,270 for the six months ended March 31, 2007.




34




For
      the
      three months ended March 31, 2007, the dollar increase was due to the inclusion
      of the DeWind general and administrative costs of $682,000 and an increase
      of
      $389,000 for corporate related activities. The corporate increase was due to
      $180,000 in additional corporate headcount related costs and $260,000 in SFAS
      123R expense increase offset by a decrease of $51,000 related to a change in
      allocated overhead costs.





For
      the
      six months ended March 31, 2007 the dollar increase was due to the inclusion
      of
      the DeWind general and administrative costs of $2,702,000 and an increase of
      $887,000 for corporate related activities. The corporate increase was due to
      $296,000 increase in professional fees related to additional audit and Sarbanes
      Oxley fees associated with the audit of DeWind’s operations in Germany, a
      $126,000 increase in amortized public relations fees paid in stock, $32,000
      in
      outside director costs, $225,000 in increased payroll and headcount related
      costs and an increase of $215,000 in SFAS 123R expenses.





Approximately
      $700,000 and $1,700,000 of General and Administrative expenses are considered
      to
      be corporate in nature for the three and six months ending March 31, 2007,
      respectively.





LEGAL,
      PROFESSIONAL, AND CONSULTING EXPENSE. Legal, professional, and consulting
      expense consisted of professional legal or litigation related expenses,
      financing related expenses, and equity related non-cash expense charges but
      excludes bankruptcy related legal expenses which are captured in reorganization
      costs. Legal, professional, and consulting expense decreased $225,970 or 37%
      from $607,407 for the three months ended March 31, 2006 to $381,437 for the
      three months ended March 31, 2007. Legal, professional, and consulting expense
      decreased $1,043,500 or 63% from $1,668,027 for the six months ended March
      31,
      2006 to $624,527 for the six months ended March 31, 2007. The decrease was
      due
      to lower litigation related legal expenses due to a settlement of all Cable
      and
      Corporate related litigation in the December, 2005 quarter. All legal,
      professional, and consulting expense is considered to be corporate in
      nature.





RESEARCH
      AND DEVELOPMENT EXPENSE. Research and development expense consisted primarily
      of
      salaries for engineers, and expenses for consultants, recruiting, supplies,
      equipment, and facilities related to engineering projects to enhance and extend
      our composite materials intellectual property offerings, and our composite
      materials product technology and production processes.





Research
      and development expense increased $78,364 or 6.2% from $1,261,587 for the three
      months ended March 31, 2006 to $1,339,951 for the three months ended March
      31,
      2007. Research and development expense increased $170,565 or 6.5% from
      $2,606,457 for the six months ended March 31, 2006 to $2,777,022 for the six
      months ended March 31, 2007.





For
      the
      three months ending March 31, 2007 the increase was due to the inclusion of
      DeWind expenses of $733,343 and a decrease in CTC Cable expenses of $655,684.
      The decrease was due to an increase in overhead and headcount related costs
      of
      $450,000 capitalized to production in the 2007 quarter resulting from improved
      production utilization, a decrease in SFAS 123R expenses of $58,000, and a
      decrease in testing costs of $100,000. For the six months ending March 31,
      2007
      the increase was due to the inclusion of DeWind’s development of $1,325,207
      offset by a decrease in CTC Cable R&D expense of $1,044,000. The CTC Cable
      decrease was due to a decrease in headcount and overhead related costs of
      $500,000 capitalized in fiscal 2007 to production inventory costs, a decrease
      of
      $504,000 in external quality testing expenses which are now substantially
      performed internally offset by a decrease of $40,000 in SFAS 123R
      expenses.




35




SALES
      AND
      MARKETING EXPENSE. Sales and marketing expense consisted primarily of salaries
      for sales and marketing personnel, expenses for consultants, equipment, travel,
      and printed marketing literature and sales materials. Sales and marketing
      expense increased approximately $1,945,435 or 510% from $381,528 for the three
      months ended March 31, 2006 to $2,326,963 for the three months ended March
      31,
      2007. Sales and marketing expense increased approximately $3,420,027 or 447%
      from $764,363 for the six months ended March 31, 2006 to $4,184,390 for the
      six
      months ended March 31, 2007.





DeWind
      sales and marketing expenses represented significantly all of the increase
      including $1,740,898 and $3,114,942 for the three and six month periods ending
      March 31, 2007 respectively. CTC Cable increases of $205,000 and $305,000 for
      the three and six months periods ending March 31 represent increases in sales
      headcount related costs and commissions on increased sales of ACCC
      cable.





