UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q
                                   (Mark One)

|X|   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
      EXCHANGE ACT OF 1934

                FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2005

|_|   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             (I.R.S. Employer Identification No.)
 Incorporation or Organization)

                       2026 McGaw Avenue Irvine, CA 92614
                    (Address of Principal Executive Offices)
                                   (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 |_|

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer(as defined in Rule 12b-2 of the
Exchange Act).

Large Accelerated Filer |_| Accelerated Filer |X| Non-Accelerated Filer |_|

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act)

YES |_| NO |X|

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 |_|

Indicate the number of shares outstanding of the issuer's common stock as of
February 2, 2006:

            CLASS                              NUMBER OF SHARES OUTSTANDING
            -----                              ----------------------------
   Common Stock, par value                         135,179,914 shares
       $0.001 per share

================================================================================

<PAGE>

                        COMPOSITE TECHNOLOGY CORPORATION
                Form 10-Q for the Quarter ended December 31, 2005
                                Table of Contents

                                                                            Page
                                                                            ----
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements                                                   3
Item 2 Management's Discussion and Analysis of Financial Condition
       and Results of Operations                                             29
Item 3 Quantitative and Qualitative Disclosures About Market Risk            52
Item 4 Controls and Procedures                                               52

PART II - OTHER INFORMATION
Item 1 Legal Proceedings                                                     53
Item 2 Unregistered Sales of Equity Securities and the Use of
       Proceeds                                                              57
Item 3 Defaults Upon Senior Securities                                       57
Item 4 Submission of Matters to a Vote of Security Holders                   57
Item 5 Other Information                                                     57
Item 6 Exhibits                                                              58
SIGNATURE                                                                    60

<PAGE>

ITEM 1
                          PART 1 - FINANCIAL STATEMENTS
                        COMPOSITE TECHNOLOGY CORPORATION
                                AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                                                   December 31,    September 30
                                                       2005            2005
                                                   ------------    ------------
                                                   (unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents                          $  1,299,193    $    807,815
Accounts receivable, net of reserve of $2.5m
  and $2.5m                                              13,060          56,998
Inventory                                             2,483,239       1,233,334
Prepaid expenses and other current asset                532,100         395,978
                                                   ------------    ------------
Total current assets                                  4,327,592       2,494,125

PROPERTY AND EQUIPMENT, net                           2,704,711       2,765,609
OTHER ASSETS                                            222,599         511,581
                                                   ------------    ------------
TOTAL ASSETS                                       $  7,254,902    $  5,771,315
                                                   ============    ============
LIABILITIES AND SHAREHOLDER EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts Payable                                      2,542,402    $  2,315,214
Accrued Payroll                                         139,164         131,803
Accrued officer compensation                            255,619              --
Accrued Interest                                             --         341,469
Due to Affiliate                                         87,480          97,200
Deferred revenue                                         27,810         621,748
Liabilities subject to compromise                            --       1,625,520
Deferred gain on sale of fixed assets                    15,523          19,052
Deferred rent                                           189,216         170,294
Accrued litigation settlements - See note 9                  --      14,244,792
Lease obligation - current                              414,594         403,191
                                                   ------------    ------------
Total current liabilities                          $  3,671,808    $ 19,970,285

LONG TERM LIABILITIES
Convertible notes                                    12,380,250      10,860,442
Lease obligation - long-term                            335,770         444,696
                                                   ------------    ------------
Total long-term liabilities                          12,716,020      11,305,138
                                                   ------------    ------------
Total Liabilities                                    16,387,828    $ 31,275,421
                                                   ------------    ------------
SHAREHOLDER EQUITY
Common stock, $.001 par value 200,000,000
  shares authorized 129,922,311 and
  118,744,359 issued and outstanding                    129,922         118,744
Additional paid-in capital                           64,574,817      40,979,912
Accumulated Deficit                                 (73,837,665)    (66,602,763)
                                                   ------------    ------------
Total shareholder's equity (Deficit)                 (9,132,926)    (25,504,106)
                                                   ------------    ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY         $  7,254,902    $  5,771,315
                                                   ============    ============

   The accompanying notes are an integral part of these financial statements

                                        3

<PAGE>

                        COMPOSITE TECHNOLOGY CORPORATION
                                AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004
                                   (UNAUDITED)

                                                  Three Months    Three Months
                                                     ended            ended
                                                  December 31,     December 31,
                                                      2005            2004
                                                   (unaudited)     (unaudited)
                                                  -------------   -------------
Revenue:
  Product Sales                                   $      22,892   $      46,485
  Consulting Revenue                                    550,000              --
                                                  -------------   -------------
Total Revenue                                     $     572,892   $      46,485
Cost of production sales sold                            16,680          30,894
Cost of consulting revenue                              304,787              --
                                                  -------------   -------------
Gross margin                                      $     251,425   $      15,591

OPERATING EXPENSES
Officer compensation                                    102,130          85,385
General and administrative                              907,164         598,607
Legal, professional, & consulting                     1,449,583       2,825,830
Research and development                              1,211,255       1,079,651
Sales and Marketing                                     516,449         272,789
Depreciation                                            191,645         111,376
Reorganization expense - bankruptcy legal fees          283,369              --
                                                  -------------   -------------
Total operating expenses                          $   4,661,595   $   4,973,638
                                                  -------------   -------------
LOSS FROM OPERATIONS                              $  (4,410,170)  $  (4,958,047)
                                                  -------------   -------------
OTHER INCOME /EXPENSE
Interest expense                                       (218,666)       (751,219)
Interest income                                          14,245          27,260
Gain on sale of assets                                    3,529           4,256
Reorganization item - adjustment to carrying
value of convertible debt                            (2,622,240)             --
                                                  -------------   -------------

Total other income/expense                        $  (2,823,132)  $    (719,703)
                                                  -------------   -------------
Earnings before Income Taxes                      $  (7,233,302)  $   5,677,750
Income Taxes                                              1,600              --
                                                  -------------   -------------
NET LOSS                                          $  (7,234,902)  $   5,677,750
                                                  -------------   -------------
BASIC AND DILUTED LOSS PER SHARE                  $       (0.06)  $       (0.05)

TOTAL BASIC AND DILUTED LOSS PER SHARE
AVAILABLE TO COMMON SHAREHOLDERS                  $       (0.06)  $       (0.05)

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING          124,511,518     111,814,117
                                                  -------------   -------------
    The accompanying notes are an integral part of these financial statements

                                        4

<PAGE>

                        COMPOSITE TECHNOLOGY CORPORATION
                                AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                     For the         For the
                                                                  three months     three months
                                                                     ending           ending
                                                                  December 31,     December 31
                                                                      2005             2004
                                                                 --------------   --------------
                                                                   (unaudited)      (unaudited)
<S>                                                              <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                         $   (7,234,902)  $   (5,677,750)
Adjustments to reconcile net loss to net cash provided by (used
  in) operating activities:
  Accretion of deferred gain on PP&E                                     (3,529)         (20,666)
  Loss on sale of fixed assets                                               --           16,410
  Depreciation                                                          191,645          111,376
  Deferred rent expense                                                   9,202               --
  Inventory reserve expense                                             529,613               --
  Interest on fixed conversion features                                      --          530,340
  Expense related to fair value of vested options                       145,029           40,325
  Issuance of common stock for services                                 494,330               --
  Issuance of warrants for services                                     180,416           85,714
  Issuance of warrants for modification of debt agreement                    --        1,993,809
  Compensation expense related to modification of stock                 388,692               --
    warrants
  Reorganization item - adjustment to carrying value of               2,622,240               --
convertible debt
(Increase) decrease in Assets:
  Restricted Cash                                                            --       10,010,060
  Accounts Receivable                                                    43,938            1,994
  Inventory                                                          (1,779,518)        (343,943)
  Prepaid Expenses                                                      217,878           66,053
  Capitalized construction costs                                        304,787               --
  Other assets                                                          (15,805)         (47,921)
Increase (Decrease) in Liabilities
  Accounts payable - trade                                           (1,144,699)        (669,974)
  Accrued payroll and related expenses                                    7,361           (3,618)
  Accrued officer compensation                                               --           (8,942)
  Deferred revenue                                                     (593,938)              --
                                                                 --------------   --------------
Net cash provided by (used in) operating activities              $   (5,637,260)  $    6,083,267
                                                                 --------------   --------------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property and equipment                                     (130,747)        (230,716)
Proceeds from sale of assets                                                 --           93,015
                                                                 --------------   --------------
Net cash provided by (used in) investing activities                    (130,747)        (137,701)
                                                                 --------------   --------------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible debentures                      6,000,000               --
Payments on capital lease assets                                        (97,523)         (65,684)
Proceeds from exercise of options                                            --           30,000
Proceeds from exercise of warrants                                      356,908          859,620
                                                                 --------------   --------------
Net cash provided by financing activities                             6,259,385          823,936
                                                                 --------------   --------------
Net increase/(decrease) in cash and cash equivalents                    491,378        6,769,502
CASH AND CASH EQUIVALENTS, BEGINNING OF  PERIOD                         807,815        2,930,615
                                                                 --------------   --------------
CASH AND CASH EQUIVALENTS, END OF  PERIOD                        $    1,299,193   $    9,700,117
                                                                 --------------   --------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW  INFORMATION
CASH PAID FOR BANKRUPTCY ITEMS                                   $      503,279   $           --
INTEREST PAID                                                    $      218,666   $      220,879
INCOME TAX PAID                                                  $        1,600   $        1,600
</TABLE>

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

                                        5

<PAGE>

Supplemental Schedule for Non Cash Financing Activities

During the first quarter of fiscal 2006, the Company issued 2,858,913 shares of
common stock for the conversion of $4,480,191 of the August, 2004 Convertible
Debentures as follows:

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

o     $3,800,000 of principal was converted at $1.55 per share into 2,451,613
      shares of common stock.

During the first quarter of fiscal 2006, the Company issued 7,521,425 shares of
common stock for settlement of bankruptcy claims and litigation settlements
valued at $14,507,521. On September 30, 2005, $14,244,792 had been recorded as
accrued litigation and $262,729 had been recorded as liabilities subject to
compromise.

During the first quarter of fiscal 2006, the Company issued 232,258 shares of
common stock for debt financing services valued at $360,000.

During the first quarter of fiscal 2006, the Company issued 73,961 shares of
common stock in settlement of Accounts Payable totaling $131,651.

During the first quarter of fiscal 2006, the Company issued 200,000 shares of
common stock as prepayment for commissions valued at $354,000 in conjunction
with a bankruptcy settlement.

During the first quarter of fiscal 2006, the Company issued 261,132 shares of
common stock in lieu of interest totaling $433,435.

During the first quarter of fiscal 2006, in October, 2005 the Company raised
$6,000,000 in convertible notes. In conjunction with these notes:

o     The Company issued 1,354,838 warrants and valued the conversion features
      of the notes and warrants at $1,834,092. Under bankruptcy accounting, the
      entire balance was expensed as a reorganization item immediately following
      issuance. See also footnotes 3, 4, 5, and 12.

o     The Company triggered certain anti-dilution provisions in the August, 2004
      Convertible debentures including the re-pricing of warrants issued to the
      debenture holders and a re-setting of the debt conversion price from $1.67
      to $1.55. The company re-priced 4,537,538 warrants and recorded an expense
      charge of $388,962 to legal, professional, and consulting. The Company
      recorded the intrinsic value of the change to the conversion price at
      $788,148 as additional debt discount to the August, 2004 debentures. Under
      bankruptcy accounting, the debt discount was immediately charged to
      expense as a reorganization item - adjustment to debt carrying value
      immediately following the re-pricing . See also footnotes 3, 4, 5, and 12.

                                        6

<PAGE>

NOTE 1 - ORGANIZATION AND LINE OF BUSINESS

Composite Technology Corporation, incorporated in Florida and reincorporated in
Nevada, is an Irvine, CA based company providing advanced composite core
conductor ("ACCC") cables for electric transmission and distribution lines. The
Company operates under four wholly owned subsidiaries incorporated in the State
of Nevada: CTC Wind Systems Corporation, CTC Cable Corporation, CTC Towers &
Poles Corporation, and Transmission Technology Corporation. The Company's first
product is high performance ACCC cable for electric transmission and
distribution lines.

ACCC cable is commercially available in the United States and Canada through
distribution and purchase agreements between General Cable Industries, Inc. and
the Company's wholly owned subsidiary, CTC Cable Corporation and elsewhere
worldwide directly from the Company.

NOTE 2 - GOING CONCERN

The Company has received a report from its independent auditors for the year
ended September 30, 2005 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.

Our principal sources of working capital have been private debt issuances and
historically, the Company has issued registered stock and unregistered,
restricted stock, stock options, and warrants in settlement of both operational
and non-operational related liabilities and as a source of funds.

Commercial orders: We announced our initial commercial order of our ACCC cable
under the General Cable agreement in May, 2005. From this initial commercial
order through January, 2006, we have received cumulative confirmed orders for
approximately $3.1 million of our ACCC cable and related ACCC hardware and we
have recognized approximately $1.0 million as revenue in fiscal 2005. During the
next 12 months, we anticipate that our sales will increase and that our ACCC
products will gain acceptance in the marketplace resulting in additional sales
orders and positive cash flows from operations.

We believe our cash position as of December 31, 2005 of $1.3 million, in
addition to approximately $2,400,000 of "in the money" warrants expiring in
fiscal 2006, approximately $1,000,000 of "in the money" callable warrants, and
expected cash flows from revenue orders may not be sufficient to fund operations
for the next four calendar quarters. We anticipate that additional cash is
needed to fund operations beyond February, 2006 and to the extent required the
Company intends to continue the practice of issuing stock, debt or other
financial instruments for cash or for payment of services until our cash flows
from the sales of our primary products is sufficient to provide cash from
operations or if we believe such a financing event would be a sound business
strategy.

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements of Composite
Technology Corporation (the "Company" or "Composite Technology") 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 year ended September 30, 2005 filed with the
Securities and Exchange Commission on December 13, 2005.

The results of operations for the three months ended December 31, 2005 are not
necessarily indicative of the operating results that may be reported for the
fiscal year ending September 30, 2006 or for any other future period.

Certain amounts in the prior year financial statements have been reclassified to
conform to the current year presentation.

                                        7

<PAGE>

REVENUE RECOGNITION

Revenues are recognized based on guidance provided in the Securities and
Exchange Commission (SEC) Staff Accounting Bulletin No. 104 "Revenue Recognition
in Financial Statements," as amended (SAB 104). Accordingly, our general revenue
recognition policy is to recognize revenue when there is persuasive evidence of
an arrangement, the sales price is fixed or determinable, collection of the
related receivable is reasonably assured, and delivery has occurred or services
have been rendered. The Company derives, or seeks to derive revenues from two
sources:

(1) Product revenue which includes revenue from the sale of composite core,
wrapped composite core, and other electric utility related products.

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

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

PRODUCT SALES. Product revenues are generally recognized when product shipment
has been made and title has passed to the end user customer. Product revenues
consist primarily of revenue from the sale of: (i) wrapped composite core to
utilities either sold directly by the Company or through our distributor, ii)
composite core sold to a cable wrapping partner not subject to a distributor
agreement and where title passes to the partner, or iii) cable core hardware
sold to utility companies. For most product sales, we expect that the terms of
sales generally will not contain provisions that will obligate us to provide
additional products or services after installation to end users. We recognize
revenue: (i) upon shipment when products are shipped FOB shipping point or (ii)
upon delivery at the customer's location when products are shipped FOB
destination.

CONSULTING REVENUE Consulting revenues are generally recognized as the
consulting services are provided. We have entered into service contract
agreements with electric utility and utility services companies that generally
require us to provide engineering or design services, often in conjunction with
current or future product sales. In return, we receive engineering service fees
payable in cash. For multiple element contracts where there is no vendor
specific objective evidence (VSOE) that would allow the allocation of an
arrangement fee amongst various pieces of a multi-element contract, fees
received in advance of services provided are recorded as deferred revenues until
additional operational experience or other vendor specific objective evidence
becomes available, or until the contract is completed.

During its history, the Company has entered into revenue bearing contracts of a
long term (greater than one year) duration. Due to a lack of operational history
resulting in low reliability of estimates on interim rates of completion of such
contracts, revenues associated with long term contracts are recognized on the
completed-contract method of accounting. Under this method, billings and costs
are accumulated during the period of installation, but no revenues are recorded
before the completion of the work. Costs of revenues are capitalized and are
recorded in other current assets. Provisions for estimated losses on uncompleted
contracts are made at the time such losses are determined. Operating expenses,
including indirect costs and administrative expenses, are charged as incurred to
periodic income and not allocated to contract costs.

Stock-Based Compensation

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

                                        8

<PAGE>

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123R, " Share-Based Payments" to require that compensation cost relating to
share-based payment arrangements be recognized in the financial statements. As
of October 1, 2005, we adopted SFAS No. 123R using the modified prospective
method, which requires measurement of compensation cost for all stock-based
awards at fair value on date of grant and recognition of compensation over the
service period for awards expected to vest. The fair value of stock options were
determined using the Black-Scholes valuation model, which is consistent with our
valuation techniques previously utilized for stock options in footnote
disclosures required under SFAS No. 123, as amended by SFAS No. 148. Such fair
value is recognized as expense over the service period, net of estimated
forfeitures. The adoption of SFAS No.123R resulted in no cumulative change in
accounting as of the date of adoption.

On September 27, 2001, the FASB Emerging Issues Task Force (EITF) issued EITF
Issue 96-18 "Accounting for Equity Instruments That are Issued to Other than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services"
which requires that equity instruments issued in exchange for services be valued
at the more accurate of the fair value of the services provided or the fair
value of the equity instruments issued. For equity instruments issued that are
subject to a required service period the expense associated with the equity
instruments is recorded as the instruments vest or the services are provided.
The Company has granted options and warrants to non-employees and recorded the
fair value of the equity instruments on the date of issuance using the
Black-Scholes valuation model. For grants subject to vesting or service
requirements, the expenses is deferred and is recognized over the more
appropriate of the vesting period, or as services are provided.

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 December 31, 2005 and 2004 is as follows
(in thousands):

                                                           Three Months Ended
                                                              December 31,
                                                          2005           2004
                                                      ------------  ------------
Officer Compensation                                  $     36,848  $         --
Legal, Professional and Consulting                         931,188     2,079,523
Selling and marketing                                        3,158            --
Research and development                                    38,103        40,325
General and administrative                                  66,920            --
                                                      ------------  ------------
Totals                                                $  1,076,217  $  2,119,848
                                                      ============  ============

Our stock options vest on an annual or a quarterly basis. For the remainder of
fiscal 2006, we expect stock based compensation expense related to employee
stock options of approximately $172,000, $155,000, and $119,000 before income
taxes for the quarters ending March 31, 2006, June 30, 2006, and September 30,
2006 respectively. We expect stock based compensation related to non-employee
stock options to be approximately $129,000, $37,000, and $37,000 before income
taxes for the quarters ending March 31, 2006, June 30, 2006, and September 30,
2006 respectively. Such amounts may change as a result of additional grants,
forfeitures, modifications in assumptions and other factors. SFAS No. 123R
provides that income tax effects of share-based payments are recognized in the
financial statements for those awards which will normally result in tax
deductions under existing tax law. Under current U.S. federal tax law, we would
receive a compensation expense deduction related to non-qualified stock options
only when those options are exercised and vested shares are received.
Accordingly, the financial statement recognition of compensation cost for
non-qualified stock options creates a deductible temporary difference which
results in a deferred tax asset and a corresponding deferred tax benefit in the
income statement. However, since we currently have a full valuation allowance
for all of our deferred tax assets, any tax consequences for fiscal 2006 is
expected to be negligible to the financial statements.