DEPRECIATION
      & AMORTIZATION EXPENSE. Depreciation expense consisted of depreciation on
      capitalized equipment, leasehold improvements, and other capital assets and
      amortization of acquired intangibles. Depreciation and amortization expense
      increased approximately $453,569 or 226% from $200,408 for the three months
      ended March 31, 2006 to $653,977 for the three months ended March 31, 2007.
      Depreciation and amortization expense increased approximately $1,040,120 or
      265%
      from $392,053 for the three month period ended March 31, 2006 to $1,432,173
      for
      the six months ended March 31, 2007. The increase was due to $451,032 and
      $1,026,543 attributable to DeWind fixed asset depreciation and intangible
      amortization for the three and six months ending March 31, 2007.





REORGANIZATION
      EXPENSE - BANKRUPTCY LEGAL FEES: Bankruptcy legal fees consist of legal and
      professional fees and costs associated with the preparation for our bankruptcy
      confirmation hearings, our bankruptcy financing hearings, and work performed
      subsequent to our bankruptcy confirmation. No further bankruptcy related
      expenses have been incurred since we exited from bankruptcy in the first fiscal
      quarter of 2006.





INTEREST
      INCOME. Interest income increased $25,776 or 1,758% from $1,466 for the three
      months ended March 31, 2006 to $27,242 for the three months ended March 31,
      2007. Interest income increased $44,581 or 283.8% from $15,711 for the six
      months ended March 31, 2006 to $60,292 for the six months ended March 31, 2007.
      The increase was due to the higher cash balances on hand as a result of the
      additional financing resources obtained in February, 2007.





INTEREST
      EXPENSE. Interest expense increased $1,119,412 or 234% from $479,106 for the
      three months ended March 31, 2006 to $1,598,518 for the three months ended
      March
      31, 2007 and increased $1,316,299 or 187% from $697,772 for the six months
      ended
      March 31, 2006 to $2,014,071 for the six months ended March 31, 2007. The
      increase in interest expense was due primarily to the non-cash interest expense
      related to the amortization of the $843,840 value of warrants issued as the
      penalty for the late payment on the Factor Receivable Note Payable discussed
      in
      Note 8 of the financial statements, the amortization of the debt discount
      associated with the issuance of the warrants as part of the $22,825,000
      February, 2007 Convertible Notes and cash interest on the Convertible Notes
      payable.




36




OTHER
      INCOME AND EXPENSES During the three and six months ended March 31, 2007, we
      recorded expenses of $1,902,967 and which represents a SFAS 5 accrual of
      estimated balances due under a tentative settlement of the FKI litigation
      negotiated in May, 2007. See also Note 11. During the three and six months
      ended
      March 31, 2007, as a result of warrant re-pricings pursuant to anti-dilution
      protections in certain of our warrant and convertible note agreements, we
      recorded $285,588 as expense for the modification of warrants and which reflects
      the difference in fair values before and after the re-pricings. See Notes 7
      and
      8.





INCOME
      TAXES. We made no provision for income taxes in the three months and six months
      ended March 31, 2007 due to net losses incurred. Due to our continuing operating
      losses as well as the uncertainty of the timing of profitability in future
      periods, we have fully reserve our deferred tax assets. Tax expense represents
      statutory minimum tax payments, primarily in Europe for DeWind. As of March
      31,
      2007, our deferred tax assets continued to be fully reserved. We will continue
      to evaluate, on a quarterly basis, the positive and negative evidence affecting
      the realization of our deferred tax assets.





**Net
      Loss**





Our
      net
      losses may be summarized as follows:








**Three
                Months Ended March 31,**
            
            **Six
                Months Ended March 31,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Cable
            
            $
            (4,399,262
            )
            $
            (6,518,653
            )
            $
            (7,999,909
            )
            $
            (13,753,555
            )Dewind
            
            
            (6,673,941
            )
            
            --
            
            
            (10,022,618
            )
            
            --Total
            
            $
            (11,073,203
            )
            $
            (6,518,653
            )
            $
            (18,022,527
            )
            $
            (13,753,555
            )





For
      the
      three months ended March 31, 2007
      the CTC Cable and Corporate loss decrease of $2.1 million was due to an
      operating loss decrease of $3.8 million, primarily due to $0.8 million increase
      in gross margin, operating expense decreases of $3.5 million related to
      bankruptcy and legal expenses, other administrative cost savings and decreased
      research and development expenses due to an allocation of R&D costs to
      inventory production and a decrease of $0.8 million other expenses, primarily
      the $2.3 million convertible debt inducement expense offset by an increase
      of
      $1.2 million of interest expense and $0.3 million of warrant modification
      expense.





For
      the
      six months ended March 31, 2007
      the CTC Cable and Corporate loss decrease of $5.7 million was due to an
      operating loss decrease of $2.2 million, primarily $0.9 million increase in
      gross margin and operating expense decrease of $1.3 million and other expense
      decrease of $3.5 million, consisting of $2.3 million of convertible debt
      inducement and $2.6 million of carrying value adjustments to convertible debt
      in
      the fiscal 2006 period offset by $1.2 million of increased interest expense
      and
      $0.3 million of warrant modification expenses.




37





**LIQUIDITY
      AND CAPITAL RESOURCES**





Since
      inception, our principal sources of working capital have been private debt
      issuances and equity financings.





For
      the
      six months ended March 31, 2007, we had a net loss of $18.0 million. At March
      31, 2007 we had $5.8 million of cash and cash equivalents, which represented
      an
      increase of $3.2 million from September 30, 2006. The increase was due to cash
      used by operations of $13.5 million and cash used in investing activities,
      primarily the purchase of our prototype turbine, offset by $21.4 million in
      net
      proceeds provided by financing activings, primarily net proceeds from our $22.8
      million convertible note offering in February, 2007.





Cash
      used
      by operations during the six months ended March 31, 2007 of $13,463,141 was
      the
      result of operating losses, offset by depreciation, amortization, and non-cash
      compensation expenses and working capital requirements. In particular, during
      the March 31, 2007 quarter, we made considerable investments in both our CTC
      Cable and Turbine businesses to purchase key raw materials and turbine parts.
      Cash used by investing activities of $4,531,523 was primarily the capitalization
      of our prototype turbine and the cash investment required by our E Services
      entity. Cash provided by financing of $21,239,849 was primarily due to the
      net
      cash proceeds from the $22.8 million Convertible Note offering in February,
      2007.





We
      anticipate that sales of our ACCC cable will not be sufficient to sustain our
      newly combined operations including the DeWind segment without sufficient wind
      turbine orders with sizable customer advance payments of cash and further
      anticipate that we will continue to incur consolidated net losses due to our
      costs exceeding our revenues for an indefinite period of time. Further, our
      cash
      flows are reliant upon the payment of several large invoices from international
      customers and the payment of cash advances from turbine customers. If existing
      cash and cash generated from operations are insufficient to satisfy our
      liquidity requirements, we may seek to raise additional capital through
      issuances of equity or debt securities. Any additional financing may not be
      available in amounts or on terms acceptable to us, or at all.


There
        is
        no guarantee that we will be successful in completing these contemplated
        financings, nor can we assure you that we will be successful in obtaining
        any
        additional financing should it be required. If we cannot secure additional
        financing when needed, we may be required to cease operations.
 
 By
        adjusting its operations and development to the level of capitalization,
        management belives it has sufficient capital resources to meet projected
        cash
        flow deficits through the next twelve months . However, if thereafter, we
        are
        not successful in generating sufficient liquidity from operations or in raising
        sufficient capital resources, on terms acceptable to us, this could have
        a
        material adverse effect on our business, results of operations liquidity
        and
        financial condition.
 
 Our
        independent certified public accountants have stated in their report, which
        is
        included with our unaudited financial statements in the Form 10-Q for the
        period
        ended March 31, 2007, that we have incurred operating losses in the last
        two
        years and that we are dependent on management's ability to raise capital
        and
        develop profitable operations. These factors, among others, may raise
        substantial doubt about our ability to continue as a going
        concern.


**CAPITAL
      EXPENDITURES**





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





**EFFECTS
      OF INFLATION**





We
      are
      subject to inflation and other price risks arising from price fluctuations
      in
      the market prices of the various raw materials that we use to produce our
      products including the price of aluminum. Price risks are managed through
      cost-containment measures. Since we anticipate passing through the risk of
      market fluctuations of the price of aluminum to our customers, as is the
      practice in the cable industry, we do not believe that inflation risk or other
      price risks with respect to raw materials used to produce our products are
      material to our business, financial position, results of operations or cash
      flows.