                                        9

<PAGE>

Convertible Debt

The Company has issued two series of convertible debt securities. Convertible
debt is accounted for under the guidelines established by APB Opinion No. 14
Accounting for Convertible Debt and Debt issued with Stock Purchase Warrants
(APB14) under the direction of Emerging Issues Task Force (EITF) 98-5,
Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios, (EITF 98-5) EITF 00-27 Application of
Issue No 98-5 to Certain Convertible Instruments (EITF 00-27), and EITF 05-8
Income Tax Consequences of Issuing Convertible Debt with Beneficial Conversion
Features. Under these guidelines, the Company allocates the value of the
proceeds received from a convertible debt transaction between the conversion
feature and any other detachable instruments (such as warrants) on a relative
fair value basis. The allocated fair value is recorded as a debt discount or
premium and is amortized over the expected term of the convertible debt to
interest expense. The company values any warrants issued using the Black-Scholes
Merton option pricing model as described and based on the assumptions listed in
footnote 5. If the conversion price of a convertible debt issue changes, the
additional intrinsic value of the debt conversion feature, calculated as the
number of additional shares issuable due to a conversion price change multiplied
by the previous conversion price, is recorded as additional debt discount and
amortized over the remaining life of the debt.

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

Principles of Consolidation

The consolidated financial statements include the accounts of CTC and its wholly
owned subsidiaries (collectively, the "Company"). All significant inter-company
accounts and transactions are eliminated in consolidation.

Research and Development Expenses

Research and development expenses are charged to operations as incurred.

Accounts Receivable

The Company extends credit to its customers. Collateral is generally not
required. Credit losses are provided for in the financial statements based on
management's evaluation of historical and current industry trends as well as
history with individual customers. Although the Company expects to collect
amounts due, actual collections may differ from estimated amounts. As of
December 31, 2005, the Company had gross accounts receivable of $2,513,060 and
had recorded a reserve of $2,500,000.

Inventory

Inventories consist of our wrapped and unwrapped manufactured composite core and
related hardware products and raw materials used in the production of those
products. Inventories are valued at the lower of cost or market under the FIFO
method. Costs to ship product for sale or for products sold is recorded to costs
of goods sold as the expenses are incurred. Products manufactured internally are
valued at standard cost which approximates replacement cost. Inventory is
periodically evaluated for obsolescence and salability and reserves are recorded
for product that is believed by management to be impaired in value. As of
December 31, 2005, the company had recorded gross inventory of $3,247,030 and
had inventory reserves of $763,791.

Business Segments

The Company organizes itself as one segment and conducts its operations in the
United States.

The Company sells its products and technology to domestic and international
customers. All revenues recognized during the quarter ended December 31, 2004
and 2005 occurred in the United States. The City of Kingman, KS represented 100%
of the revenues recognized during the quarter ended December 31, 2005.

                                       10

<PAGE>

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 December 31, 2005 and 2004
since their effect would have been anti-dilutive:

                                                             December 31
                                                      --------------------------
                                                          2005          2004
                                                      ------------  ------------
Options for common stock                                 6,167,936     7,175,336
Warrants                                                 9,862,468    11,748,282
Convertible Debentures, if converted                     7,987,258     8,982,036
                                                      ------------  ------------
                                                        24,017,662    27,905,654
                                                      ============  ============

RECENT ACCOUNTING PRONOUNCEMENTS

SFAS No. 153 Exchanges of Nonmonetary Assets:

On December 16, 2004, the FASB issued Statement No. 153, Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for
Nonmonetary Transactions, Statement 153 addresses the measurement of exchanges
of nonmonetary assets and redefines the scope of transactions that should be
measured based on the fair value of the assets exchanged. Statement 153 is
effective for nonmonetary asset exchanges beginning in our second quarter of
fiscal 2006. We do not believe adoption of Statement 153 will have a material
effect on our consolidated financial position, results of operations or cash
flows.

SFAS No. 154 Accounting Changes and Error Corrections:

On June 7, 2005, the FASB issued Statement No. 154, Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and
Statement No. 3, Reporting Accounting Changes in Interim Financial Statements.
Statement 154 changes the requirements for the accounting for and reporting of a
change in accounting principle. Previously, most voluntary changes in accounting
principles were required recognition via a cumulative effect adjustment within
net income of the period of the change. Statement 154 requires retrospective
application to prior periods' financial statements, unless it is impracticable
to determine either the period-specific effects or the cumulative effect of the
change. Statement 154 is effective for accounting changes made in fiscal years
beginning after December 15, 2005; however, the Statement does not change the
transition provisions of any existing accounting pronouncements. We do not
believe adoption of Statement 154 will have a material effect on our
consolidated financial position, results of operations or cash flows.

                                       11

<PAGE>

NOTE 4 - BANKRUPTCY

On May 5, 2005 (Petition Date) Composite Technology Corporation filed a
voluntary petition for relief 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. On October 31, 2005, the Judge
John Ryan of the Central district court, Santa Ana division of the US Bankruptcy
court approved the Company's Third amended Plan of Reorganization which provided
for payment of 100% of creditors allowed claims. On November 1, 2005 the Company
paid substantially all of its pre-petition liabilities payable in cash, thereby
effectively consummating the plan of Bankruptcy. On November 18, 2005, United
States Bankruptcy Judge John Ryan signed and entered the order approving the
Company's Third Amended Chapter 11 Plan of Reorganization with non-material
modifications that confirms the Company's emergence from bankruptcy.

As discussed in Note 1, for financial reporting purposes, the consolidated
financial statements have been prepared on a going concern basis. In addition,
the debtor has applied the provisions of the AICPA SOP 90-7, Accounting for
Bankruptcies. We have reviewed the guidelines and determined that the following
applies to our situation.

o     Assets are recorded at net realizable value. As of September 30, 2005 and
      November 18, 2005, our assets consisted primarily of cash, receivables,
      inventory, and equipment which were all reviewed for impairment. Based on
      a review of our asset base, we determined that our carrying value as of
      September 30, 2005 and November 18, 2005 was equal to the net realizable
      value of our assets. We therefore determined that there are no
      requirements to adjust our assets since their book value approximates
      their net realizable value.

o     All pre-petition liabilities subject to compromise have been segregated in
      the September 30, 2005 Balance Sheet and classified as Liabilities Subject
      to Compromise, at the estimated amount of allowable claims. December 31,
      2005 balances of remaining liabilities subject to compromise were
      reclassified to conform to pre-bankruptcy classifications. See the table
      below for additional information.

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

o     In October, 2005 and prior to our emergence from bankruptcy, we received
      $6,000,000 in exchange for Convertible Debentures and Common Stock
      Warrants as described in footnotes 5 and 13. We recorded a $1,834,092
      discount to the $6,000,000 convertible notes for the value of the warrants
      and the conversion features of the notes. Under bankruptcy accounting we
      are required to state our liabilities at the amounts we expect to settle.
      Therefore, we immediately expensed the $1,834,092 as a carrying value
      adjustment.

o     In conjunction with the $6M financing in October, certain anti-dilution
      provisions were triggered in the August, 2004 convertible debentures and
      the warrants held by the debenture holders. We recorded an additional
      discount of $788,148 for the intrinsic value of the lower conversion price
      on the remaining principal as of the date of the October financing. Under
      bankruptcy accounting we are required to state our liabilities at the
      amounts we expect to settle. Therefore, we immediately expensed the
      $788,148 as a carrying value adjustment.

o     Since we intend to pay our creditors at 100% and modifications to existing
      contracts and liability are primarily non-financial in nature, we recorded
      no gains related to the bankruptcy for any liability modification.

o     Our bankruptcy related expenses consist primarily of professional fees.
      During the quarter ended December 31, 2005 we incurred $283,369 in
      bankruptcy related legal and professional fees. We have segregated these
      fees in our Statement of Operations.

o     Interest expense recorded related to the bankruptcy filing consists of 3%
      annual interest on our pre-petition liabilities and totals $15,720 for
      fiscal 2005 and $2,841 for the quarter ended December 31, 2005.

o     We have disclosed the cash payments for reorganization costs as a
      supplemental disclosure to our Statement of Cash Flows. Reorganization
      costs consist primarily of trustee fees, and professional services.

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

o     We determined that we did not qualify for Fresh-Start reporting upon
      emergence from bankruptcy.

                                       12

<PAGE>

Since we had emerged from bankruptcy on November 18, 2005, presentation of
Liabilities subject to compromise was not required as of December 31, 2005.
Consistent presentation of liabilities subject to compromise between September
30, 2005 and December 31, 2005 balances are as follows:

                                                    Remaining at
                                                    December 31,   September 30,
                                                        2005            2005
                                                   ------------     ------------
Pre-petition Accounts Payable                                --     $  1,180,202
Accrued Officer                                    $    255,619(1)       255,619
Compensation
Accrued disputed                                         53,000(2)        65,000
balances
Accrued pre-petition interest payable                        --           89,286
Accrued pre-petition employee
  benefits                                               12,955(3)        35,413
                                                   ------------     ------------
Total                                              $    321,574     $  1,625,520

(1) Included as a separate balance sheet line item as of December 31, 2005

(2) Included in Accounts Payable as of December 31, 2005

(3) Included in Accrued payroll as of December 31, 2005

The common stock issued during the quarter ending December 31, 2005 for payment
of litigation related and bankruptcy related liabilities consist of:

                                            Shares issued
                                            -------------
Litigation settlements                          7,175,000
Bankruptcy claim settlements                      287,301
Debenture interest payable to 9/30/05             259,790
Pre-petition liabilities and other                 59,124
                                            -------------
Total Bankruptcy related issuances              7,781,215

The shares represent 6.0% of the shares issued and outstanding as of December
31, 2005. The issuance of these shares had no incremental impact on the loss per
share reported during the quarter ended December 31, 2005.

Note 5. Equity and Equity-Based Compensation

On October 1, 2005, the Company adopted SFAS No. 123 (revised 2004),
"Share-Based Payment, " (SFAS No. 123R) which was issued in December 2004. SFAS
No. 123R revises SFAS No. 123, "Accounting for Stock1Based Compensation," and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees," and
its related interpretations. SFAS No. 123R requires recognition of the cost of
employee services received in exchange for an award of equity instruments in the
financial statements over the period the employee is required to perform the
services in exchange for the award. SFAS No. 123R also requires measurement of
the cost of employee services received in exchange for an award based on the
grant-date fair value of the award. SFAS No. 123R also amends SFAS No. 95, "
Statement of Cash Flows ," to require that excess tax benefits be reported as
financing cash inflows, rather than as a reduction of taxes paid, which is
included within operating cash flows. The Company adopted SFAS No. 123R using
the modified prospective method. Accordingly, prior period amounts have not been
restated. Under this application, the Company is required to record compensation
expense for all awards granted after the date of adoption and for the unvested
portion of previously granted awards that remain outstanding at the date of
adoption.

                                       13

<PAGE>

On September 27, 2001, the FASB Emerging Issues Task Force (EITF) issued EITF
Issue 96-18 "Accounting for Equity Instruments That are Issued to Other than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services"
which requires that equity instruments issued in exchange for services be valued
at the more accurate of the fair value of the services provided or the fair
value of the equity instruments issued. For equity instruments issued that are
subject to a required service period, the expense associated with the equity
instruments is recorded as the instruments vest or the services are provided.
For common stock issued, the fair value is determined to be the closing market
price on the date of issuance. For options and warrants issued or granted, the
Company values the options and warrants on the date of issuance using the
Black-Scholes valuation model. For grants subject to vesting or service
requirements, the expenses is deferred and is recognized over the more
appropriate of the vesting period, or as services are provided.

Key assumptions used in valuing options and warrants issued in the quarters
ending December 31, 2005 and 2004 are as follows:

                                                           Three Months Ended
                                                              December 31,
                                                         2005           2004
                                                      ------------  ------------
Risk Free Rate of Return                                 3.97%             3.66%
Volatility                                                100%               73%
Dividend yield                                              0%                0%

Classification of Stock-Based Compensation Expense

Stock-based compensation expense in the first quarter of fiscal 2006 and 2005
are as follows:

                                                           Three Months Ended
                                                              December 31,
                                                          2005           2004
                                                      ------------  ------------
Officer Compensation                                  $     36,848  $         --
Legal, Professional and Consulting                         931,188     2,079,523
Selling and marketing                                        3,158            --
Research and development                                    38,103        40,325
General and administrative                                  66,920            --
                                                      ------------  ------------
Totals                                                $  1,076,217  $  2,119,848
                                                      ============  ============

The significant components of stock based compensation expense in the first
quarter of fiscal 2006 and 2005 were:

                                                           Three Months Ended
                                                              December 31,
                                                          2005           2004
                                                      ------------  ------------
Warrants issued in November, 2004 at fair value
  pursuant to amendment of August, 2004 Debentures              --     1,993,809
Warrants approved in November, 2004 valued at
  fair value for other services                                 --        85,714
Warrants issued for services rendered in
  conjunction with October, 2005 debenture
  offering at fair value                                   180,416            --
Warrant modification related to anti-dilution
  provisions of August, 2004 debentures                    388,692            --
Vesting of fair value of non-employee stock
  options                                                   22,850        40,325
Stock issued for services at fair value of
  services rendered                                        362,080            --
Employee stock option expense under SFAS 123R              122,179            --
                                                      ------------  ------------
Totals                                                $  1,076,217  $  2,119,848
                                                      ============  ============

                                       13

<PAGE>

Tax Effect related to Stock-based Compensation Expense

SFAS No. 123R provides that income tax effects of share-based payments are
recognized in the financial statements for those awards that will normally
result in tax deductions under existing tax law. Under current U.S. federal tax
law, the Company would receive a compensation expense deduction related to
non-qualified stock options only when those options are exercised and vested
shares are received. Accordingly, the financial statement recognition of
compensation cost for non-qualified stock options creates a deductible temporary
difference which results in a deferred tax asset and a corresponding deferred
tax benefit in the income statement. Due to the uncertainty surrounding the
future utility of the Company's deferred tax assets, all deferred tax assets are
fully allowed for as of December 31, 2005.

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

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

Net Loss:
As reported                                                       $  (5,677,750)
                                                                  -------------
Deduct: Total stock-based employee compensation
  expense determined under the fair value based
  method for all awards, net of tax                                     (89,455)
                                                                  -------------
Pro forma                                                         $  (5,767,205)
                                                                  =============
Basic earnings per share:
As reported                                                       $       (0.05)
Pro forma                                                         $       (0.05)
Diluted earnings per share:
As reported                                                       $       (0.05)
Pro forma                                                         $       (0.05)

The fair value of the Company's stock-based awards to employees was estimated at
the date of grant using the Black-Scholes option-pricing model (Black-Scholes),
assuming no dividends and using the valuation assumptions noted in the following
table. The risk-free rate is based on the U.S. Treasury yield curve in effect at
the time of grant. The expected life (estimated period of time outstanding) of
the stock options granted was estimated using the historical exercise behavior
of employees and the option expiration date. The Company's volatility estimate
for option grants varies by the year issued. Due to the lack of an efficient
public market in the Company's stock prior to 2003 it was determined that the
use of a volatility period that matches the expected term was not meaningful.
Options granted prior to January 1, 2004 had their volatility based on
historical volatility of 181 days. Options granted in fiscal 2004 had their
volatility based on one year and options granted in fiscal 2005 had their
volatility based on two years. All volatility calculations were made on a daily
basis. The company has issued no option grants to date in fiscal 2006 but
expects any 2006 grants to be valued using a 3 year volatility and that
eventually the volatility term will be consistent with the expected term of the
options.

Expected term                                                          3-7 years
Expected and weighted average volatility                                  86.27%
Risk-free rate                                                        3.33-4.73%

                                       14

<PAGE>

COMMON STOCK

During the three months ended December 31, 2005 a total of 230,263 shares of the
Company's Common Stock was issued pursuant to exercises of Debenture warrants
originally priced at $1.75 per warrant with a revised exercise price of $1.55
for total cash consideration of $356,908.

During the three months ended December 31, 2005, the Company issued a total of
407,300 shares of common stock pursuant to conversions of $680,191 in principal
of the August, 2004 convertible debt at a conversion price of $1.67 per share.

During the three months ended December 31, 2005, the Company issued a total of
2,451,613 shares of common stock pursuant to conversions of $3,800,000 in
principal of the August, 2004 convertible debt at a conversion price of $1.55
per share.

During the three months ended December 31, 2005, the Company issued a total of
8,088,776 shares of Common stock registered pursuant to Bankruptcy Code 1145 for
satisfaction of the following liabilities:

o     6,500,000 shares were issued on November 18, 2005 to the Acquvest and Koch
      litigation parties on November 18, 2005. On October 31, 2005, the Company
      agreed to settlement terms with the Acquvest parties litigation. In
      exchange for a full release of all liability, the Company agreed to issue
      6,500,000 shares of common stock. The Company recorded an accrual in
      accordance with SFAS 5 of $12,675,000 on September 30, 2005 to accrue the
      liability. The value of the settlement was calculated using a price of
      $1.95 per share, the closing market price on the day prior to the
      settlement date.

o     650,000 shares were issued on November 18, 2005 to the Ascendiant
      litigation parties in settlement of litigation claims and pursuant to the
      order of the US Bankruptcy court on November 18, 2005. The Company had
      recorded an accrual of $1,196,000 as of September 30, 2005. The accrual
      was valued at the market price on the day prior to August 10, 2005 which
      was the date when the substantial settlement terms were agreed to.

o     25,000 shares were issued on November 18, 2005 to the Shields litigation
      parties in settlement of litigation claims and pursuant to the order of
      the US Bankruptcy court on November 18, 2005. The Company had recorded an
      accrual of $45,500 as of September 30, 2005. The accrual was valued at the
      market price on the day prior to the September 2, 2005 settlement date.

o     200,000 shares were issued on November 18, 2005 to American China
      Technology Solutions in settlement of a bankruptcy claim and pursuant to
      the order of the US Bankruptcy court on November 18, 2005. The shares were
      valued at $1.77 per share. The issuance was valued at the market price on
      the day prior to the October 7, 2005 settlement. Because the settlement
      will result in future services to be provided by ACTS, the company has
      recorded a prepaid commissions expense of $354,000 representing
      commissions on future sales of ACCC cable to China.

o     87,301 shares were issued on November 18, 2005 to John Nunley in
      settlement of a bankruptcy claim and pursuant to the order of the US
      Bankruptcy court on November 18, 2005. The Company had recorded an accrual
      of $125,277 as of September 30, 2005. The shares were valued at $1.435 per
      share. The issuance was valued at the market price on the day prior to the
      October 1, 2005 settlement.

o     59,124 shares were issued on November 18, 2005 to Composite Support &
      Solutions in settlement of a bankruptcy claim and pursuant to the order of
      the US Bankruptcy court on November 18, 2005. The Company had recorded an
      accrual of $111,744 as of September 30, 2005. The shares were valued at
      $1.89 per share which was the fair value of the services provided by the
      claimant prior to May 5, 2005.

o     259,790 shares were issued on November 9, 2005 for payment of $431,355 in
      interest accrued on the August, 2004 $15 million Debentures from April 1,
      2005 to September 30, 2005. The $1.66 per share value was calculated as
      93% of the 20 day Volume Weighted Average price for the 20 trading days
      prior to November 1, 2005 and was pursuant to the terms of the Debenture
      agreement, as amended.

o     233,600 shares were issued on November 15, 2005 to Ryan Lane for services
      valued at $362,080 provided in conjunction with the October, 2005
      Debenture financing. The $1.55 per share value was determined as
      equivalent to the conversion price of the $6.0 million debentures.

o     73,961 shares were issued on November 3, 2005 to Mike McIntosh in payment
      of consulting and intellectual property advisory services valued at
      $131,577. The Company had received the services prior to September 30,
      2005 and had accrued for the expenses in Accounts Payable as of September
      30, 2005.

                                       15

<PAGE>

STOCK OPTIONS

Stock Plan

On May 15, 2001, TTC established the 2001 Incentive Compensation Stock Option
Plan (the "TTC Plan"). The TTC Plan was administered by the Company's Board of
Directors. Under the TTC Plan, the Board had reserved 4,764,000 shares of common
stock to support the underlying options which may be granted. As part of TTC's
acquisition by CTC on November 3, 2001, the TTC Plan was terminated, and the
options were converted into options to purchase shares of CTC's common stock
pursuant to the 2002 Non-Qualified Stock Compensation Plan (the "Stock Plan").
The number of shares reserved initially under the Stock Plan was 9,000,000. This
number was increased to 14,000,000 on October 24, 2002.

The exercise price of the underlying shares will be determined by the Board of
Directors; however, the exercise price may not be lower than 100% of the mean of
the last reported bid and asked price of the Company's common stock as quoted on
the NASDAQ Bulletin Board or any other exchange or organization. The term of
each option will be established by the Board of Directors at the date of issue
and may not exceed 10 years. The Plan automatically terminates on May 15, 2021
and no options under the Plan may be granted after May 15, 2011.

The following table summarizes the Stock Plan stock option activity as of
December 31, 2005.

                                                                       Average
                                                          Number      Exercise
                                                        of Options      Price
Outstanding, September 30, 2005                          6,167,936  $       0.57
  Granted                                                       --
  Exercised                                                     --
  Cancelled                                                     --
OUTSTANDING, December 31, 2005                           6,167,936  $       0.57
                                                      ============

EXERCISABLE, December 31, 2005                           3,661,965  $       0.50
                                                      ============

The weighted-average remaining contractual life of the options outstanding at
December 31, 2005 was 6.97 years. The exercise prices of the options outstanding
at December 31, 2005 ranged from $0.25 to $4.02, and information relating to
these options is as follows:

<TABLE>
<CAPTION>
                                                           Weighted Average      Weighted Average   Weighted Average
                                                               Remaining           Exercise Price     Exercise Price
Range of Exercise       Stock Options      Stock Options    Contractual Life        of Options         of Options
     Prices              Outstanding        Exercisable         in years            Outstanding        Exercisable
<C>                        <C>                <C>                    <C>                   <C>                <C>
       $0.25-0.49           2,720,432          1,966,344              6.0                 $0.30             $0.30
       $0.50-$0.99          2,775,000          1,385,000              7.9                 $0.59             $0.54
       $1.00-$1.49            447,504            149,371              8.5                 $1.00             $1.00
       $1.50-$1.99             50,000             50,000              1.0                 $1.75             $1.75
       $2.00-$2.99            100,000            100,000              1.0                 $2.00             $2.00
       $3.00-$5.00             75,000              7,500              9.1                 $4.02             $4.02
                            ---------          ---------

           Total            6,167,936          3,661,965
                            ---------          ---------
</TABLE>

As of December 31, 2005, there was $1.4 million of total unrecognized
compensation cost related to non-vested share-based compensation arrangements
related to stock options granted under the Plan. That cost is expected to be
recognized over a weighted-average period of 2.3 years.

                                       16

<PAGE>

WARRANTS

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

The following table summarizes the Warrant activity for the quarter ending
December 31, 2005:

                                                    Number      Weighted-Average
                                                 of Warrants     Exercise Price
                                              ----------------  ----------------
Outstanding, September 30, 2005                      8,796,383  $           1.40
  Granted                                            1,354,838  $           1.86
  Exercised                                            230,263  $           1.55
  Cancelled                                             58,500  $           1.95
                                              ----------------  ----------------
OUTSTANDING, December 31, 2005                       9,862,468  $           1.46
                                              ================

EXERCISABLE, December 31, 2005                       9,862,468  $           1.46
                                              ================

During the quarter ended December 31, 2005 230,263 warrants were exercised for
cash proceeds of $356,908 and 58,500 Series R warrants expired unexercised.

We issued 1,354,838 warrants in conjunction with our October, 2005 $6.0 million
Convertible Note offering including 193,548 warrants issued to Lane Capital as
part of their financing fees and 1,161,290 warrants issued to the note holders.
Under the terms of the financing, 50% of the warrants were issued at an exercise
price of $1.78 and 50% at an exercise price of $1.94. We valued the warrants
using the Black Scholes Merton option pricing model with a volatility of 100%, a
risk free rate of 3.97%, a life of 3 years, a 0% dividend rate and a market
price of $1.55 at $0.9452 and $0.9191 for the $1.78 and $1.94 warrants
respectively. The fair value of the warrants issued to the note holders was used
as part of the beneficial conversion feature allocation described in footnote 12
below. The 193,548 warrants issued to Lane Capital were valued at $180,416 and
were included in legal and professional expenses during the quarter.

As a result of the financing, we triggered anti-dilution provisions existing in
our $15 million August, 2004 Convertible Debentures and related warrants. The
warrant exercise prices for the "$1.75 Debenture," "1.82 Debenture" and "$3.23
Debenture Amendment" warrants were adjusted from their original exercise prices
of $1.75, $1.82, and $3.23 respectively to @1.55 per warrant for each warrant
series. We accounted for the re-pricing by calculating the difference in the
fair value of the warrants immediately before the re-pricing to the value of the
warrants immediately after the re-pricing. We used the Black-Scholes Merton
option pricing model using the following assumptions:

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

The re-pricing resulted in a warrant value difference per warrant of $0.0367,
$0.0487, and $0.2226 for the $1.75, $1.82, and $3.23 warrants respectively
resulting in a compensation charge of $388,692 recorded in fiscal 2006 into
legal, professional, and consulting expenses.

                                       17

<PAGE>

The following table summarizes the warrants issued, outstanding, and exercisable
as of December 31, 2005:

<TABLE>
<CAPTION>
                                                                        Warrants      Proceeds if   Call
Warrant Series          Grant Date   Strike Price   Expiration Date     remaining      Exercised    feature
<S>                     <C>          <C>            <C>                 <C>           <C>           <C>
"Red Guard"              July, 2001      $1.26            July, 2006      1,897,660   $  2,391,052      None
2002 Numbered            June, 2002      $0.50            July, 2006         83,333         41,667      None
"December 2003"          Dec., 2003      $2.04        December, 2008        120,000        244,800       (1)
Debenture $1.75           Aug, 2004      $1.55(4)       August, 2008      1,496,710      2,319,901      None
Debenture $1.82           Aug, 2004      $1.55(4)       August, 2008      1,726,973      2,676,808      None
Series S                 Sept, 2004      $1.00            July, 2007      1,427,000      1,427,000       (2)
Series T                 Sept, 2004      $1.00            July, 2008        160,000        160,000      None
Series U                 Sept, 2004      $1.83          August, 2008        512,362        937,622       (3)
Debenture Amend           Nov, 2004      $1.55(4)     November, 2008      1,083,592      1,679,568      None
Oct 2005 $1.78            Oct, 2005      $1.78         October, 2008        677,419      1,205,806      None
Oct 2005 $1.94            Oct, 2005      $1.94         October, 2008        677,419      1,314,193      None
                                                                        -----------   ------------
Total                                                                     9,862,468   $ 14,398,417
</TABLE>

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

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

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

(4) Re-priced pursuant to anti-dilution provisions of the October, 2005
debenture offering

NOTE 6 - PROPERTY AND EQUIPMENT

Property and equipment at December 31, 2005 consisted of the following:

Manufacturing equipment                                            $  2,855,137
Office Furniture and equipment                                          304,670
Leasehold improvements                                                  411,790
                                                                   ------------
                                                                   $  3,571,597
Less accumulated depreciation                                          (866,886)
                                                                   ------------
Total                                                              $  2,704,711
                                                                   ============

Depreciation expense was $191,646 and $111,376, for the three months ended
December 31, 2005 and 2004 respectively.

                                       18

<PAGE>

NOTE 7 - INVENTORY

Inventories consist of the following:

                                                     December        September
                                                     31, 2005        30, 2005
                                                   ------------    ------------
Raw Materials                                      $  1,343,356    $    473,007
Finished Goods Available for Sale                     1,897,194         970,318
FG Inventory allocated for Sale                           6,480          24,681
                                                   ------------    ------------
Gross Inventory                                    $  3,247,030    $  1,468,006
Reserve for Raw Materials                              (185,421)       (186,377)
Reserve for FG Inventory                               (578,370)        (48,295)
                                                   ------------    ------------
Net Inventory                                      $  2,483,239    $  1,233,334
                                                   ============    ============

Inventory allocated for sale includes products that have: i) been shipped to
third parties and is either held for distribution to end-user customers or ii)
is awaiting additional processing by our cable wrapping affiliate.

During 2005, we changed certain raw materials used to produce our ACCC core
product, in particular our composite core resin mixture. During fiscal 2005, we
fully reserved all remaining raw materials that are not returnable to vendors
and which are not currently used in production during fiscal 2005.

As of September 30, 2005 we believed that the core produced using earlier
production resin material was not impaired and was saleable to our current
customers. During the quarter ended December 31, 2005 we determined that our
primary customer would not purchase composite core that was produced using older
resin mixtures. Consequently, we determined that the older resin products should
be reserved for to represent the current market value. As such, we fully
reserved for all core produced using older resin mixtures. For the quarter ended
December 31, 2005, we recorded a reserve of $440,819, expensed to Research and
Development expense to fully allow for the older resin based core.

During 2005, we fully reserved for partial reels of completed ACCC core that are
not currently able to be wrapped by our existing cable wrapping partner due to
the reel length. We continued this practice in fiscal 2006. We reserved an
additional $88,794 for partial reel core product in the first fiscal quarter of
2006.

NOTE 8 - CONTRACT RIGHTS

The Company has certain rights to technology developed outside of the company.
The technology is carried at $0 on the balance sheet.

In 2003, the Company and W.B.G., Inc. ("WBG") were involved in litigation
regarding the interpretation and enforcement of a License Agreement dating from
2001. The lawsuits were settled amicably in February 2003, resulting in a
revised License Agreement between W. Brandt Goldsworthy & Associates, Inc.
("WBGA") and CTC. The new License Agreement (the "New License Agreement")
supersedes the previous License Agreement and grants CTC the exclusive license
for use of any components in CTC's Aluminum Conductor Composite Core ("ACCC")
products that include items contained in patent claims granted to WBGA by the
United States Patent and Trademark Office (the "USPTO").

The Company also has a non-exclusive license for any other pultruded composite
core electrical cable designs characterized by WBGA as CRAC-1. The New License
Agreement bears a 2% royalty on net sales revenues for that component of ACCC
using any patent claim issued to WBGA and a 1% royalty for any component of the
CRAC-1 technology, if any, used by CTC, provided WBGA is granted valid patent
claims by the USPTO. As of September 30, 2005, no such claims have been granted
by the USPTO.. The duration of the New License Agreement is for the life of any
patent granted to WBGA by the USPTO for the specific technologies licensed
therein.

                                       19

<PAGE>

NOTE 9- COMMITMENTS AND CONTINGENCIES

LEASES

In January 2004, the Company entered into a seven-year lease agreement for a
combination manufacturing and office facility in Irvine, California for minimum
monthly payments of $73,584. This base rent increases by $3,154 per month on
each January 1 anniversary.

The Company leases office equipment with a minimum payment of $1,395 per month.
Leases expire through December 2010.

Rent expense was $239,414, $220,752, and $37,328 for the quarters ended December
31, 2005, 2004 and 2003, respectively. Future minimum operating lease payments
at December 31, 2005 were as follows:

Year ending December 31,        Operating Leases
2006                                 $   975,440
2007                                   1,013,283
2008                                   1,051,126
2009                                   1,079,013
2010                                   1,111,672
Thereafter                           $         0

In May 2004, the Company entered into a $500,000 sale leaseback of certain of
its capital assets. Under the terms of the Master Lease Agreement the Company
received $450,000 which was net of a 10% security deposit, and is to make
payments of $16,441 per month for 36 months. At the end of the lease period, the
Company has the right to renew the lease for an additional 12 months, terminate
and return the equipment or purchase the equipment at the greater of fair market
value subject to a minimum of 10% and a maximum of 20% of the capitalized cost.
The company recognized a gain in the amount of $59,045 from this transaction has
deferred the gain and is amortizing the deferred gain to income over the period
of the initial lease term.

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

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

Future minimum capital lease payments under the new leases at December 31, 2005
were as follows:

2006                                                               $    481,291
2007                                                                    280,717
2008                                                                     73,152
Thereafter                                                                   --
                                                                   ------------
Total Payments                                                     $    835,160
Less: Amounts representing interest                                     (84,796)
                                                                   ------------
Fair Value of Capital Leases                                       $    750,364
                                                                   ------------
Less Current Portion                                                   (414,594)
                                                                   ------------
Non Current Portion                                                $    335,770

                                       20

<PAGE>

Property and equipment under capital leases consisted of the following at
December 31, 2005:

Machinery and Equipment                                            $  1,282,339
Accumulated Depreciation                                               (577,332)
                                                                   ------------
Net Property and Equipment                                         $    705,007
                                                                   =============
PROFESSIONAL SERVICES AGREEMENTS

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

o     A contract with two professional services corporations for legal,
      intellectual property, and business advisory consulting services at a rate
      of $500,000 per year, payable at the Company's option in cash or in
      registered common stock. In fiscal 2005, the entity was issued 150,000
      shares of stock registered under form S-8 in fiscal 2005 for services
      valued at $325,769. This agreement commenced in March 2002, expired in
      March 2005 and was extended for three years to March, 2008. The initial
      agreement also contained the granting of options to purchase up to
      1,000,000 shares of common stock pursuant to a Registration Statement
      under the Securities Act of 1933 on Form S-8 at a price of $0.10 per
      share. The options vested in pro-rata equal segments in April 2002,
      January 2003, and January 2004. The options were exercised in fiscal 2005
      for cash. Subsequent to quarter end, on January 6, 2006 the principal
      owner of the two professional services corporations, Michael McIntosh, was
      appointed a Director of the Company. See also related party disclosure in
      footnote 11.

o     A finder's fee agreement for capital financing with an unrelated party was
      agreed to in August 2004. This entity was paid $717,500 in August 2004 and
      $307,500 in December 2004. The contract is complete as of December 22,
      2004.

OTHER COMMITMENTS

On December 17, 2005, Composite Wind Systems ("CTC Wind"), a 100% owned
subsidiary of Composite Technology Corporation (the "Company") and EU Energy
Inc. executed a purchase agreement. Under the terms of the agreement , CTC Wind
shall complete a due diligence review of the business and prospects of EU Energy
at the end of which CTC Wind shall have the right to acquire approximately 48%
of the issued share capital of EU Energy. The due diligence review shall be
completed not later than May 1, 2006 and the closing date shall be 5 business
days following completion of due diligence. The Company is under no obligation
to complete the acquisition. In the event the Company decides to pursue the
acquisition, CTC Wind will be required to pay to EU Energy $1 million on
closing, with a further $4 million due in 2 installments 60 and 90 days
following the closing, respectively, for the 48% interest in EU Energy.

BANKRUPTCY AND OTHER CONTINGENCIES

Under our Chapter 11 Bankruptcy filing dated May 5, 2005 the Bankruptcy Court
established August 9, 2005 as the bar date for the filing of claims for
liabilities or damages that existed prior to May 5, 2005. Substantially all
claims filed have been resolved as of the end of December, 2005. Excluding items
listed in the litigation Footnote 10, we have two remaining unresolved claims
relating to our Chapter 11 Bankrutpcy filing as follows:

A claim was filed by Patricia vanMidde for 250,000 shares of the Company's
common stock. VanMidde, a former consultant to the Company, claims that the
Company did not issue 250,000 shares of common stock alleged to have been
promised in 2004 for services rendered. The Company represents that there was no
promise of such a share issuance and believes the claim to be without merit. If
the claim is awarded in its entirety, the Company would be obligated to issue
the shares and record an expense based on the market price of the stock on the
date of issuance. The Company has not recorded an accrual because any potential
judgment or settlement is neither probable nor reasonably estimable. A hearing
is scheduled in February, 2006.

A claim was filed by Zenith Insurance Company "Zenith" for $157,323 based on the
results of a workers compensation inquiry for the time period of July, 2004 to
January, 2005 representing additional workers compensation premiums due Zenith
by the Company. The Company disputes the classifications used and believes the
liability to be $53,000 which has been accrued as a disputed balance and is
included in accounts payable as of December 31, 2005. Zenith and the Company
have agreed to resolve the issue through the State of California Workers
Compensation Rating Bureau of California appeals process and to cap any award or
resolution at the original claim amount of $157,323. The appeals process is
currently underway.

                                       21

<PAGE>

During the bankruptcy proceedings before the Judge, the holders of the $15
million August, 2004 Debentures reserved their right to make a claim in the
Bankruptcy against the Company for `liquidated damages' allegedly resulting a
delay in the registration of the common shares issuable in the event the
Debentures and warrants were converted. The claim, under the terms of the
original Debenture agreement, would encompass damages of 2% per month of the
remaining principal plus interest at 18% per annum covering the time period from
July 1, 2005 to August 19, 2005. The Company has calculated the potential
damages at approximately $480,000. The Company believes that no damages are due
under this potential claim because the registration was delayed principally as a
result of questions relating to the bankruptcy and thus the shares could never
have been registered on time. Delays due to the bankruptcy were expressly
excluded from this liability. As a result, the Company believes that no actual
damage was caused to the Debenture holders. The Company plans to defend against
the claim vigorously if it is filed. No claim has been filed as of the date of
the filing of this form 10-Q and no accrual has been recorded as of December 31,
2005.