**OFF
      BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS**





There
      are
      no off **** balance
      sheet arrangements. The following table summarizes our contractual obligations
      (including interest expense) and commitments as of March 31, 2007:





Contractual
                Obligations
            
            Total
            
            Less
                than 1 year
            
            1-3
                years
            
            More
                than 3 YearsDebt
                Obligations
            
            $
            28,848,250
            
            $
            6,023,250
            
            $
            22,825,000
            
            $
            --Capital
                Lease Obligations
            
            $
            190,304
            
            $
            157,935
            
            $
            32,369
            
            $
            --Operating
                Lease Obligations
            
            $
            4,856,074
            
            $
            1,611,044
            
            $
            3,245,030
            
            $
            --




38





**ITEM
      3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**





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





As
      of
      March 31, 2007 we did not hold any derivative financial instruments for
      speculative or trading purposes. The primary objective of our investment
      activities is the preservation of principal while maximizing investment income
      and minimizing risk. As of March 31, 2007, we had $5.8 million in cash, cash
      equivalents and short-term investments that mature in twelve months or less.
      Due
      to the short duration of these financial instruments, we do not expect that
      a
      change in interest rates would result in any material loss to our investment
      portfolio.





**ITEM
      4: CONTROLS AND PROCEDURES**





Based
      on
      an evaluation under the supervision and with the participation of the Company's
      management, including the Chief Executive Officer, the Chief Financial Officer
      and the Chief Operating Officer, the Company's principal executive officer
      and
      principal financial officer have concluded that the Company's disclosure
      controls and procedures (as defined under the Securities Exchange Act of 1934,
      as amended (Exchange Act)) were not effective as of March 31, 2007 to ensure
      that information required to be disclosed by the Company in reports that it
      files or submits under the Exchange Act is recorded, processed, summarized
      and
      reported within the time periods specified in Securities and Exchange Commission
      rules and forms.





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





Entity
      level Processes and weaknesses. As of September 30, 2006, the following material
      weaknesses existed related to general processes and weaknesses for the entity
      taken as a whole:





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





o
      The
      Company had one member Audit Committee, a one member Compensation Committee,
      and
      had a designated financial expert on the Board of Directors since January of
      2006. Until December, 2005 we only had a two person non-independent Board of
      Directors and from January, 2006 through November, 2006 we had one independent
      director and two non-independent directors comprising our Board of
      Directors.





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





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




39




Information
      Technology Controls (ITCs) . ITCs are policies and procedures that relate to
      many applications and support the effective functioning of application controls
      by helping to ensure the continued proper operation of information systems.
      ITGCs include four basic information technology (IT) areas relevant to internal
      control over financial reporting: program development, program changes, computer
      operations, and access to programs and data. As of September 30, 2006, a
      material weakness existed relating to our information technology general
      controls, including ineffective controls relating to:





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





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





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





Procure
      to Pay process. During our fiscal 2006 assessment of the Company’s procure to
      pay (cash payments and disbursements) cycle, we determined that there were
      numerous significant control deficiencies relating primarily to inventory
      purchasing and related purchasing and payable system control deficiencies.
      If
      assessed on an individual basis, none of these deficiencies were determined
      to
      be material weaknesses. However, taken in the aggregate we believe the following
      constitute a material weakness:





i)
            An
                effective purchasing function did not exist during the entire fiscal
                year.ii)
            There
                were inadequate system driven matching controls over the receiving
                function for inventory parts and supplies. Receiving tolerances for
                inventory related pricing and quantities received are not established
                systematically.


iii)
            There
                was a lack of segregation of duties between the purchasing and payable
                processing functions.iv)
            There
                were inadequate vendor management duties and responsibilities during
                the
                yearv)
            There
                was a lack of sufficient purchasing reports for management
                review.








During
      the six months ended March 31, 2007 the Company improved the internal control
      structure and addressed the identified material weaknesses as
      follows:





During
      the quarter, the Company began the documentation, identification, testing,
      and
      remediation of the DeWind internal control structure that was previously
      excluded from the scope of fiscal 2006 testing.





In
      February, 2007, the Company promoted an individual to be Chief Financial Officer
      who will be tasked with further section 404 compliance responsibility and
      provide additional oversight to financial transactions.