NOTE 10 - LITIGATION

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

On October 16, 2003, CTC filed suit against Acquvest, Inc., Paul Koch, Victoria
Koch, Patricia Manolis, and Michael Tarbox in Orange County Superior Court. CTC
alleges causes of action for declaratory relief, breach of contract, fraudulent
inducement, rescission and economic duress arising out of certain subscription
and related agreements among the Company and the defendants. In connection with
such agreements, CTC issued to Acquvest, Inc. and Patricia Manolis, in April
2003 and September 2003, a total of 150,000 units for a total purchase price of
$375,000. Each unit consists of 10 shares of unregistered, restricted common
stock and 10 Series I warrants to purchase one share of unregistered, restricted
common stock. Each Series I warrant entitles the holder to purchase a share of
common stock at $0.50 per share and expires on March 30, 2005. The agreements
provide for the issuance of up to an additional 550,000 of such units for the
same purchase price of $2.50 per unit, subject to certain conditions, and
registration of share issuances under the Securities Act of 1933. The additional
units have not been issued and the additional purchase consideration has not
been paid. The parties disagree as to their respective rights and obligations
with respect to the original issuances and such additional units. 10,000 units
were also issued to Paul Koch for services in connection with such agreements,
and a dispute has arisen as to his entitlement to those and additional units and
warrants in connection with the agreements. CTC is seeking actual damages,
punitive damages, statutory costs, attorneys' fees and injunctive relief against
the defendants. CTC also seeks rescission of the pertinent agreements based on
numerous grounds, including fraudulent inducement. By a letter to CTC's counsel
dated September 8, 2004, Acquvest stated that it was waiving the contractual
conditions to its purchase of an additional 400,000 units under its subscription
agreement and was tendering $1,000,000, which was available on deposit, to CTC
as payment for the units. Acquvest, Koch, and Manolis filed a Cross-Complaint on
September 16, 2004, which they amended per stipulation on December 17, 2004. On
April 14, 2005, CTC was served with notice that the Court granted defendants and
cross-complainants' application for Writs of Attachment allowing for the
attachment of CTC's assets totaling $2.55 million. The Court had denied two
prior applications by defendants and cross-complainants for Writs of Attachment.
CTC immediately filed a Notice of Appeal on April 14, 2005 and an Emergency Writ
on April 18, 2005 with the California Courts of Appeal to challenge the Court's
decision to grant the Writs of Attachment and to stay the Writs of Attachment.
Trial date was set for May 9, 2005, but was vacated as a result of the
bankruptcy filing. The bankruptcy court has ordered that the trial be re-set in
Orange County Superior Court. On October 31, 2005, CTC agreed to a complete
settlement of the claims of Acquvest, Inc., Paul R. Koch, Victoria Koch and
Patricia Manolis (the "Acquvest Parties"). CTC agreed to transfer 6.5 million
shares (the "Settlement Shares") to settle all of the Acquvest Parties claims.
There is an existing dispute over one of the settlement terms. CTC contends that
an additional term of the settlement was that the Acquvest Parties would be
responsibility for settling any claims of Michael Tarbox against CTC. An
evidentiary hearing on this issue is set for February, 2006 in the bankruptcy
court. On November 18, 2005, CTC entered into a Mutual Release Agreement to
settle claims made by Acquvest, Inc., Paul R. Koch, Victoria Koch and Patricia
Manolis against CTC and Benton H. Wilcoxon, CTC's CEO, in consideration for the
issuance of 6,500,000 shares of CTC's common stock. As part of this settlement,
it was recorded that Acquvest, Inc., Paul R. Koch, Victoria Koch and Patricia
Manolis would be responsible for resolving CTC's issues with Michael Tarbox (see
"Tarbox v. Koch"). Acquvest, Inc., Paul R. Koch, Victoria Koch and Patricia
Manolis now claim that no such agreement was reached. Resolution of this matter
will have no effect on the main release of CTC in the Acquvest, Inc., Paul R.
Koch, Victoria Koch and Patricia Manolis litigation. One half of the Settlement
Shares were transferred to the Acquvest Parties on delivery of the Mutual
Release Settlement with the remaining shares being released 45 days thereafter.
As of September 30, 2005, the Company recorded an accrual under SFAS 5 for
$12,675,000 representing the shares to be issued in the settlement valued at
$1.95 per share, the market price on the date immediately prior to the
settlement date. On November 21, 2005, the Company issued the 6,500,000 shares.
Accordingly, no accrual remained as of December 31, 2005.

                                       22

<PAGE>

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

On October 13, 2004, Michael Tarbox ("Tarbox") filed an action in Orange County
Superior Court (Case No. 04-CC-10345) against Paul Koch, Acquvest, CTC and Doe
Defendants. Tarbox alleges that Koch made fraudulent transfers to Acquvest and
the Doe Defendants for the purpose of avoiding the debt owed to Tarbox. Tarbox
alleges that CTC securities were intended to serve as security for a debt owed
by Koch to Tarbox. Tarbox alleges that Koch was not a bona fide purchaser of the
CTC securities since they received such securities for the benefit of Tarbox.
Tarbox further alleges that CTC breached an agreement to pay him a finder's fee
in connection with investments made by Koch, since the finder's fees was given
to Koch for the benefit of Tarbox. Tarbox alleges that CTC's breach has caused
him to suffer damages in excess of $750,000. On November 14, 2004, CTC filed a
demurrer to the Complaint, and the other defendants also filed a demurrer. The
Court granted leave to amend, and Tarbox then filed an amended Complaint. A
demurrer filed by the other Defendants was granted on February 22, 2005, and
Tarbox was again granted leave to amend. Tarbox filed a Second Amended
Complaint. CTC has answered to Second Amended Complaint. However, since CTC
delivered to Koch the finder's fee which Tarbox might have otherwise been
entitled to, on April 11, 2003, Tarbox executed a written release, whereby
Tarbox released CTC of any obligation to pay him a finder's fee in connection
with the introductions made to Paul Koch and Acquvest, Inc. Based on the fact
that Tarbox has released his claims against CTC for any finder's fee, CTC will
vigorously defend this litigation and will seek to have the court expeditiously
adjudicated, in CTC's favor, the portions of the lawsuit alleged against CTC. An
evidentiary hearing on this issue is set for February, 2006 in the bankruptcy
court. The Company has not recorded an accrual for this case as of December 31,
2005 since we believe that a judgment is neither probable nor reasonably
estimable.

David S. Shields v. Composite Technology Corporation:

On January 21, 2005, David S. Shields filed suit against CTC in Santa Clara
Superior Court (Case No. 1-05-CV-034368) alleging CTC breached a subscription
agreement by failing to issue the appropriate number of shares thereunder. CTC
denies the claims and intends to vigorously defend against them. CTC filed an
Answer and Cross-Complaint against Shields for Rescission and Declaratory Relief
on April 18, 2005. The case has been removed to the U.S. Bankruptcy Court in the
Central District of California. A status conference was set for January 10,
2006. On or about September 2, 2005, the parties entered into a settlement
agreement whereby CTC agreed to issue Shields an additional 25,000 shares of
common stock in exchange for a complete release of all claims. The Motion to
Approve the Settlement was granted by the bankruptcy court on October 4, 2005.
On November 21, 2005, the Company issued the shares. Accordingly, no accrual
remained as of December 31, 2005.

                                       23

<PAGE>

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

On November 4, 2003, Ascendiant Capital Group LLC, Mark Bergendahl, and Bradley
Wilhite ("Plaintiffs") filed suit in Orange County Superior Court alleging
causes of action against CTC and its CEO, Benton Wilcoxon, personally
("Defendants") for breach of contract, specific performance, fraud and deceit,
negligent misrepresentations, breach of covenant of good faith and fair dealing,
and declaratory relief arising out of a business advisory and consulting
agreement (the "Agreement") allegedly executed between CTC and Ascendiant. CTC
denies the material allegations and, on November 10, 2003, CTC filed a case in
Orange County Superior Court against Plaintiffs alleging causes of action for
declaratory relief, breach of contract, fraudulent inducement, and economic
coercion arising out of the Agreement as well as various unrelated business
agreements between Plaintiffs and Wilcoxon. CTC is seeking actual damages,
punitive damages, statutory costs, attorneys' fees and injunctive relief against
Plaintiffs. The principal parties are Ascendiant, Bergendahl, Wilhite, CTC and
Wilcoxon. On November 24, 2003, the court entered an order consolidating the
cases. On January 15, 2004, the parties agreed to submit all claims and
cross-claims arising out of the Agreement to binding arbitration before the
Honorable Robert Thomas Ret. at JAMS - Orange County. The remaining claims and
cross-claims not arising out of the Agreement are pending before the Honorable
Kazuharu Makino of Orange County Superior Court. On May 28, 2004, CTC's
demurrers to Plaintiffs' causes of action in the arbitration for specific
performance, negligent misrepresentation and breach of covenant of good faith
and fair dealing were sustained, with leave to amend, as well as CTC's motion to
strike Plaintiff's claims for punitive damages. Plaintiffs subsequently filed an
amended complaint. Judge Thomas has reserved ruling on Plaintiffs' demurrers and
motion to strike in the arbitration pending the outcome of the ruling on
Plaintiffs' demurrers and motions to strike filed with respect to CTC's
cross-claim pending in the superior court. An order has issued in the Orange
County Superior Court action exempting this case from various pre-trial
deadlines and noting that he expects that the case will not proceed to trial
within 24 months of the date of filing. On February 22, 2005, CTC and Wilcoxon
filed a Demurrer to Plaintiffs' causes of action for breach of contract and
alter ego liability. The court overruled the Demurrer on April 1, 2005 and set
Trial in the State court action for November 7, 2005. The arbitration commenced
on February 9, 2005. Prior to completion of the arbitration, a settlement was
reached on or about August 10, 2005 to resolve all claims by the parties. CTC
agreed to pay $200,000 and issue 650,000 shares of common stock as part of the
settlement. The Motion to Approve the Ascendiant Settlement was granted by the
bankruptcy court on October 10, 2005. The Company recorded an accrual as of
September 30, 2005 of $1,396,000 representing the $200,000 cash and $1,196,000
for the value of the stock, representing the market value of $1.84 per share on
the date immediately prior to the settlement date. On November 2, 2005 the
Company released the $200,000 payment in cash and on November 21, 2005, the
Company issued the shares. Accordingly, no accrual remained as of December 31,
2005.

                                       24

<PAGE>

NOTE 11 - 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. The agreements were executed on March 1, 2002 for a term of
three years and were renewed in March, 2005 for an additional three years
expiring on February 29, 2008. Each contract provides for payment of service
fees of $250,000 per annum plus out of pocket expenses. The contracts expire on
February 29, 2008.

Prior to March 1, 2005, the Company had one contract with TMA dating from March,
2002 for $500,000 per annum plus incidental and patent related expenses and
subcontracted the legal and intellectual property expenses to TMG. The 2002 TMA
contract was to have expired on March 31, 2005 but was cancelled effective to
February 28, 2005 by the execution of the contracts listed above.

For the fiscal quarter ended December 31, 2005 we recorded fees of $62,500 and
incidental expenses of $1,395 for TMG and fees of $62,500 and incidental
expenses of $10,377 for TMA. For the fiscal quarter ended December 31, 2004 we
recorded fees of $125,000 for TMA, passed through patent and international
filing fees of $111,068 and incidental expenses of $26,242. All of these
expenses were recorded to Research and Development expenses for the respective
time periods.

In March, 2005 we issued 150,000 shares of the Company's common stock to Michael
McIntosh, registered under an S-8 registration statement, in partial payment of
balances due by the Company to TMA and TMG. The Company valued the stock issued
at $325,769 and applied this balance to the balances due TMA and TMG for work
performed through July, 2005.

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

As of December 31, 2005 the Company had outstanding balances due to TMA and TMG
of $142,123.42 and $0 respectively.

In May, 2005, Michael McIntosh exercised 1,000,000 options granted in March,
2002 with an exercise price of $0.10 per share. The options were fully vested as
of September 30, 2004 and the Company had previously recorded expense of
$513,000 prior to fiscal 2005. Mr. McIntosh was the beneficial owner of these
shares as of December 31, 2005.

                                       25

<PAGE>

NOTE 12 - CONVERTIBLE DEBT

A. August, 2004 Convertible Debentures:

On August 17, 2004, CTC closed a financing transaction in which it sold 6%
convertible debentures (the "August, 2004 Debentures") to select institutional
accredited investors, in order to raise a total of $15,000,000. We received
$5,000,000 upon closing and $10,000,000 was deposited into a Custodian Account
to secure repayment of the Debentures. The Debentures will mature on August 17,
2007. The investors may convert the Debentures into our common stock for $1.67
per share, subject to adjustment (the "Conversion Price"). On November 23, 2004,
we reached an agreement with the four funds that purchased the Debentures to
release the $10 million held in the custodian account. The $10 million was to
have been released periodically after the effectiveness of a registration
statement filed by the Company on Form SB-2 pursuant to monthly optional
redemptions. In consideration for such early release of the $10 million, each of
the four funds was issued an additional warrant to purchase (in aggregate)
1,083,591 shares of our common stock with an exercise price of $3.23. The four
funds also agreed to extend the deadlines for the filing of and effectiveness
date of the registration statement. The additional warrants were valued using
the Modified Black-Scholes-Merton option pricing model at $1.84 per warrant. The
aggregate warrant value of $1,993,523 was recorded as Paid in Capital and Legal,
Professional, and Consulting expense in Fiscal 2005.

Concurrent with the debenture financing in August, 2004, the investors also
received warrants to purchase an aggregate of 3,453,947 shares of common stock,
50% of which are at an exercise price of $1.75 per share and the balance of
which are at an exercise price of $1.82 per share. The combined value of the
allocated conversion features of the Debentures and the value allocated to the
warrants issued was $6,364,063 which was recorded as paid in capital and as a
discount to the Convertible Debentures. The discount will be amortized to
interest expense over the expected duration of the Convertible Debentures which
are scheduled for repayment in August, 2007. The Discount will be amortized
ratably over the 36 month term of the debentures. On May 5, 2005 pursuant to the
requirement under Bankruptcy accounting (AICPA SOP 90-7) we adjusted the
carrying value of our Debentures to their face value of $15,000,000. This
resulted in a non-cash charge to earnings for $4,831,970. The charge reduced the
prospective monthly amortization of the debt discount to $0.

Between August 19, 2005 and September 30, 2005 the holders of the convertible
debentures converted a total of $4,139,558 of principal to 2,478,777 shares of
Common Stock at a conversion price of $1.67 per share. Between October 1, 2005
and December 31, 2005, the holders of the convertible debentures converted a
total of $4,480,191 of principal as follows: $3,800,000 of principal was
converted at $1.55 per share into 2,000,000 shares of common stock $680,191 of
principal was converted at $1.67 per share into 858,913 shares of common stock.

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

Prior to May 5, 2005, we paid the Debenture holders interest at a rate of 6% per
annum, payable quarterly in cash. Under our Bankruptcy Plan of Reorganization,
interest accrued but unpaid as of the bankruptcy date in addition to interest
payable since the bankruptcy is to be paid in common stock upon plan
confirmation. As of September 30, 2005 we had accrued interest payable of
$430,755. On November 9, 2005 we issued 259,790 shares of common stock in full
payment of all interest accrued through September 30, 2005. On December 30,
2005, we paid all interest earned for the quarter ended December 31, 2005 in
cash. Accordingly, no interest accrual was recorded for the August, 2004
debentures as of December 31, 2005.

                                       26

<PAGE>

B. October, 2005 Convertible Notes

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

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

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

On January 30, 2006, the Company entered into an agreement with all of the seven
holders of the Company's 6% Senior Convertible Notes issued to amend and modify
the Convertible Notes and related warrants to purchase the common stock of the
Company issued on October 13, 2005. As a result of this amendment, the Company
agreed to issue 1,308,142 shares of restricted common stock to the holders of
the Notes. The restricted shares will receive piggyback registration rights on
future share registrations. The Company valued this issuance at $2,250,005 at
$1.72 per share, the closing market price on the trading date prior to the
settlement and recorded and expense of this amount during the fiscal quarter
ending March 31, 2006. In exchange, the holders agreed to fully convert their
principal at $1.55 per share into 3,870,872 shares of common stock registered
under Bankruptcy code section 1145 and to waive certain rights under the
original securities purchase agreement, warrant agreements, and convertible note
agreements including certain restrictive note covenants. The Company agreed to
pay Lane Capital $135,000 in fees to facilitate the agreement amendment. The fee
will be paid in 78,489 shares of the Company's restricted common stock valued at
$1.72 per share with piggyback registration rights. A total of 5,257,603 shares
were issued on January 31, 2006 as a result of this transaction.

                                       27

<PAGE>

NOTE 13 - SUBSEQUENT EVENTS

On January 2, 2006, the Company entered into a Public and Media Relations
Strategy and Services Consulting with Media Relations Strategy, Inc., ("MRS") to
provide public and media relations strategy and marketing counsel in the
financial markets for a term of 27 months and will terminate on March 28, 2008.
The Agreement provides that MRS shall (1) act as a liaison between the Company
and its shareholders, (2) act as an advisor to the Company with respect to
existing and potential markets and investors, and (3) act as an advisor to the
Company with respect to communications and information dissemination. The
Company shall pay MRS a non-refundable retainer fee of $36,500 per month in
advance as follows: (i) $197,100 on execution of the present Agreement; (ii)
$197,100 on April 21, 2006; (iii) $197,100 on August 25, 2006; (iv) $197,100 on
December 22, 2006 and (v) $197,100 on March 23, 2007. MRS shall be responsible
for all the costs and expenses related to the provision of the Services. As a
further incentive to the MRS, the Company agrees to issue MRS the following
warrants to acquire the Company's unregistered, restricted shares of common
stock: (i) 200,000 warrants at an exercise price of $2.00 per warrant; and (ii)
200,000 warrants at an exercise price of $2.50 per warrant; and (iii) 200,000
warrants at an exercise price of $3.00 per warrant ("the Warrants").

The Company shall have the right at its sole discretion to settle the entire
remuneration due under the Agreement by paying the full amount of the contract
in advance within sixty (60) days of the signature of the present Agreement. In
the event that the Company shall elect to pay the contract remuneration in
advance, the full amount payable shall be discounted by fifteen percent (15%).
The Company shall have the right to pay the remuneration in cash or in shares.
In the event of the payment of the remuneration in shares, such shares shall be
unregistered shares of common stock (half of which shall carry piggyback
registration rights) and valued at a price above the market price on the date of
issuance. No stock or warrants have been issued as of the date of this filing
for the MRS agreement.

On January 4, 2006, the Company accepted the resignation of William Arrington as
an employee and on January 6, 2006 the Board of Directors accepted Mr.
Arrington's resignation as a Director of the Company. Mr. Arrington was formerly
the Chief Operating Officer of the Company but had resigned that position in
January, 2005. The resignations resulted in an acceleration of 127,044 options
to purchase common stock at $0.35 per share granted in 2001. The options were to
have vested in June, 2006.

On January 6, 2006, the Company appointed Michael D. McIntosh as a Director of
the Company.
On January 9, 2006, the Company appointed Dean McCormick III as a Director of
the Company.

Both appointments provide for a cash payment of $4,000 per month plus additional
monthly fees for members of the audit committee and compensation committee. On
January 9, 2006 both Directors received option grants to purchase 325,000 shares
of the Company's common stock at $1.04 per share. The vesting of each grant is
over three years as follows: 27,000 options vesting three months after the
January 9, 2006 grant date with 27,000 options vesting each quarter thereafter
and the final vesting to be 28,000 options. The company will account for these
options under the guidance provided by SFAS 123R and EITF 96-18 by calculating
the fair value of the grant and amortizing the fair value over the vesting
period. The company valued the options under the Black-Scholes-Merton option
pricing model at $0.6950 per option using a risk free rate of 4.28%, a
volatility of 107%, a life of 3 years and a 0% dividend yield.

On January 24, 2006 the Company announced the sale of approximately $1.1 million
of ACCC conductor cable to Jiang-su Far East Group in the Fujian Province of
China. The order represents the Company's largest single order to date and is
comprised of 60 kilometers of ACCC conductor along with certain related
hardware. The Company expects to begin installation of the conductor in March,
2006.

On January 30, 2006, the Company entered into an agreement with all of the seven
holders of the Company's 6% Senior Convertible Notes issued to amend and modify
the Convertible Notes and related warrants to purchase the common stock of the
Company issued on October 13, 2005. As a result of this amendment, the Company
agreed to issue 1,308,142 shares of restricted common stock to the holders of
the Notes. The restricted shares will receive piggyback registration rights on
future share registrations. The Company valued this issuance at $2,250,005 at
$1.72 per share, the closing market price on the trading date prior to the
settlement and recorded an expense of this amount during the fiscal quarter
ending March 31, 2006. In exchange, the holders agreed to fully convert their
principal at $1.55 per share into 3,870,972 shares of common stock registered
under Bankruptcy code 1145 and to waive certain rights under the original
securities purchase agreement, warrant agreements, and convertible note
agreements including certain restrictive note covenants. The Company agreed to
pay Lane Capital $135,000 in fees to facilitate the agreement amendment. The fee
will be paid in 78, 489 shares of the Company's restricted common stock valued
at $1.72 per share with piggyback registration rights. A total of 5,257,603
shares were issued on January 31, 2006 as a result of this transaction.


                                       28

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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, 2005 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 13, 2005.

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, 2005. All forward-looking statements are
based on information currently available to Composite Technologies 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

We develop and market composite related products for the electrical utility
industry and provide engineering, product design, and other services related to
the design and installation of our products to the global electrical utility
industry that are designed to improve the performance and capacity of
transmission and distribution electrical grids. Our principal product is our
proprietary patent pending composite reinforced conductor known as Aluminum
Conductor Composite Core, or ACCC cable. Our ACCC cable is designed to transmit
more power than conventional cables of the same diameter, create energy savings
through less line losses under comparable operating conditions, and
significantly reduce sag caused by overheating due to power overloads. We
believe that ACCC cable enables utility companies, power producers and
transmission or distribution owners to easily replace transmission lines using
standard installation techniques and equipment without modification to existing
towers and in many cases avoid the deployment of new towers and the
establishment of easements, all of which may be costly, time consuming,
controversial and harmful to the environment.

ACCC cable is now commercially available for sale in the U.S. and Canadian
markets through a strategic partnership with an existing cable manufacturer,
General Cable Industries, Inc., and worldwide, on a limited basis, directly from
the Company. To date, we have made successful commercial sales in the United
States and China.

Our marketing strategy for ACCC is to penetrate the domestic U.S. and Canadian
markets through our strategic partnership with General Cable and to negotiate
similar partnerships globally to market the product internationally. Our product
and production development strategy is to develop and market follow-on products
serving the utility industry using our proprietary composite materials
technologies by taking initial concepts to commercially promising prototype,
then moving to small scale production, making relevant product modifications to
optimize the combination of manufacturability and performance. Following
optimization, pilot production is organized to mimic factory conditions under
close monitoring. During this process, the optimal commercial production
parameters and product design are documented so that the technology will be
available for licensing or transfer to third parties or subsidiaries in a full
scale factory launch.

At the beginning of the first quarter of Fiscal 2005, on October, 2, 2004, our
wholly owned subsidiary, CTC Cable Corporation, entered into two separate
agreements for the manufacture and distribution of our proprietary ACCC cable
with General Cable Industries, Inc., the principal U.S. operating subsidiary of
General Cable Corporation.

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<PAGE>

Under the Purchase Agreement, General Cable has been granted exclusive
manufacturing rights to wrap, or apply aluminum strand around our ACCC composite
core, providing a finished ACCC conductor cable in Canada and the U.S. to be
installed and operated in the U.S. and Canada. Pursuant to the terms of this
agreement, we have agreed to purchase articles, materials, services or equipment
from General Cable for the manufacture of ACCC conductor cable at prices no
higher than prices that General Cable would provide to its best commercial
customer, subject to General Cable's right to modify prices upon material
increases in any of General Cable's raw material costs. General Cable has agreed
to certify that its materials, equipment and services covered by the purchase
orders comply with the utility cable industry standard specifications and
manufacturing processes as well as our specifications. It also warrants for a
time period of 12 months after installation, excluding all other warrants, that
the wrapped products sold under the purchase orders will meet government
approved specifications in the U.S. or Canada and will comply with all
specifications and standards agreed upon with CTC in writing. This warranty is
not effective more than 20 months from the date of our invoice covering the
products. Under the terms of this agreement, General Cable's liability is
limited to replacement of any wire or cable that does not substantially meet the
manufacturing specifications or fails during normal use within one year from the
date of installation and such failure was caused by defects in material or
workmanship at time of shipment. Our liability is limited to replacement of
products within the warranty period that are defective due to failure of the
core to meet applicable specifications or failure to perform as part of a
finished product. The agreement terminates on December 31, 2007, unless
terminated earlier in the event General Cable is unable to supply products or we
are unable to accept delivery of products due to causes beyond our or General
Cable's control.

Under the Distribution Agreement, General Cable is appointed a non-exclusive
distributor for the marketing and sale of all ACCC cable wrapped by General
Cable that conform with applicable industry standards for the U.S. and Canadian
markets only. Pursuant to the terms of the agreement, General Cable has agreed,
at its expense, to assist CTC in promotional and marketing activities in the
U.S. and Canada, coordinate its sales efforts with CTC and establish and
maintain a place of business as necessary to provide customer support and
marketing coverage in the U.S. and Canada. The agreement grants General Cable a
license to use trademarks and trade names used by CTC for the term of the
agreement. This agreement terminates on December 31, 2007 and automatically
renews from year to year, unless either party gives prior written notice of
non-renewal or earlier termination pursuant to the terms of the agreement.
General Cable has the right to terminate the agreement at any time without cause
upon 90-day prior written notice. General Cable or CTC may terminate the
agreement upon uncured breach by the other party or in the event General Cable
is unable to supply products or we are unable to accept delivery of products due
to causes beyond our or General Cable's control. The agreement automatically
terminates in the event of either party's bankruptcy or insolvency, or if
performance is impossible or commercially impracticable.

These agreements represent the conclusion of the initial phase of the
introduction of our bare overhead conductor ACCC product range in that they
provide the framework for the products to be made available in commercial
quantities produced by General Cable. We believe the General Cable relationship
provides an important level of comfort to customers regarding the stability of
supply and consistency and viability of production since they are an established
manufacturer and distributor with long standing market relationships. The
agreements also mark the beginning of a new phase of our operations in which the
focus will be on production of the core for supply to cable manufacturers
worldwide and sales of the ACCC products to end users.

In addition, we provide consulting services relating to the planning of overhead
electrical transmission power lines and utility services, including undertaking
preliminary feasibility analysis and strategic advice regarding location and for
scope as well as advice regarding the establishment of production facilities for
the production of products used in the Electrical Transmission Industry. We
currently, however, are not concentrating our efforts to increase our consulting
business and instead are focused on the commercialization of the ACCC Cable.

                                       30

<PAGE>

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations
is based upon the condensed consolidated financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles. The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities as of the date
of the financial statements, and the reported amounts of revenue and expense
during the periods. These estimates are based on historical experience and
various other assumptions that we believe to be reasonable under the
circumstances. We have identified those critical accounting policies used in
reporting our financial position and results of operations based upon a
consideration of those accounting policies that involve the most complex or
subjective decisions or assessment. We consider the following to be our critical
policies.

TITLE 11 BANKRUPTCY

The accompanying Consolidated Financial Statements have been prepared on a going
concern basis, which assumes continuity of operations and realization of assets
and satisfaction of liabilities in the ordinary course of business. Balances
pertaining to activities or reporting periods prior to the date of our emergence
from bankruptcy on November 18, 2005 are accounted for in accordance with AICPA
SOP 90-7. For those balances, all pre-petition liabilities subject to compromise
have been segregated in the Consolidated Balance Sheets and classified as
Liabilities Subject to Compromise, at the estimated amount of allowable claims.
Liabilities not subject to compromise are separately classified as current and
non-current.

Revenue Recognition

Revenues are recognized based on guidance provided in the Securities and
Exchange Commission (SEC) Staff Accounting Bulletin No. 104 "Revenue Recognition
in Financial Statements," as amended (SAB 104). Accordingly, our general revenue
recognition policy is to recognize revenue when there is persuasive evidence of
an arrangement, the sales price is fixed or determinable, collection of the
related receivable is reasonably assured, and delivery has occurred or services
have been rendered.

The Company derives, or seeks to derive revenues from two sources:

(1) Product revenue which includes revenue from the sale of composite core,
wrapped composite core, and other electric utility related products.

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

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

PRODUCT SALES. Product revenues are generally recognized when product shipment
has been made and title has passed to the end user customer. Product revenues
consist primarily of revenue from the sale of: (i) wrapped composite core to
utilities either sold directly by the Company or through our distributor, ii)
composite core sold to a cable wrapping partner not subject to a distributor
agreement and where title passes to the partner, or iii) cable core hardware
sold to utility companies. For most product sales, we expect that the terms of
sales generally will not contain provisions that will obligate us to provide
additional products or services after installation to end users.. We recognize
revenue: (i) upon shipment when products are shipped FOB shipping point or (ii)
upon delivery at the customer's location when products are shipped FOB
destination.

CONSULTING REVENUE Consulting revenues are generally recognized as the
consulting services are provided. We have entered into service contract
agreements with electric utility and utility services companies that generally
require us to provide engineering or design services, often in conjunction with
current or future product sales. In return, we receive engineering service fees
payable in cash. For multiple element contracts where there is no vendor
specific objective evidence (VSOE) that would allow the allocation of an
arrangement fee amongst various pieces of a multi-element contract, fees
received in advance of services provided are recorded as deferred revenues until
additional operational experience or other vendor specific objective evidence
becomes available, or until the contract is completed.

                                       31

<PAGE>

During its history, the Company has entered into revenue bearing contracts of a
long term (greater than one year) duration. Due to a lack of operational history
resulting in low reliability of estimates on interim rates of completion of such
contracts, revenues associated with long term contracts are recognized on the
completed-contract method of accounting. Under this method, billings and costs
are accumulated during the period of installation, but no revenues are recorded
before the completion of the work. Costs of revenues are capitalized and are
recorded in other current assets. Provisions for estimated losses on uncompleted
contracts are made at the time such losses are determined. Operating expenses,
including indirect costs and administrative expenses, are charged as incurred to
periodic income and not allocated to contract costs.

Stock-Based Compensation

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

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123R, " Share-Based Payments" to require that compensation cost relating to
share-based payment arrangements be recognized in the financial statements. As
of October 1, 2005, we adopted SFAS No. 123R using the modified prospective
method, which requires measurement of compensation cost for all stock-based
awards at fair value on date of grant and recognition of compensation over the
service period for awards expected to vest. The fair value of stock options were
determined using the Black-Scholes valuation model, which is consistent with our
valuation techniques previously utilized for stock options in footnote
disclosures required under SFAS No. 123, as amended by SFAS No. 148. Such fair
value is recognized as expense over the service period, net of estimated
forfeitures. The adoption of SFAS No.123R resulted in no cumulative change in
accounting as of the date of adoption.

On September 27, 2001, the FASB Emerging Issues Task Force (EITF) issued EITF
Issue 96-18 "Accounting for Equity Instruments That are Issued to Other than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services"
which requires that equity instruments issued in exchange for services be valued
at the more accurate of the fair value of the services provided or the fair
value of the equity instruments issued. For equity instruments issued that are
subject to a required service period the expense associated with the equity
instruments is recorded as the instruments vest or the services are provided.
The Company has granted options and warrants to non-employees and recorded the
fair value of the equity instruments on the date of issuance using the
Black-Scholes valuation model. For grants subject to vesting or service
requirements, the expenses is deferred and is recognized over the more
appropriate of the vesting period, or as services are provided.

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<PAGE>

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 December 31, 2005 and 2004 is as follows
(in thousands):

                                                          Three Months Ended
                                                             December 31,
                                                          2005          2004
                                                      ------------  ------------
Officer Compensation                                  $     36,848  $         --
Legal, Professional and Consulting                         931,188     2,079,523
Selling and marketing                                        3,158            --
Research and development                                    38,103        40,325
General and administrative                                  66,920            --
                                                      ------------  ------------
Totals                                                $  1,076,217  $  2,119,848
                                                      ============  ============

Our stock options vest on an annual or a quarterly basis. For the remainder of
fiscal 2006, we expect stock based compensation expense related to employee
stock options of approximately $172,000, $155,000, and $119,000 before income
taxes for the quarters ending March 31, 2006, June 30, 2006, and September 30,
2006 respectively. We expect stock based compensation related to non-employee
stock options to be approximately $129,000, $37,000, and $37,000 before income
taxes for the quarters ending March 31, 2006, June 30, 2006, and September 30,
2006 respectively. Such amounts may change as a result of additional grants,
forfeitures, modifications in assumptions and other factors. SFAS No. 123R
provides that income tax effects of share-based payments are recognized in the
financial statements for those awards which will normally result in tax
deductions under existing tax law. Under current U.S. federal tax law, we would
receive a compensation expense deduction related to non-qualified stock options
only when those options are exercised and vested shares are received.
Accordingly, the financial statement recognition of compensation cost for
non-qualified stock options creates a deductible temporary difference which
results in a deferred tax asset and a corresponding deferred tax benefit in the
income statement. However, since we currently have a full valuation allowance
for all of our deferred tax assets, any tax consequences for fiscal 2006 is
expected to be negligible to the financial statements.

Convertible Debt

The Company has issued two series of convertible debt securities. Convertible
debt is accounted for under the guidelines established by APB Opinion No. 14
Accounting for Convertible Debt and Debt issued with Stock Purchase Warrants
(APB14) under the direction of Emerging Issues Task Force (EITF) 98-5,
Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios, (EITF 98-5) EITF 00-27 Application of
Issue No 98-5 to Certain Convertible Instruments (EITF 00-27), and EITF 05-8
Income Tax Consequences of Issuing Convertible Debt with Beneficial Conversion
Features. Under these guidelines, the Company allocates the value of the
proceeds received from a convertible debt transaction between the conversion
feature and any other detachable instruments (such as warrants) on a relative
fair value basis. The allocated fair value is recorded as a debt discount or
premium and is amortized over the expected term of the convertible debt to
interest expense. The company values any warrants issued using the Black-Scholes
Merton option pricing model as described and based on the assumptions listed in
footnote 5. If the conversion price of a convertible debt issue changes, the
additional intrinsic value of the debt conversion feature, calculated as the
number of additional shares issuable due to a conversion price change multiplied
by the previous conversion price, is recorded as additional debt discount and
amortized over the remaining life of the debt.

Under Bankruptcy accounting guidance, namely AICPA 90-7, the Company is required
to record its liabilities at the expected settlement amount. Therefore, for debt
discount that existed prior to the Chapter 11 bankruptcy or for debt discount
incurred during the bankruptcy, any discount is immediately charged to expense
as a debt carrying value adjustment.

Principles of Consolidation

The consolidated financial statements include the accounts of CTC and its wholly
owned subsidiaries (collectively, the "Company"). All significant inter-company
accounts and transactions are eliminated in consolidation.

                                       33

<PAGE>

Research and Development Expenses

Research and development expenses are charged to operations as incurred.

Accounts Receivable

The Company extends credit to its customers. Collateral is generally not
required. Credit losses are provided for in the financial statements based on
management's evaluation of historical and current industry trends as well as
history with individual customers. Although the Company expects to collect
amounts due, actual collections may differ from estimated amounts. As of
December 31, 2005, the Company had gross accounts receivable of $2,513,060 and
had recorded a reserve of $2,500,000.

Inventory

Inventories consist of our wrapped and unwrapped manufactured composite core and
related hardware products and raw materials used in the production of those
products. Inventories are valued at the lower of cost or market under the FIFO
method. Costs to ship product for sale or for products sold is recorded to costs
of goods sold as the expenses are incurred. Products manufactured internally are
valued at standard cost which approximates replacement cost. Inventory is
periodically evaluated for obsolescence and salability and reserves are recorded
for product that is believed by management to be impaired in value. As of
December 31, 2005, the company had recorded gross inventory of $3,247,030 and
had inventory reserves of $763,791.

Property and Equipment

Property is stated at the lower of cost or realizable value, net of accumulated
depreciation. Depreciation is computed using the straight-line method based on
estimated useful lives of the assets which range from three to ten years.
Leasehold improvements and leased assets are amortized or depreciated over the
lesser of estimated useful lives or lease terms, as appropriate. Property is
periodically reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. We did not
recognize any property impairment charges in the quarter ending December 31,
2005.

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

Impairment of Long-Lived Assets

Management evaluates long-lived assets for impairment whenever even or changes
in circumstances indicate that the carrying value of an asset may not be
recoverable. If the estimated future cash flow (undiscounted and without
interest charges) from the use of an asset are less than the carrying value, an
impairment would be recorded to reduce the related asset to its estimated fair
value.

Fair Value of Financial Instruments

The Company's financial instruments include cash and cash equivalents and
accounts payable - trade. The carrying amounts for these financial instruments
approximate fair value due to their short maturities.

Comprehensive Income

The Company utilizes SFAS No. 130, "Reporting Comprehensive Income." This
statement establishes standards for reporting comprehensive income and its
components in a financial statement. Comprehensive income as defined includes
all changes in equity (net assets) during a period from non-owner sources.
Examples of items to be included in comprehensive income, which are excluded
from net income, include foreign currency translation adjustments, minimum
pension liability adjustments, and unrealized gains and losses on
available-for-sale securities. Comprehensive income is not presented in the
Company's financial statements since the Company did not have any changes in
equity from non-owner sources.

                                       34

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Income Taxes

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

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.

RESULTS OF OPERATION

Three Months Ended December 31, 2005 and December 31, 2004

PRODUCT REVENUES. Product revenues for the three months ended December 31, 2005
consisted of small orders for ACCC hardware. We had no substantial ACCC cable or
ACCC core sales during the quarter. Product revenues for the three months ending
December 31, 2004 consist of revenue from the sale of ACCC Cable products to
utility companies on a "trial" basis that enables these companies to assess our
technology on a use basis. The cable sold does not have a right of return.
Product revenues decreased from $46,485 for the three months ending December 31,
2004 to $22,892 for the three months ending December 31, 2005. The dollar
decrease was due to a lack of ACCC cable or core revenues in the December 31,
2005 quarter offset by small ACCC hardware orders.

CONSULTING REVENUES. Consulting revenues for the three months ended December 31,
2005 consisted of consulting and technical services performed in fiscal 2004 and
fiscal 2005 to the City of Kingman but which had been deferred under the
original City of Kingman contract. The original contract had been accounted for
based on the completed contract method due to a requirement that funds paid to
the Company could be required to be refunded if the entire contract were not
completed. The original contract also required the Company to provide
construction services and provided for future products that the Company has not
developed. On November 18, 2005, the Bankruptcy court approved a revised
contract with the City of Kingman that removed the refund provision and the
requirements to deliver future products and services. Accordingly, the Company
recognized the revenue for the consulting services performed in the amount of
$550,000 on the date the revised contract was approved. There were no consulting
services transactions during the quarter ended December 31, 2004.

COST OF PRODUCT REVENUES. Cost of product revenues for the three months ending
December 31, 2005 represent materials, labor, freight, and allocated overhead
costs to produce ACCC hardware. Cost of product revenues for the three months
ending December 31, 2004 represented materials, labor, freight, and allocated
overhead costs to produce ACCC cable. Cost of product revenues decreased from
$30,984 for the three months ending December, 2004 to $16,680 for the three
months ending December, 2005. The dollar decrease was due the mix of products
sold and the product volumes.

COST OF CONTRACT REVENUE. Cost of contract revenue consists primarily of
salaries for engineers and expenses for consultants, supplies, equipment,
depreciation and facilities associated with contract projects. Our total
engineering costs are allocated between cost of contract revenue and research
and development expense. In a given period, the allocation of engineering costs
between cost of contract revenue and research and development is a function of
the level of effort expended on each. The cost of contract revenue of $304,787
had previously been capitalized and included in other assets on the balance
sheet as of September 30, 2005.

No consulting contracts were completed during the three months ended December
31, 2004 and accordingly, no costs of contract revenue were recorded for that
quarter.

                                       35

<PAGE>

OFFICER COMPENSATION. Officer compensation expense consisted of salaries and
employee benefits for our Chief Executive and Secretary in the Quarter ended
December 31, 2005 and for the Chief Executive, Chief Operating Officer, and
Secretary for the quarter ended December 31, 2004. Officer compensation expenses
increased 20% from $85,385 in the first quarter of fiscal 2005 to $102,130 in
the current year quarter. For the three month period, the dollar increase was
due to approximately $37,000 in SFAS 123R option expense offset by $20,000 in
headcount related expenses due to fewer officers for the quarter ending December
31, 2005 caused by the resignation of our Chief Operating Officer in January,
2005.