40




During
      the quarter ending March 31, 2007, the Company's management continued to address
      the material weaknesses existing in 2006 described above, as
      follows:





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





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





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





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





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





(6)
      Evaluating the internal audit function in relation to the Company's financial
      resources and requirements. We expect to pursue a strategy of outsourcing our
      internal audit function in fiscal 2007.





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





All
      of
      these steps are in process and plans are in place to hire additional staff
      to
      help remediate the control weaknesses identified as of September 30, 2006 and
      for those weaknesses identified in the DeWind accounting and financial control
      structure.





Therre
      were no changes in our internal control over financial reporting during the
      quarter ended March 31, 2007 that has materially affected, or is reasonably
      likely to materially affect, our internal control over financial reporting,
      other than the remediation measures which are described above.





Singer
      Lewak Greenbaum & Goldstein LLP, our independent registered public
      accounting firm, has audited management's assessment of the effectiveness of
      the
      Company's internal control over financial reporting as of September 30, 2005
      and
      2006 as stated in their report which appears in the Annual Report on Form
      10-K for
      the
      year end September 30, 2006.




41







**PART
      II - OTHER INFORMATION**


**ITEM
      1 - LEGAL PROCEEDINGS**





There
      have been no material changes to the Legal Proceedings described in Form 10-K
      filed December 26, 2006 except as noted in Footnote 11. See also footnote 11
      to
      the financial statements in this document.




**ITEM
      1A. RISK FACTORS**





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





The
      following risk factors have changed or have been updated for recent information
      as compared to the Risk Factors listed in Form 10-K filed December 26, 2006
      and
      such risk factors should be read in conjunction with the risk factors listed
      in
      such Form 10-K filed December 26, 2006.





WE
      EXPECT
      FUTURE LOSSES AND OUR FUTURE PROFITABILITY IS UNCERTAIN.


Prior
      to
      acquiring Transmission Technology Corporation, or TTC, in November 2001, we
      were
      a shell corporation having no operating history, revenues from operations,
      or
      assets since December 31, 1989. We have recorded approximately $8.3 million
      in
      ACCC product sales since inception and we have $23.3 million in Turbine and
      related services revenues since the acquisition of DeWind on July 3, 2006.
      Historically, we have incurred substantial losses and we may experience
      significant quarterly and annual losses for the foreseeable future. We may
      never
      become profitable. If we do achieve profitability, we may not be able to sustain
      or increase profitability on a quarterly or annual basis. We expect the need
      to
      significantly increase our product development and product prototype and
      equipment prototype production expenses, as necessary. As a result, we will
      need
      to generate significant revenues and earnings to achieve and maintain
      profitability.





WE
      HAVE A
      SIGNIFICANT PORTION OF OUR CURRENT REVENUES AND ORDER BOOKINGS WITH A SMALL
      NUMBER OF CUSTOMERS.


For
      both
      our cable and turbine business units, revenues recognized over the past two
      fiscal quarters and order bookings received to date are concentrated with a
      very
      small number of customers, primarily our distribution partner in China and
      our
      sole US contract for our D8.2 turbine models.. Further, our sole US turbine
      customer has missed the payment date for their initial payment required under
      their wind turbine purchase contract. We can provide no assurance that this
      customer will make this payment or other payments required under our contract.
      The loss of one or more of our customers or material changes to the contracts
      with or payment terms of these customers may result in a significant business
      interruption through reduced revenues, reduced cash flows, delays in revenues
      or
      cash flows and such delays or reductions could have a material impact on the
      future revenue growth and profitability of the Company.




OUR
      INDEPENDENT AUDITORS HAVE ISSUED A QUALIFIED REPORT AS OF AND FOR THE YEAR
      ENDED
      SEPTEMBER 30, 2006 WITH RESPECT TO OUR ABILITY TO CONTINUE AS A GOING CONCERN,
      AND WE MAY NEVER ACHIEVE PROFITABILITY.