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 expense increased 52% or
approximately $308,000 from $598,607 in the first fiscal 2005 quarter to
$907,164 in the first fiscal 2006 quarter. For the three month period ended
December 31, 2005, the dollar increase was primarily due to an increase of
$155,000 from $58,000 in the fiscal 2005 quarter to $213,000 in the fiscal 2006
quarter for increases in audit fees and Sarbanes Oxley related fees, an increase
from $0 to $67,000 in the fiscal 2006 quarter for the fair value of employee
stock options, and an increase in $88,000 from $86,000 in the fiscal 2005
quarter to $174,000 in the fiscal 2006 quarter due to a change in overhead
allocation between departments. Headcount related expenses were flat from
quarter to quarter resulting from the net increase in employee expenses due to
increased employee headcount offset by reduced consulting costs.

LEGAL, PROFESSIONAL, AND CONSULTING EXPENSE. Legal, professional, and consulting
expense consisted of professional legal, litigation related, financing related
expenses but excludes bankruptcy related legal expenses which are captured in
reorganization costs. Legal, professional, and consulting expenses decreased
$1,376,000 or 49% from $2,825,830 in the first fiscal 2005 quarter to $1,449,583
in the first fiscal 2006 quarter.

For the three month period ended December 31, 2004, legal, professional, and
consulting expense consisted primarily of: $2,080,000 in non-cash compensation
expense related to warrants issued to our Debenture holders in exchange for a
modification to the debenture agreement, $363,000 in finders fees paid in cash
for the $15MM debenture, $85,000 in SEC and general legal expenses and $300,000
in litigation related legal expenses.

For the three month period ended December 31, 2005, legal, professional, and
consulting expense consisted primarily of: $360,000 in financing fees paid in
stock, $180,000 for warrants valued at the fair value of the warrants issued for
financing fee, $169,000 in legal costs associated with the $6M financing,
$389,000 in expenses related to the modification of the August, 2004 debenture
warrants and debenture amendment warrants as a result of anti-dilution
provisions, $310,000 in litigation related expenses and $53,000 in SEC and
general legal expenses.

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 $131,000 or 12% from $1,079,651 in the first
quarter of fiscal 2005 to $1,211,255 in the first quarter of fiscal 2006. In the
2004 quarter, all manufacturing related expenses were included in research and
development expenses since the company was ramping up to production during that
time period. In the December 31, 2005 quarter, certain headcount, equipment, and
overhead related manufacturing related expenses were capitalized into inventory
and therefore excluded from Research and Development expenses. The fiscal 2006
quarter also included a $521,000 reserve for inventory produced prior to July,
2005 using older resin mixtures that had been capitalized as of September 30,
2005 but which was determined in the 2006 fiscal quarter as impaired.

                                       36

<PAGE>

For consistency of presentation, the table below lists reconciles the
classification of the combined R&D and Manufacturing related expenses between
the two fiscal quarters:

<TABLE>
<CAPTION>
                                                  Quarter ending        Quarter ending          Increase
                                                December 31, 2005     December 31, 2004        (decrease)
                                                ------------------   ------------------   ------------------
<S>                                             <C>                  <C>                  <C>
Cash basis headcount related costs              $          710,000   $          617,000   $           93,000
Equipment and tools purchases                               46,000              230,000             (184,000)
Rents and overhead                                         183,000              233,000              (50,000)
Employee stock option (SFAS 123R) expense                   15,000                   --               15,000
                                                ------------------   ------------------   ------------------
Subtotal                                        $          954,000   $        1,080,000   $          128,000
                                                ------------------   ------------------   ------------------
Inventory write-offs charged to R&D expense                521,000                   --              521,000
Expenses capitalized to inventory                         (264,000)                  --             (264,000)
                                                ------------------   ------------------   ------------------
Expense reported on Income Statement            $        1,211,000   $        1,080,000   $          131,000
</TABLE>

The combined cash basis headcount costs increased $93,000 from quarter to
quarter due to increased manufacturing related headcount expenses offset by
decreased consulting development costs. Of the $710,000 combined total in the
fiscal 2006 quarter, $120,000 was capitalized into inventory for a net R&D cash
basis headcount expense of $590,000 in fiscal 2006. Equipment and tools
purchases decreased $184,000 to $46,000 in the fiscal 2006 quarter due to
decreased expensed equipment and tools purchases. In the December, 2004 quarter
we were ramping up or core production which required the purchase of a
substantial amount of tools, including production dies, and parts. Included in
the fiscal 2006 quarter was $37,000 of parts, tools, and dies that were consumed
and capitalized into inventory for a net R&D expense of $6,000 for fiscal 2006.
Overhead expense in total decreased $50,000 to $183,000 in the fiscal 2006
quarter due to a revised allocation as compared to fiscal 2005. In fiscal 2005,
a large area of our facility was being used for composite pole design. A much
lower percentage of our facility was used for research and development in fiscal
2006. Of the rents and overhead expense in fiscal 2006, $107,000 was capitalized
into inventory for a net overhead expense to R&D of $76,000 for the quarter.

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 $244,000 or 89% from $272,789 in the first quarter
of fiscal 2005 to $516,449 in the first quarter of fiscal 2006. The dollar
increase in the three month period was primarily due to an increase of $213,000
in personnel costs, and an increase of $22,000 of allocated overhead due to
increased headcounts for both employees and consultants as we increase our sales
efforts for our ACCC conductor products.

DEPRECIATION EXPENSE. Depreciation expense consisted of depreciation on
capitalized equipment, leasehold improvements, and other capital assets.
Depreciation expense increased by $80,269 or 72% from $111,376 in the first
quarter of fiscal 2005 to $191,645 in the first quarter of fiscal 2006. The
dollar increase in the three month period ended December 31, 2005was primarily
due to a higher depreciable base resulting from equipment purchased during the
last three quarters of fiscal 2005.

REORGANIZATION EXPENSE - BANKRUPTCY LEGAL FEES The balance in the fiscal 2006
quarter of $283,369 was due to 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. There were no such activities in the fiscal 2005 quarter.

INTEREST INCOME. Interest income decreased to $14,245 in the first quarter of
fiscal 2006 from $27,260 in the prior year quarter. The decrease was due to
interest earned on lower cash balances.

INTEREST EXPENSE. Interest expense decreased $532,553 or 71% from $751,219 in
the first quarter of fiscal 2005 to $218,666 in the first quarter of 2006. The
decrease was due to lower non-cash interest expense. The fiscal 2005 interest
expense had approximately $528,000 per quarter of convertible debt discount that
had been amortized to interest expense. The discount was adjusted to $0 in May,
2005 pursuant to a carrying value adjustment recorded when the Company filed for
Chapter 11 bankruptcy protection.

                                       37

<PAGE>

INCOME TAXES. We made no provision for income taxes in the three months ending
December 31, 2005 and 2004 due to net losses incurred. In 2002, we determined
that due to our continuing operating losses as well as the uncertainty of the
timing of profitability in future periods, we should fully reserve our deferred
tax assets. As of December 31, 2005, 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 loss increased to $7.2 million in the three months ended December 31,
2005 compared to $5.7 million during the corresponding period in 2004. The
increase in 2005 from 2004 of $1.5 million was due to other expenses increase of
$2.1M offset by operating expense decrease of $0.3 million and gross margin
increase of $0.25 million. The net loss was heavily influenced by the expenses
incurred with our bankruptcy filing, the defense of our litigation which was
substantially resolved at quarter end, and with the issuance of our convertible
debt in October, 2005 and the related charges related to anti-dilution and
adjustments to the carrying value of the debt under bankruptcy accounting.

Gross margin increased by $0.25 million due to the recognition of the City of
Kingman consulting revenue in the fiscal 2006 quarter. Only one small trial sale
was recognized in the fiscal 2005 quarter.

Operating expenses decreased by $0.3 million, the net effect of the change from
2005 to 2006 of a $200,000 increase from $2.3 million to $2.5 million in
continuing operating expenses and a net decrease of $500,000 from $2.7 million
to $2.2 million in non-recurring one time charges.

Continuing expenses include the costs of operating our business on an ongoing
basis. Expense increases reflect our increased efforts in sales and marketing of
our ACCC products, increased audit and Sarbanes Oxley costs related to fiscal
2005, and decreased production costs due to the allocation of manufacturing
costs recorded in previous reporting periods in R&D expense but capitalized into
inventory beginning with the fiscal 2006 quarter. The approximately $200,000
increase from the fiscal 2005 to the fiscal 2006 quarter consists of the net
effect of employee and consultant headcount related increase of $155,000, Audit
and Sarbanes Oxley compliance expense increase of $155,000, stock option expense
increase of $122,000, expensed tools and production parts decrease of $230,000
and decreased overhead charged to SGA of $47,000. Not included in the $200,000
net increase was $264,000 of manufacturing expense that was capitalized into
inventory during the fiscal 2006 quarter consisting of headcount costs of
$120,000, overhead costs of $107,000 and expensed tools and parts of $37,000.

Non-recurring one time charges in 2006 of $2.2 million include: $283,000 in
bankruptcy related legal expenses, $540,000 in warrants and stock issued for
debt financing services in October, 2005, $389,000 in warrant modification
expense related to anti-dilution provisions in the August, 2004 debenture
warrants and triggered with the October, 2005 financing, $169,000 in legal
expenses related to the October, 2005 financing, $528,000 in inventory reserves
charged to R&D expense in the fiscal 2006 quarter, and $299,000 in litigation
legal expenses. Non-recurring charges in 2005 include $2,080,000 for the fair
value of warrants issued for the August, 2004 debenture amendments in November,
2004 and other financing services $310,000 in litigation legal expenses and
$363,000 in cash fees associated with the August, 2004 debentures and expensed
in November, 2004.

The other expense increase of $2.1 million consisted of $2.6 million in fiscal
2006 for the non-recurring carrying value adjustment expenses of our convertible
debt. The $2.6 million consists of $1.8 million for the accelerated expense on
the debt discount of the October, 2005 convertible notes and $0.8M for the
accelerated expense on the additional debt discount on the August, 2004
debentures resulting from the anti-dilution provisions of the August debenture
agreement. Both discounts were accelerated due to bankruptcy accounting
requirements. The $2.6 million was offset by a $0.5 million decrease in interest
expense, caused by the May, 2005 acceleration of the August, 2004 debt discount,
again the result of bankruptcy accounting requirements.

                                       38

<PAGE>

RECENT ACCOUNTING PRONOUNCEMENTS

SFAS No. 153

Exchanges of Nonmonetary Assets: On December 16, 2004, the FASB issued Statement
No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29,
Accounting for Nonmonetary Transactions, Statement 153 addresses the measurement
of exchanges of nonmonetary assets and redefines the scope of transactions that
should be measured based on the fair value of the assets exchanged. Statement
153 is effective for nonmonetary asset exchanges beginning in our second quarter
of fiscal 2006. We do not believe adoption of Statement 153 will have a material
effect on our consolidated financial position, results of operations or cash
flows.

SFAS No. 154

Accounting Changes and Error Corrections: On June 7, 2005, the FASB issued
Statement No. 154, Accounting Changes and Error Corrections, a replacement of
APB Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements. Statement 154 changes the
requirements for the accounting for and reporting of a change in accounting
principle. Previously, most voluntary changes in accounting principles were
required recognition via a cumulative effect adjustment within net income of the
period of the change. Statement 154 requires retrospective application to prior
periods' financial statements, unless it is impracticable to determine either
the period-specific effects or the cumulative effect of the change. Statement
154 is effective for accounting changes made in fiscal years beginning after
December 15, 2005; however, the Statement does not change the transition
provisions of any existing accounting pronouncements. We do not believe adoption
of Statement 154 will have a material effect on our consolidated financial
position, results of operations or cash flows.

LIQUIDITY AND CAPITAL RESOURCES

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

For the three months ended December 31, 2005, we had a net loss of $7.2 million.
At December 31, 2005, we had $1.3 million of cash and cash equivalents, which
represented an increase of $0.5 million from September 30, 2005. The increase
was due to $6,000,000 of cash proceeds from the issuance of convertible notes in
October, 2005 and $356,000 of cash received from the exercise of warrants offset
by cash used in operations of $5.6 million, cash used to purchase equipment of
$0.1 million, and cash used to pay capital leases of $0.1 million.

Cash used by operations during the three months ended December 31, 2005 of
$5,637,260 was the result of operating losses, offset by depreciation,
amortization, and non-cash compensation expenses and working capital
requirements. In addition to our operations cash burn of $2.4 million, we used
approximately $1.1 million to pay our pre-bankruptcy accounts payable, incurred
additional bankruptcy related cash expenditures of $0.3 million, and purchased
approximately $1.8 million in industrial grade carbon and other key raw
materials in anticipation of future sales growth. Due to our Chapter 11
bankruptcy, our carbon vendors required cash on delivery for these materials.
Cash used for investing activities of $130,747 was related to the purchase of
computer hardware and software, certain leasehold improvements, and equipment
put in service in anticipation of manufacturing activities offset by the sale of
equipment. Cash provided by financing of $6,259,385 was primarily due to the
cash proceeds from the $6M in convertible notes and $356,000 from warrant
exercises net of principal payments made on capital lease obligations.

We anticipate that sales of our ACCC cable will not be sufficient to sustain our
operations, and further anticipate that we will continue to incur net losses due
to our costs exceeding our revenues for an indefinite period of time. 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.


                                       39

<PAGE>

CAPITAL EXPENDITURES

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

EFFECTS OF INFLATION

We are subject to inflation and other price risks arising from price
fluctuations in the market prices of the various raw materials that we use to
produce our products. Price risks are managed through cost-containment measures.
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.

DEVELOPMENTS THIS QUARTER

Sales and Marketing:

During this quarter we continued to make progress towards the full
commercialization of our primary product, ACCC conductor cable. Our sales and
marketing efforts were hampered somewhat by delays in the installation of our
two initial commercial sales and our bankruptcy filing. We had originally
anticipated that the initial ACCC commercial sales to Pacificorp and American
Electric Power (AEP) would be installed and operational early in the quarter
ended December 31, 2005. Due to the impact and rebuilding efforts resulting from
Hurricanes Katrina & Rita and the resultant shortage of qualified personnel
during the rebuilding, the installation of these ACCC lines was delayed by
approximately two months each. As a result, the Pacificorp installation was
completed at the end of December and the AEP installation was begun on December
15, 2005 and is expected to be completed by February, 2006. Our sales and
marketing strategy included showcasing these installations with demonstrations
to the utility industry of the benefits of ACCC. While we do not anticipate that
the delay of these installations will have a negative impact on our overall
market opportunity, we believe that the installation delay may have resulted in
a short term delay in the market visibility of our products to utility leaders.
In addition, although we emerged from Chapter 11 Bankruptcy in November, 2005 as
described below, our sales and marketing efforts include establishing and
enhancing sales relationships with current and potential utility customers and
we believe that domestic and international electrical utilities and potential
partners have been hesitant to conduct business with us during our bankruptcy
proceedings. Now that we have emerged from bankruptcy, we believe that these
barriers have been eliminated.

Based on the renegotiated Kingman order and the new January China order, both
described below, as of January 30, 2006 we currently have approximately $2.1
million in order backlog that we anticipate filling during or shortly after the
quarter ending March 31, 2006.

On October 4, 2005, the Company and the City of Kingman, Kansas executed an
agreement, contingent on Bankruptcy Court approval, pursuant to which the City
of Kingman agreed to purchase 70 linear miles of the Company's ACCC conductor
and related hardware and to release the Company from the previous Kingman
Contract. The original contract was structured to have components for: i.
engineering services of $550,000, ii. CTC poles of $740,000, iii. Cable
installation services of $850,000, iv. Contingency fund of $535,000, and
provided for delivery of 21 circuit miles (63 linear miles) of ACCC cable at no
charge for a total contract of $2,675,000. As of September 30, 2005, the Company
had recorded $564,750 as deferred revenue under the previous contract for cash
received to date. Under the terms of the revised agreement, Kingman and the
Company agreed that $550,000 of the deferred revenue shall be kept by the
Company for consulting services provided by the Company to date and the Company
agrees to credit $14,750 of the total purchase price for the future sale of ACCC
conductor cable. The revised contract provided for purchases of ACCC cable and
related hardware consisting of 369,600 feet of Hawk sized cable for $839,167 and
an additional $148,985 for ACCC hardware for a total contract of $1,538,152. On
November 18, 2005 the Bankruptcy Court approved the revised contract and
cancellation of the previous contract. We received a purchase order from the
City of Kingman in December, 2005 and we expect to ship the ACCC cable and
related hardware in February, 2006. Based on these developments, we recorded
$550,000 in consulting revenue in the quarter ended December 31, 2005. We expect
to ship ACCC cable and hardware and record this revenue in the fiscal quarter
ending March 31, 2006.

Subsequent to quarter end, in January, 2006 we received an order from Jiang-Su
Far East for 60 km of ACCC Conductor and related hardware worth approximately
$1.1 million. This order is due in part to the successful testing of the 2 km
sale that we made in July, 2005. We anticipate delivering this product during
the quarter ended March 31, 2006.

                                       40

<PAGE>

Research and Development:

We continue to develop and refine the ACCC product and our production processes.
During this quarter, refinements to the product and production process have
resulted in processing optimizations, including materials usage efficiencies and
improvements in our quality control processes. In addition, funds were expended
to redesign our pultrusion machines and to build a working prototype of a new
pultrusion machine. Our four current production pultrusion machines are
customized versions of purchased machinery that were not specifically designed
for our processes. We expect that the redesigned machines will allow additional
production efficiencies, will be less expensive, and our time to install and
place these machines in productions will be greatly reduced allowing us to
implement new pultrusion machines much more quickly as our production
requirements increase. We currently plan to place five of these newly designed
pultrusion machines in production over the next twelve months.

General Corporate, Finance, Administrative, Bankruptcy, and Litigation:

On October 14, 2005 we closed a financing whereby we sold $6.0 million in
convertible notes due in January, 2007. The closing of this financing was a key
financial cornerstone for the Company's eventual emergence from bankruptcy as
described below. The notes bear interest at 6% per year payable in cash or
common stock on a quarterly basis. The notes are convertible into common shares
of the Company at $1.55 per share at the discretion of the note holders or can
be forced to convert by the Company under certain conditions. We also issued
1,161,290 warrants to the note holders in conjunction with the financing, 50% of
the warrants with an exercise price of $1.94 and 50% of the warrants with an
exercise price of $1.78 per share. On January 30, 2006 the $6.0 million notes
were converted at $1.55 per share into 3,870,872 shares of common stock. See
footnote 12 to the financial statements.

On October 31, 2005, the Company agreed to settlement terms with the Acquvest
parties' litigation. In exchange for a full release of all liability, the
Company agreed to issue 6,500,000 shares of common stock. The Company recorded
an accrual in accordance with SFAS 5 of $12,675,000 on September 30, 2005 to
accrue the liability. The value of the settlement was calculated using a price
of $1.95 per share, the closing market price on the day prior to the settlement
date. With the settlement of the Acquvest litigation, substantially all of the
Company's litigation activities were resolved. In total, during the quarter we
issued 7,175,000 shares of common stock in settlement of the Acquvest,
Ascendiant, and Shields litigation.

On October 31, 2005, the Judge John Ryan of the Central District Court, Santa
Ana division of the US Bankruptcy court approved the Company's Third amended
Plan of Reorganization which provides for payment of 100% of creditors allowed
claims.. On November 1, 2005 the Company paid substantially all of its
pre-petition liabilities payable in cash, thereby effectively consummating the
plan of Bankruptcy. On November 18, 2005, United States Bankruptcy Judge John
Ryan signed and entered the order approving the Company's Third Amended Chapter
11 Plan of Reorganization with non-material modifications that confirms the
Company's emergence from bankruptcy. We have complied in all material aspects of
the bankruptcy plan and we expect to file for and receive the final formal
decree of bankruptcy emergence during the quarter ended March 31, 2006.

On December 15, 2005, CTC Wind Systems Corporation ("CWS"), a wholly owned
subsidiary of Composite Technology Corporation (the "Company") and EU Energy
Incorporated ("EU Energy") entered into an Equity Purchase Agreement ("Equity
Purchase Agreement") pursuant to which CWS has the right to purchase
approximately 48% of the issued and outstanding shares of capital stock of EU
Energy (the "Equity Purchase"). The closing of the Equity Purchase is subject to
completion of CTC's due diligence investigation of EU Energy and other standard
closing conditions set forth in the Equity Purchase Agreement. The total
purchase price for the Equity Purchase is $5,000,000 which shall be paid as
follows: (i) $1,000,000 at the time of closing of the Equity Purchase; (ii)
$2,000,000 on March 1, 2006 or 60 days after the date of such closing; and (iii)
the final $2,000,000 on April 1, 2006 or 90 days after the date of such closing.
At the time of Closing all of the shareholders of EU Energy shall execute a
shareholders' agreement with shall provide that, among other things, CWS shall
have the right to appoint 2 board members of EU Energy, the remaining 2
directors to be appointed by the other EU Energy shareholders and that certain
major decisions shall require the unanimous decision of the board of directors
of EU Energy. The Equity Purchase Agreement shall be terminated by: (i) mutual
written consent of the parties; (ii) either party if the closing of the Equity
Purchase does not occur by May 1, 2006; (iii) on written notice by either party
if any order permanently restraining, enjoining or prohibiting consummation of
the transactions contemplated in the Equity Purchase Agreement shall become
final and non-appealable; (iv) the seller on written notice if any buyer closing
condition is not performed by the closing date; or (v) the buyer on written
notice if any seller closing condition is not performed by the closing date,
(vi) if Buyer is not satisfied with its due diligence investigations prior to
the closing date, or (vii) if the Buyer is unable to obtain satisfactory
financing to meet the terms of its financing obligations. As of the date of this
filing, neither CWS nor the Company had paid any amount under this agreement.

                                       41

<PAGE>

On January 2, 2006, the Company entered into a Public and Media Relations
Strategy and Services Consulting with Media Relations Strategy, Inc., ("MRS") to
provide public and media relations strategy and marketing counsel in the
financial markets for a term of 27 months and will terminate on March 28, 2008.
The Agreement provides that MRS shall (1) act as a liaison between the Company
and its shareholders, (2) act as an advisor to the Company with respect to
existing and potential markets and investors, and (3) act as an advisor to the
Company with respect to communications and information dissemination. The
Company shall pay MRS a non-refundable retainer fee of $36,500 per month in
advance as follows: (i) $197,100 on execution of the present Agreement; (ii)
$197,100 on April 21, 2006; (iii) $197,100 on August 25, 2006; (iv) $197,100 on
December 22, 2006 and (v) $197,100 on March 23, 2007. MRS shall be responsible
for all the costs and expenses related to the provision of the Services. As a
further incentive to the MRS, the Company agrees to issue MRS the following
warrants to acquire the Company's unregistered, restricted shares of common
stock: (i) 200,000 warrants at an exercise price of $2.00 per warrant; and (ii)
200,000 warrants at an exercise price of $2.50 per warrant; and (iii) 200,000
warrants at an exercise price of $3.00 per warrant ("the Warrants").

The Company shall have the right at its sole discretion to settle the entire
remuneration due under the MRS Agreement by paying the full amount of the
contract in advance within sixty (60) days of the signature of the present
Agreement. In the event that the Company shall elect to pay the contract
remuneration in advance, the full amount payable shall be discounted by fifteen
percent (15%). The Company shall have the right to pay the remuneration in cash
or in shares. In the event of the payment of the remuneration in shares, such
shares shall be unregistered shares of common stock (half of which shall carry
piggyback registration rights) and valued at a price above the market price on
the date of issuance. As of the date of this filing, the Company had not paid
any amount due and has not issued any stock or warrants under this agreement.`

On January 4, 2006, the Company accepted the resignation of William Arrington as
an employee and on January 6, 2006 the Board of Directors accepted Mr.
Arrington's resignation as a Director of the Company. Mr. Arrington was formerly
the Chief Operating Officer of the Company but had resigned that position in
January, 2005.

On January 6, 2006, the Company appointed Michael D. McIntosh as a Director of
the Company. Mr. McIntosh currently and historically has provided intellectual
property legal and strategic services through his two wholly-owned companies
Technology Management Advisors and The McIntosh Group.

On January 9, 2006, the Company appointed Dean McCormick III as a Director of
the Company. Mr. McCormick has had no previous relationship with the Company.

Both appointments provide for a cash payment of $4,000 per month plus additional
monthly fees for members of the audit committee and compensation committee. On
January 9, 2006 both Directors received option grants to purchase 325,000 shares
of the Company's common stock at $1.04 per share. The vesting of each grant is
over three years as follows: 27,000 options vesting three months after the
January 9, 2006 grant date with 27,000 options vesting each quarter thereafter
and the final vesting to be 28,000 options.

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 December 31, 2005:

<TABLE>
<CAPTION>
                                               Less than                                           More than 5
Contractual Obligations        Total             1 year          1-3 years        3-5 years           Years
-----------------------        -----             ------          ---------        ---------           -----
<S>                         <C>                 <C>             <C>               <C>              <C>
Long-Term Debt
Obligations                 $13,379,323          $742,815       12,636,508                --               --
Capital Lease
Obligations                 $   835,160           480,291          353,869                --               --
Operating Lease
Obligations                 $ 5,230,534           975,440        3,443,422         1,111,672               --
</TABLE>

                                       42

<PAGE>

FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

BANKRUPTCY RELATED RISKS

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

Although our plan of reorganization was confirmed by the Bankruptcy Court and
was substantially consummated by us, our Title 11 filing may hinder our ongoing
business activities and our ability to operate, fund and execute our business
plan by

(i) impairing relations with existing and potential customers;
(ii) negatively impacting our ability to attract, retain and compensate key
executives and associates and to retain employees generally;
(iii) limiting our ability to obtain additional funding; and
(iv) impairing present and future relationships with strategic partners.

THE BANKRUPTCY PROCEEDING WILL HAVE AN IMPACT ON OUR FINANCIAL STATEMENTS THAT
MAY REQUIRE US TO REVALUE OUR ASSETS TO THEIR MARKET VALUE AND RECORD ADDITIONAL
EXPENSES AND LIABILITIES THAT REPRESENT CLAIMS ALLOWED BY THE BANKRUPTCY COURT,
WHICH MAY BE IN EXCESS OF LIABILITES RECORDED IN OUR FINANCIAL STATEMENTS

Under GAAP, in particular AICPA SOP 90-7, upon the approval of our plan of
reorganization, we are required to revalue our assets to their market values and
to record as additional expenses and additional liabilities for any amounts
which represent claims allowed by the Bankruptcy Court, which may be in excess
of the liabilities recorded in our financial statements. Our assets consist
primarily of current assets valued at the lower of cost or market, which we
believe approximates their market value and for equipment which we believe that
depreciated net book value to approximate the market value. With respect to
current liabilities and capital leases, we intend to honor all payables and
accrued liabilities and our plan of reorganization stipulates payment in full
for our pre-petition accounts payable. Our Plan also stipulates the assumption
of our capital leases. To date, we have claims representing approximately
$650,000 in additional cash expenses and liabilities and stock claims of 250,000
shares of the Company's common stock that we have disputed under the Chapter 11
but which may be allowed by the Bankruptcy Court in their entirety or a fraction
of that total, or not at all. Although we have recorded all liabilities that we
believe will be the amounts approved under the bankruptcy, we may be required to
record additional expenses.

During the quarter ended December 31, 2005, while still in bankruptcy, we issued
convertible debt which resulted in the recording of approximately $1.8 million
in debt discount and triggered anti-dilution provisions in our August, 2004
debentures resulting in the recording of approximately $0.8 million in debt
discount. Due to this discount, on the date of issuance our carrying value was
less than the allowed value under the bankruptcy. For the quarter ending
December 31, 2005, we recorded additional expense of approximately $2.6 million
as a reorganization item to adjust the carrying value of our convertible notes
and convertible debentures to the anticipated allowed claim.

FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

AS A COMPANY IN THE EARLY STAGE OF COMMERCIALIZATION, OUR LIMITED HISTORY OF
OPERATIONS MAKES EVALUATION OF OUR BUSINESS AND FUTURE GROWTH PROSPECTS
DIFFICULT.

Since the reorganization of the Company in 2001, we have had a limited operating
history and are at an early stage of commercialization of a new technology
product to a market unused to using new technologies. We made our ACCC available
and entered into our first commercial agreement in 2003. Our technology is a
relatively new advance for the electrical utility industry technology and has
not yet achieved widespread adoption. We do not have enough experience in
selling our products at a level consistent with broad market acceptance and do
not know whether we can do so and generate a profit. As a result of these
factors, it is difficult to evaluate our prospects, and our future success is
more uncertain than if we had a longer or more proven history of operations.

                                       43

<PAGE>

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
$1.0 million in ACCC product sales since inception. Historically, we have
incurred substantial losses and we may experience significant quarterly and
annual losses for the foreseeable future.

We may not ever become profitable. If we do achieve profitability, we may not be
able to sustain or increase profitability on a quarterly or annual basis. We
expect the need to significantly increase our general administrative and product
prototype and equipment prototype production expenses, as necessary. As a
result, we will need to generate significant revenues to achieve and maintain
profitability.

OUR INDEPENDENT AUDITORS HAVE ISSUED A QUALIFIED REPORT WITH RESPECT TO OUR
ABILITY TO CONTINUE AS A GOING CONCERN, AND WE MAY NEVER ACHIEVE PROFITABILITY.

In previous filings, 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 product will be accepted or
provide a marketable advantage, and therefore, no guarantee that the
commercialization will ever be profitable.

For the three months ended December 31, 2005, we had a net loss of $7,234,902
and negative cash flows from operations of $5,637,260. 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 years ended September 30, 2004 and
2003, we had net losses of $14,687,874 and $6,771,252 respectively. For the same
periods, we had negative cash flows from operations of $18,735,430 and
$2,022,935, respectively.

As of December 31, 2005, our accumulated deficit was $73,837,665

WE HAVE EXPERIENCED DIFFICULTIES IN COLLECTING ACCOUNTS RECEIVABLE, WHICH COULD
HARM OUR BUSINESS AND RESULT IN HIGHER LOSSES THAN ANTICIPATED.

Our management believed the $2.5 million receivable to be collectible from
Global American Energy for work carried out between March 31, 2003 and September
30, 2004 as of the original filing date of our annual report for the year ended
September 30, 2004 through the date that the initial payment from Global
American Energy was returned for insufficient funds. We recorded the entire
balance outstanding of $2,500,000 as services revenue in fiscal 2004 and
included it in our accounts receivable balance as of September 30, 2004. As of
August 9, 2005, all payments made to us were returned for insufficient funds and
no additional payments have been received. As such, we recorded into the quarter
ending June 30, 2005 an allowance for uncollectible accounts in the amount of
2.5 million that remained uncollectible as of December 31, 2005.

Accounts receivable may not result in actual revenue because we have experienced
issues surrounding payment for our services. Consequently, we may have to
maintain significant allowances for uncollectible or doubtful accounts. If we
fail to realize revenue from our accounts receivable or we do not recognize that
revenue on our anticipated timeframe, our operating results in future reporting
periods may be materially impacted due to decreased revenue. Failure to
recognize our accounts receivable may result in higher losses than anticipated
and have an adverse impact or our cash flow.

                                       44

<PAGE>

OUR INABILITY TO RAISE ADDITIONAL WORKING CAPITAL AT ALL OR TO RAISE IT IN A
TIMELY MANNER COULD NEGATIVELY IMPACT OUR ABILITY TO FUND OUR OPERATIONS, TO
GENERATE REVENUES, AND TO OTHERWISE EXECUTE OUR BUSINESS PLAN, LEADING TO THE
REDUCTION OR SUSPENSION OF OUR OPERATIONS AND ULTIMATELY OUR GOING OUT OF
BUSINESS.

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

IF OUR PRODUCT IS NOT ACCEPTED BY OUR POTENTIAL CUSTOMERS, IT IS UNLIKELY THAT
WE WILL EVER BECOME PROFITABLE.

The electrical utility industry has historically used a variety of technologies,
including a variety of technologies involving steel cable. Compared to these
conventional technologies, our technology is relatively new, and the number of
companies using our technology is limited. The commercial success of our product
will depend upon the widespread adoption of our technology as a preferred method
by major utility companies to transmit electricity. In order to be successful,
our product must meet the technical and cost requirements for electric
transmission within the electric utility industry. Market acceptance will depend
on many factors, including: (i) the willingness and ability of customers to
adopt new technologies; (ii) our ability to convince prospective strategic
partners and customers that our technology is an attractive alternative to
conventional methods used by the electric utility industry; (iii) our ability to
change our customers' evaluation of the economics of powerline construction,
changing their focus on limiting initial capital costs to evaluating the cost
and benefit of the full life of a line liberating capital funding to acquire our
products that can overall reduce costs in power transmission; and (iv) our
ability to sell sufficient quantities of our products.

Because of these and other factors, our product may not gain market acceptance
or become the industry standard for the electrical utility industry. The failure
of utility companies to purchase our products would have a material adverse
effect on our business, results of operations and financial condition.

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

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

                                       45

<PAGE>

FAILURE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS COULD ENABLE THIRD
PARTIESTO USE OUR TECHNOLOGY, OR VERY SIMILAR TECHNOLOGY, AND COULD REDUCE OUR
ABILITY TO COMPETE IN THE MARKET, AND ANY PROPRIETARY RIGHTS LITIGATION COULD BE
TIME CONSUMING AND EXPENSIVE TO PROSECUTE AND DEFEND.

Due to the importance of proprietary technology in the electrical utility
industry, establishment of patents and other proprietary rights is important to
our success and our competitive position. Performance in the electrical utility
industry can depend, among other factors, on patent protection. Accordingly, we
have filed patent applications in the U.S. and internationally for all aspects
of our composite materials, products and processes, including aspects of our
product other than the core, and intend to devote substantial resources to the
establishment and protection of patents and other proprietary rights. Despite
our efforts to establish and protect our patents or other proprietary rights,
unauthorized parties may attempt to copy aspects of our technology or to obtain
and use information that we regard as proprietary. In addition, the laws of some
foreign countries do not protect our proprietary rights to as great an extent as
do the laws of the United States. Our means of establishing and protecting our
proprietary rights may not be adequate and our competitors may independently
develop similar technology, duplicate our products or design around our patents
or our other proprietary rights.

As a result, our business involves a risk of overlap with third party patents
and subsequent litigation with competitors or patent-holders. Any claims, with
or without merit, could be time-consuming, result in costly litigation, or cause
us to enter into licensing agreements.

WE OCCASIONALLY MAY BECOME SUBJECT TO LEGAL DISPUTES THAT COULD HARM OUR
BUSINESS.

We are currently the subject of, and may from time to time become engaged in,
legal disputes such as claims by consultants or other third parties. These
disputes could result in monetary damages or other remedies that could adversely
impact our financial position or operations. We believe these claims are without
merit and intend to vigorously defend against them. However, even if we prevail
in disputes such as this, the defense of these disputes will be expensive and
time-consuming and may distract our management from operating our business.

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

We rely to a substantial extent on the management, marketing and product
development skills of our key employees, particularly Benton H Wilcoxon, our
Chief Executive Officer, and Brian Brittsan, our acting Chief Operating Officer.
If Mr. Wilcoxon or Mr. Brittsan were unable to provide services to us for
whatever reason, our business would be adversely affected. Mr. Wilcoxon has not
entered into an employment agreement with the Company. Mr. Brittsan has entered
into a consulting agreement. The term of such consulting agreement is currently
month to month.

In addition, our ability to develop and market our products and to achieve
profitability will depend on our ability to attract and retain highly talented
personnel. We face intense competition for personnel from other companies in the
electrical utility industry. The loss of the services of our key personnel or
the inability to attract and retain the additional, highly-talented employees
required for the development and commercialization of our products, may
significantly delay or prevent the achievement of product development and could
have a material adverse effect on us.

                                       46

<PAGE>

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

We have entered into purchase and distribution agreements with General Cable to
manufacture and distribute our ACCC product in the United States and Canada. Our
success is dependent upon establishing and maintaining relationships with
strategic partners, such as our relationship with General Cable. We face
numerous risks in successfully obtaining suitable partners on terms consistent
with our business model, including, among others: (i) we must typically undergo
a lengthy and expensive process of building a relationship with a potential
partner before there is any assurance of an agreement with such party; (ii) we
must persuade cable manufacturers with significant resources to rely on us for
critical technology on an ongoing basis rather than trying to develop similar
technology internally; (iii) we must persuade potential partners to bear
retooling costs associated with producing our products; and (iv) we must
successfully transfer technical know-how to our partners.

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

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

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

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

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

Interruptions or shortages of supplies from our key suppliers of raw materials
could disrupt production or impact our ability to increase production and sales.
We use a limited number of sources for most of the other raw materials that we
use. We do not have long-term or volume purchase agreements with most of our
suppliers, and may have limited options in the short-term for alternative supply
if these suppliers fail, for any reason, including their business failure or
financial difficulties, to continue the supply of materials or components.
Moreover, identifying and accessing alternative sources may increase our costs.

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

As of January 24, 2006, Benton H Wilcoxon, our Chairman of the Board, Chief
Executive Officer and Acting Chief Financial Officer, and C. William Arrington,
our former COO and former director, in the aggregate beneficially own or control
approximately 31% of the outstanding common stock. As a result, these persons
have controlling influence in determining the outcome of any corporate matters
submitted to our stockholders 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 stockholders may differ from
the interests of the other stockholders, and may limit the ability of other
stockholders to affect our management and affairs.

                                       47

<PAGE>

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

Until and unless we secure multiple customer relationships, it is likely that we
will experience periods during which we will be highly dependent on one or a
limited number of customers. Dependence on a single or a few customers will make
it difficult to satisfactorily negotiate attractive prices for our products and
will expose us to the risk of substantial losses if a single dominant customer
stops conducting business with us. Moreover, to the extent that we may be
dependent on any single customer, we could be subject to the risks faced by that
customer to the extent that such risks impede the customer's ability to stay in
business and make timely payments to us.

OUR BUSINESS MAY BE SUBJECT TO INTERNATIONAL RISKS.