Since
      inception, our accountants have issued a report relating to our audited
      financial statements which contains a qualification with respect to our ability
      to continue as a going concern because, among other things, our ability to
      continue as a going concern is dependent upon our ability to generate profitable
      operations in the future or to obtain the necessary financing to meet our
      obligations and repay our liabilities from normal business operations when
      they
      come due. There is no guarantee that the products will be accepted or provide
      a
      marketable advantage, and therefore, no guarantee that the commercialization
      will ever be profitable. For the six months ended March 31, 2007 we had a net
      loss of $18,022,527 and negative cash flows from operations of $13,463,141
      For
      the year ended September 30, 2006, we had a net loss of $28,523,192 and negative
      cash flows from operations of $6,263,703. For the fiscal year ended September
      30, 2005, we had a net loss of $40,163,407 and negative cash flows from
      operations of $2,439,151. For the fiscal year ended September 30, 2004, we
      had
      net losses of $14,687,875 and negative cash flows from operations of
      $18,735,430. As of March 31, 2007, our accumulated deficit was
      $113,148,486.





42




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


As
      of
      April 30, 2007, Benton H Wilcoxon, our Chairman of the Board, Chief Executive
      Officer and Acting Chief Financial Officer, and Michael Porter, former CTC
      President and former majority shareholder of EU Energy in the aggregate
      beneficially own or control approximately 21% of the outstanding common stock.
      As a result, these persons have significant influence in determining the
      outcome of any corporate matters submitted to our shareholders for approval,
      including mergers, consolidations and the sale of all or substantially all
      of
      our assets, election of directors and other significant corporate actions.
      They
      also have the power to prevent or cause a change in control. The interests
      of
      these shareholders may differ from the interests of the other shareholders,
      and
      may limit the ability of other shareholders to affect our management and
      affairs.





**Risks
      Related To Our Securities**





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


The
      market price of our common stock may be subject to significant fluctuations
      in
      response to our operating results, announcements of new products or market
      expansions by us or our competitors, changes in general conditions in the
      economy, the financial markets, the electrical power transmission and
      distribution industry, or other developments and activities affecting us, our
      customers, or our competitors, some of which may be unrelated to our
      performance. The sale or attempted sale of a large amount of common stock into
      the market may also have a significant impact on the trading price of our common
      stock. During the last 12 months, the closing bid prices for our common stock
      have fluctuated from a high of $1.95 to a low of $0.72. Fluctuations in the
      trading price or liquidity of our common stock may adversely affect our ability
      to raise capital through future equity financings.





AS
      OF MAY
      7, 2007, 63,804,777 COMMON SHARES ARE ISSUABLE UPON EXERCISE OF ALL OUTSTANDING
      OPTIONS, WARRANTS AND CONVERSION OF CONVERTIBLE NOTES FOR LESS THAN THE MARKET
      PRICE OF $1.49 PER SHARE. CASH PROCEEDS RESULTING FROM THE FULL EXERCISE AND
      CONVERSION OF THESE SECURITIES WOULD BE APPROXIMATELY $29,809,015. THE EXERCISE
      OR CONVERSION OF THESE SECURITIES COULD RESULT IN THE SUBSTANTIAL DILUTION
      OF
      THE COMPANY IN TERMS OF A PARTICULAR PERCENTAGE OWNERSHIP IN THE COMPANY AS
      WELL
      AS THE BOOK VALUE OF THE COMMON SHARES. THE SALE OF A LARGE AMOUNT OF COMMON
      SHARES RECEIVED UPON EXERCISE OF THESE OPTIONS OR WARRANTS ON THE PUBLIC MARKET
      TO FINANCE THE EXERCISE PRICE OR TO PAY ASSOCIATED INCOME TAXES, OR THE
      PERCEPTION THAT SUCH SALES COULD OCCUR, COULD SUBSTANTIALLY DEPRESS THE
      PREVAILING MARKET PRICES FOR OUR SHARES. FULL CONVERSION OF SUCH SHARES WOULD
      INCREASE THE OUTSTANDING COMMON SHARES BY 35.5% TO APPROXIMATELY 243,665,000
      SHARES.





The
      exercise price or conversion price of outstanding options, warrants and
      convertible notes may be less than the current market price for our common
      shares. In the event of the exercise of these securities, a shareholder could
      suffer substantial dilution of his, her or its investment in terms of the
      percentage ownership in us as well as the book value of the common shares held.
      At the May 7, 2007 market price of $1.49 per share, 63,804,777 shares would
      be
      exercisable or convertible for less than the market prices. Full exercise and
      conversion of these below market shares would result in us receiving cash
      proceeds of $29,809,015 and would increase the outstanding common shares by
      35.5% to approximately 243,665,000 shares.




43




**ITEM
      2--UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**




None




**ITEM
      3 - DEFAULTS ON SENIOR SECURITIES**





None





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





None





**ITEM
      5 - OTHER INFORMATION**


None




44




**ITEM
      6 - EXHIBITS**





**EXHIBIT
      INDEX**


Number
            
            Description2.1(1)
            
            Articles
                of Merger of ElDorado Financial Group, Inc., a Florida corporation,
                into
                ElDorado Financial Group, Inc., a Nevada corporation.2.2(2)
            
            Agreement
                and Plan of Reorganization By and Among Transmission Technology
                Corporation, Certain of its Stockholders, and ElDorado Financial
                Group,
                Inc. dated November 3, 2001.2.3(3)
            
            Third
                Amended Chapter 11 Plan of Reorganization with non-material modifications
                of Composite Technology Corporation.2.4(3)
            
            Order
                confirming Debtor's Third Amended Chapter 11 Plan of Reorganization
                with
                Non-material Modifications.3.1(1)
            
            Articles
                of Incorporation of the Company.3.2(4)
            
            Bylaws
                of Composite Technology Corporation, as modified January 6,
                200610.1(5)
            
            Agreement
                by and among Enertrag AG and EU Energy Ltd. dated as of September
                27,
                2006.10.2(6)
            
            Agreement
                by and among EU Energy Inc., GE Infrastructure Technology, LLC and
                GE
                Infrastructure Technology International Inc. dated as of October
                6,
                2006.10.3(7)
            
            Strategic
                Alliance Agreement by and between the Registrant and TECO-Westinghouse
                Motor Company dated as of November 27, 2006.10.4(9)
            
            Entry
                into an employment agreement between the Registrant and Kevin Smith10.5(10)
            
            Modification
                of Agreement dated September 27, 2006 by and among Enertrag and the
                Registrant’s wholly owned subsidiary DeWind Turbines regarding E. Service
                GmbH dated as of January 19, 2007.10.6(11)
            
            Distribution
                Agreement by and between the Registrant’s wholly owned subsidiary CTC
                Cable Corporation and Far East Composite Technology Company dated
                as of
                January 30, 200710.7(13)
            
            Turbine
                Supply Agreement by and between DeWind, INC. and XRG Development
                Partners,
                LLC dated as of March 27, 2007.**10.8(14)
            
            Securities
              Purchase Agreement dated as of February 12, 2007 by and among the
              Registrant and the investors set forth therein10.9(14)
            
            Form
              of Senior Convertible Debenture10.10(14)
            
            Form
              of Warrant10.11(14)
            
            Registration
              Rights Agreement dated as of February 12, 2007 by and among the Registrant
              and the investors set forth therein10.12(15)
            
            Consulting
              Agreement, executed on April 4, 2007 but dated as of April 1, 2007,
              by and
              between Composite Technology Corporation and Michael Porter


14(8)
            
            Code
                of Ethics.21(12)
            
            Subsidiaries
                of the Registrant.31.1(13)
            
            Rule
                13a-14(a) / 15d-14(a)(4) Certification31.2(13)
            
            Rule
                13a-14(a) / 15d-14(a)(4) Certification32.1(13)
            
            Section
                1350 Certifications




45




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





(2)
      Incorporated herein by reference to Form 8-K filed with the U. S. Securities
      and
      Exchange Commission on November 20, 2001.





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





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





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





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





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





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





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





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





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





(12)
      Incorporated herein by reference to Form 10-K filed with the U.S. Securities
      and
      Exchange Commission on December 26, 2006.





(13)
      Filed herewith.


(14)
        Incorporated by reference to Form 8-K filed with the U.S. Securities and
        Exchange Commission on February 13, 2007
 
 (15)
        Incorporated by reference to Form 8-K filed with the U.S. Securities and
        Exchange Commission on April 10, 2007
 
 **
        Confidential treatment requested as to portions of the Exhibit. Omitted
        materials have been filed separately with the Securities and Exchange
        Commission.




46




**SIGNATURE**





Pursuant
      to the requirements of the Securities Exchange Act of 1934, the Registrant
      has
      duly caused this Form 10-Q to be signed on its behalf by the undersigned,
      thereunto duly authorized.





**COMPOSITE
      TECHNOLOGY CORPORATION**


(Registrant)





*By:
                /s/ Benton H Wilcoxon*
              *Benton
                H Wilcoxon*
              *Chief
                Executive Officer*
              
              *May
                10, 2007*




47