We are pursuing international business opportunities, including in China,
Mexico, Brazil, Europe, the Middle East, certain far eastern countries and
Africa. As to international business in the Middle East, our current target
markets include Saudi Arabia, Qatar, United Arab Emirates, Oman, Iraq,
Afghanistan and Jordan. Of these the only countries that we believe pose a
particular problem are Iraq and Afghanistan as a result of additional
instability. In Africa we are actively pursuing South Africa and Kenya as well
as engaging in discussions with engineering companies that bid on trans-African
projects. There are no special additional risks related to these countries that
are not disclosed in the list of risks affecting most international business. To
date, we have not engaged in any transactions on these countries. Our business
model has been implemented only in the United States and Canada where we produce
the ACCC core for delivery to General Cable under a manufacturing agreement.
Expansion internationally will depend on our adaptation of this model to
international markets and may be costly and time consuming. Risks inherent in
international operations in general include: (i) nexpected changes in regulatory
requirements, export restrictions, tariffs and other trade barriers; (ii)
hallenges in staffing and managing foreign operations; (iii) ifferences in
technology standards, employment laws and business practices; (iv) longer
payment cycles and problems in collecting accounts receivable; (v) political
instability; (vi) changes in currency exchange rates; (vii) currency exchange
controls; and (viii) potentially adverse tax consequences.

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

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

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

                                       48

<PAGE>

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

As a manufacturer and distributor of wire and cable products we are subject to a
number of industry standard-setting authorities, such as the Institute of
Electrical and Electronic Engineers, the European based International Council on
Large Electric Systems , the American Society of Testing and Materials and the
Canadian Standards Association. In addition, many of our products may become
subject to the requirements of federal, state and local or foreign regulatory
authorities. Changes in the standards and requirements imposed by such
authorities could have an adverse effect on us. In the event we are unable to
meet any such standards when adopted our business could be adversely affected.
In addition, changes in the legislative environment could affect the growth and
other aspects of important markets served by us. While certain legislative bills
and regulatory rulings are pending in the energy and telecommunications sectors
which could improve our markets, including energy bill H.R. 6 that passed both
the House and Senate in 2003 and the House Conference Committee, any delay or
failure to pass such legislation and regulatory rulings could adversely affect
our opportunities and anticipated prospects may not arise. Energy bill H.R. 6 is
a federal bill, that, if enacted, would cover energy conservation, research and
development and improvement of the energy infrastructure pursuant to a national
energy policy. We believe that this bill could improve our market opportunities
if, as a result, it enhances the willingness and ability of potential customers
to adopt new technologies in the electrical utility industry. This comprehensive
bill currently remains in conference committee in the Senate. It is not possible
at this time to predict the impact that any such legislation or regulation or
failure to enact any such legislation or regulation, or other changes in laws or
industry standards that may be adopted in the future, could have on our
financial results, cash flows or financial position.

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

The market in which we compete is intensely competitive. Our competitors include
makers of traditional bare overhead wire and other companies with
developmental-stage products that may be marketing or developing products that
compete with our products or would compete with them if developed. There is no
certainty that unique technological advances won't be achieved by our
competition, with better capital resources, in the future or that would render
our technologies and products obsolete. We believe our competitors will continue
to improve the design and performance of their products and to introduce new
products with competitive price and performance characteristics. We expect that
we will be required to continue to invest in product development, productivity
improvements and customer service and support in order to compete in our
markets. Such competitors could develop a more efficient product or undertake
more aggressive and costly marketing campaigns than us which may adversely
affect our marketing strategies and could have a material adverse effect on our
business, results of operations or financial condition. In addition, as we
introduce new products, we will compete directly with a greater number of
companies. There is no assurance that we will compete successfully against
current or future competitors nor can there be any assurance that competitive
pressures faced by us will not result in increased marketing costs, loss of
market share or otherwise will not materially adversely affect our business,
results of operations and financial condition.

RISKS RELATED TO OUR SECURITIES

THERE IS CURRENTLY A LIMITED TRADING MARKET FOR OUR COMMON STOCK, SO YOU MAY BE
UNABLE TO LIQUIDATE YOUR SHARES IF YOU NEED MONEY.

Our common stock is traded in the OTC market through the OTC Bulletin Board.
There is currently an active trading market for the common stock; however there
can be no assurance that an active trading market will be maintained. Trading of
securities on the OTC Bulletin Board is generally limited and is effected on a
less regular basis than that effected on other exchanges or quotation systems,
such as the NASDAQ Stock Market, and accordingly investors who own or purchase
common stock will find that the liquidity or transferability of the common stock
is limited. Additionally, a stockholder may find it more difficult to dispose
of, or obtain accurate quotations as to the market value, of common stock. There
can be no assurance that the common stock will ever be included for trading on
any stock exchange or through any other quotation system, including, without
limitation, the NASDAQ Stock Market.

                                       49

<PAGE>

THE APPLICATION OF THE PENNY STOCK RULES COULD ADVERSELY EFFECT THE MARKET PRICE
OF OUR COMMON STOCK.

As long as the trading price of our common stock is below $5.00 per share, the
open-market trading of our common stock will be subject to the penny stock
rules. The penny stock rules impose additional sales practice requirements on
broker-dealers who sell securities to persons other than established customers
and accredited investors, generally those with assets in excess of $1,000,000 or
annual income exceeding $200,000 or $300,000 together with their spouse. For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of securities and have received the
purchaser's written consent to the transaction before the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
broker-dealer must deliver, before the transaction, a disclosure schedule
prescribed by the Securities and Exchange Commission relating to the penny stock
market. The broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements must be sent disclosing recent price
information on the limited market in penny stocks. These additional burdens
imposed on broker-dealers may restrict the ability of broker-dealers to sell the
common stock and may affect a stockholder's ability to resell the common stock.

Stockholders should be aware that, according to Securities and Exchange
Commission Release No. 34-29093, dated April 17, 1991, the market for penny
stocks has suffered in recent years from patterns of fraud and abuse. Such
patterns include: (i) control of the market for the security by one or a few
broker-dealers that are often related to the promoter or issuer; (ii)
manipulation of prices through prearranged matching of purchases and sales and
false and misleading press releases; (iii) boiler room practices involving
high-pressure sales tactics and unrealistic price projections by inexperienced
sales persons; (iv) excessive and undisclosed bid-ask differential and markups
by selling broker-dealers; and (v) the wholesale dumping of the same securities
by promoters and broker-dealers after prices have been manipulated to a desired
level, along with the resulting inevitable collapse of those prices and with
consequent investor losses.

THE PRICE OF OUR COMMON STOCK IS VOLATILE, WHICH MAY INCREASE IN THE FUTURE, AND
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 $5.23 to a low of $0.45. Fluctuations in the
trading price or liquidity of our common stock may adversely affect our ability
to raise capital through future equity financings.

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

We plan to use all of our earnings; to the extent we have earnings, to fund our
operations. We have not paid dividends on the common stock and do not anticipate
paying such dividends in the foreseeable future. We cannot guarantee that we
will, at any time, generate sufficient surplus cash that would be available for
distribution as a dividend to the holders of our common stock. Therefore, any
return on your investment would derive from an increase in the price of our
stock, which may or may not occur.

In the past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted. If a
securities class action suit is filed against us, we would incur substantial
legal fees and our management's attention and resources would be diverted from
operating our business in order to respond to the litigation.

                                       50

<PAGE>

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

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

AS OF February 3, 2006 7,557,047 COMMON SHARES ARE ISSUABLE UPON EXERCISE OF
ALL OUTSTANDING OPTIONS, WARRANTS AND CONVERSION OF CONVERTIBLE DEBENTURES FOR
LESS THAN THE MARKET PRICE OF $1.33 PER SHARE. CASH PROCEEDS RESULTING FROM THE
FULL EXERCISE AND CONVERSION OF THESE SECURITIES WOULD BE APPROXIMATELY
$5,676,820. 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 5.6%
TO APPROXIMATELY 142,737,000 SHARES.

The exercise price or conversion price of outstanding options, warrants and
convertible debentures 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 or her investment in terms of the percentage
ownership in us as well as the book value of the common shares held. At the
February 3, 2006 market price of $1.33 per share, 7,557,047 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 $5,676,820 and would increase the outstanding common shares by
5.6% to approximately 142,737,000 shares.

                                       51

<PAGE>

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

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

Our business is subject to a variety of additional risks, which could materially
adversely affect quarterly and annual operating results, including:

(i) market acceptance of our composite technologies by utility companies;
(ii) due to the potential lengthy lead time for the implementation of new lines
or the reconductoring of existing lines, the extent and timing of these new
cable transactions with utility companies may lead to significant delays in
sales that could adversely impact our cash flow;
(iii) the loss of a strategic relationship or termination of a relationship with
a cable partner, specifically General Cable;
(iv) announcements or introductions of new technologies or products by us or our
competitors;
(v) delays or problems in the introduction or performance of enhancements or of
future generations of our technology;
(vi) failures or problems in our utility cable product, particularly during the
early stages of the introduction of the product when problems or failures
identified during trials carried out with the product or during its installation
or operation can have an adverse effect;
(vii) delays in the adoption of new industry standards or changes in market
perception of the value of new or existing standards;
(viii) competitive pressures resulting in lower revenues;
(ix) personnel changes, particularly those involving engineering and technical
personnel;
(x) costs associated with protecting our intellectual property;
(xi) the potential that customers could fail to make payments under their
current contracts, including Global American Energy and City of Kingman;
(xii) market-related issues, including lower ACCC Cable demand brought on by
excess cable inventory and lower average selling prices for ACCC cable as a
result of market surpluses;
(xiii) increased costs or shortages of key raw materials including carbon fiber
and glass fiber;
(xiv) regulatory developments; and
(xv) general economic trends and other factors.

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 December 31, 2005 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 December 31, 2005, we had $1.3 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 acting 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 effective as of December 31, 2005 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.

There were no significant changes in the Company's internal control over
financial reporting identified in management's evaluation during the first
quarter of fiscal 2006 that have materially affected or are reasonably likely to
materially affect the Company's internal control over financial reporting.

                                       52

<PAGE>

                           PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

Bankruptcy Proceedings and Summary of Reorganization Plan

On May 5, 2005 we filed a voluntary reorganization plan and disclosure statement
under the provisions of Title 11 of the Federal Bankruptcy Code in the United
States Bankruptcy Court for the Central District of California under case number
SA 05-13107 JR. Our disclosure statement was approved by the bankruptcy court on
July 6, 2005 and a hearing was held resulting in the confirmation of our
bankruptcy plan October 31, 2005. The order approving our bankruptcy plan was
entered November 18, 2005 and concurrently notice was given that the plan
effective date was established as November 18, 2005. We are now in the process
of implementing the plan of reorganization. The "Q" was removed from our trading
symbol on December 1, 2005.

We filed for voluntary reorganization because multiple lawsuits were taxing the
Company's managerial, operational and financial resources and threatened to
divert management from their duties of running the business. One of these
lawsuits had resulted in an attachment of more than $2.5 million of the
Company's funds. We believed that the bankruptcy filing would release cash for
the operation of our business, give us a reprieve from burdensome litigation so
that management could focus on marketing and sales, and stay attempts to
collect, secure or enforce remedies with respect to most pre-petition claims. We
also chose to have these lawsuits heard by the Bankruptcy Court as part of the
reorganization to provide a fair and reasonable means of addressing each claim
and affording the same treatment to each claim. Had the lawsuits proceeded in
different jurisdictions there would have been a possibility of inconsistent
judgments.

As required by the Bankruptcy Code, our plan of reorganization classifies claims
and interests according to their right to priority. The confirmed plan is an
Exhibit to this annual report. The plan states whether each claim or interest is
impaired or unimpaired and provides the treatment for each class. An impaired
claim or interest means that a party's legal rights have been altered in any
manner under applicable law. The table below summarizes our reorganization plan.

<TABLE>
<CAPTION>
Class No.          Description                 Impaired (Y/N)                                  Treatment
--------- -------------------------------- ------------------------- ---------------------------------------------------------------
<S>       <C>                              <C>                       <C>
2-A       General Unsecured Claim          Yes                       Allowed Claims, or Claims that CTC has filed with the
                                                                     Bankruptcy Court and not listed as disputed, contingent or
          Approximately 50 holders of      Impaired; claims in       unliquidated and as to which no objection has been timely
          General Unsecured Claims, or     this class are entitled   filed, in this class will be paid the full amount of their
          unsecured Claims against CTC     to vote on the plan.      respective Allowed Claim, without interest, in six monthly
          that are not entitled to                                   installment payments commencing thirty days after the
          priority under Chapter 11 of                               Effective Date, or generally the date not later than 30 days
          the Bankruptcy Code, totaling                              after the date on which the Bankruptcy Court enters its order
          approximately $1,725,418.70.                               confirming the reorganization plan and such order becomes a
          This amount includes Disputed                              Final Order. A Final Order means an order or judgment of the
          Claims, or Claims that CTC has                             Bankruptcy Court, or other court of competent jurisdiction,
          identified as unliquidated,                                that has not been reversed, stayed, modified or amended, and
          disputed or contingent or as                               as to which the time to appeal has expired or any right to
          to which a timely objection                                appeal has been waived to CTC's satisfaction or any appeal has
          has been timely filed to any                               been resolved by the highest court to which the order was
          portion of such Claim. Under                               appealed timely or from which rehearing was denied.
          the terms of our disclosure
          statement, a Claim is a right                              Allowed Claims also include Claims as to which proof of claim
          to payment from CTC or a right                             has been filed by a holder of a Claim in accordance with
          to an equitable remedy for                                 applicable federal law by August 9, 2005, and as to which no
          breach of performance if such                              objection has been timely filed or any such objection has been
          breach gives rise to a right                               determined by a Final Order. The Reorganized Debtor, or CTC on
          to payment from CTC.                                       or after the Effective Date, will have the right to pay these
                                                                     Claims prior to the due dates noted above without premium or
                                                                     penalty.

                                                                     If CTC is required to pay interest on these claims, the
                                                                     applicable annual interest rate shall be 3%.
</TABLE>

                                       53

<PAGE>

<TABLE>
<CAPTION>
Class No.          Description                 Impaired (Y/N)                                  Treatment
--------- -------------------------------- ------------------------- ---------------------------------------------------------------
<S>       <C>                              <C>                       <C>
2-B       Debenture Holders, which means                             Allowed Claims in this class will be paid pursuant to their
          Midsummer Investment, Ltd.,                                existing agreements with CTC subject to modifications.
          Islandia, L.P., Omicron Master
          Trust and Bristol Investment                               Post-petition accrued interest due to the Debenture Holders as
          Fund, Ltd.                                                 governed by the documents shall be paid in common stock of CTC
                                                                     on the Effective Date pursuant to Bankruptcy Code section
          Four Claims totaling                                       1145. The approximate quarterly interest payment is $225,000
          $15,087,500.00                                             based on simple interest at six percent on the balance of $15
                                                                     million.

3-A       Subordinated Securities          Yes                       Allowed Subordinated Securities Claims, or an Allowed Claim or
          Claims, or Claims subject to                               any portion thereof that arises from the Ascendiant Action,
          subordination under Bankruptcy   Impaired; claims in       the Tarbox Action, the O'Keefe Action, the Shields Action, or
          Code section 510(b), including   this class are entitled   the Acquvest Action and that has been allowed by a Final Order
          without limitation, any Claim    to vote on the plan.      of the Bankruptcy Court, will be issued common stock of CTC
          that arises from the                                       pursuant to Bankruptcy Code Section 1145 in an amount equal to
          rescission of a purchase or                                the full amount of their Claim that is ultimately adjudicated
          sale of the common stock of                                as an Allowed Claim. The number shares of common stock of CTC
          the Company, or for damages                                to be issued to holders of Allowed Subordinated Securities
          arising from the purchase or                               Claims shall be determined by dividing the judgment or
          sale of the common stock of                                settlement dollar amount by the average of the reported
          the Company, or for                                        closing bid price per share of CTC Common Stock on the OTC
          reimbursement, indemnification                             Bulletin Board (as reported by Bloomberg L.P. at 4:15 PM (New
          or contribution allowed under                              York time) during the twenty regular session trading days
          Bankruptcy Code section 502 on                             immediately preceding the effective date of the judgment or
          account of such Claim.                                     settlement.
          Subordinated Securities Claims
          include any claims arising out                             CTC has not reviewed the proofs of interest, if any, filed by
          of the Acquvest Action, the                                holders of Subordinated Securities Claims. CTC reserves its
          Ascendiant Action, the Tarbox                              right to object to any of the proofs of interest filed by the
          Action, the O'Keeffe Action or                             holders of Subordinated Securities Claims.
          the Shields Action

3-B       Interests, or a share of         Yes                       The rights of Interest holders are modified by the plan. The
          common stock in CTC                                        common stock of CTC will remain in effect and will be diluted
                                           Impaired; claims in       to a smaller percentage of the outstanding stock in the
          This class includes current      this class are entitled   Reorganized Debtor as a result of the common stock of CTC to
          holders of warrants              to vote on the plan       be issued to Allowed Subordinated Securities Claims. The
                                                                     percentage by which the common stock of CTC will be diluted
                                                                     depends on the total amount of Subordinated Securities Claims
                                                                     that are ultimately deemed to be Allowed Claims.

                                                                     CTC has not reviewed the proofs of interest, if any, filed by
                                                                     the Interest holders. CTC reserves its right to object to any
                                                                     of the proofs of interest filed by the Interest holders on any
                                                                     reasonable grounds.
</TABLE>

Class One Creditors are unimpaired, and are not entitled to vote on the plan.
Therefore, they are not included in the above chart.

As of December 31, 2005, all allowed general unsecured claims under the plan
have been paid in full. All stock required to be issued under the plan to
holders of allowed claims and/or pursuant to court-approved settlements has been
distributed. The company is in compliance with all applicable bankruptcy code
provisions, with the plan of reorganization, and with guidelines of the Office
of the United States Trustee. All remaining claims and litigation under review
or to be adjudicated by the Bankruptcy court are listed either in the litigation
footnote or the commitments and contingent liabilities footnotes to the
financial statements.

                                       54

<PAGE>

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

On October 16, 2003, CTC filed suit against Acquvest, Inc., Paul Koch, Victoria
Koch, Patricia Manolis, and Michael Tarbox in Orange County Superior Court. CTC
alleges causes of action for declaratory relief, breach of contract, fraudulent
inducement, rescission and economic duress arising out of certain subscription
and related agreements among the Company and the defendants. In connection with
such agreements, CTC issued to Acquvest, Inc. and Patricia Manolis, in April
2003 and September 2003, a total of 150,000 units for a total purchase price of
$375,000. Each unit consists of 10 shares of unregistered, restricted common
stock and 10 Series I warrants to purchase one share of unregistered, restricted
common stock. Each Series I warrant entitles the holder to purchase a share of
common stock at $0.50 per share and expires on March 30, 2005. The agreements
provide for the issuance of up to an additional 550,000 of such units for the
same purchase price of $2.50 per unit, subject to certain conditions, and
registration of share issuances under the Securities Act of 1933. The additional
units have not been issued and the additional purchase consideration has not
been paid. The parties disagree as to their respective rights and obligations
with respect to the original issuances and such additional units. 10,000 units
were also issued to Paul Koch for services in connection with such agreements,
and a dispute has arisen as to his entitlement to those and additional units and
warrants in connection with the agreements. CTC is seeking actual damages,
punitive damages, statutory costs, attorneys' fees and injunctive relief against
the defendants. CTC also seeks rescission of the pertinent agreements based on
numerous grounds, including fraudulent inducement. By a letter to CTC's counsel
dated September 8, 2004, Acquvest stated that it was waiving the contractual
conditions to its purchase of an additional 400,000 units under its subscription
agreement and was tendering $1,000,000, which was available on deposit, to CTC
as payment for the units. Acquvest, Koch, and Manolis filed a Cross-Complaint on
September 16, 2004, which they amended per stipulation on December 17, 2004. On
April 14, 2005, CTC was served with notice that the Court granted defendants and
cross-complainants' application for Writs of Attachment allowing for the
attachment of CTC's assets totaling $2.55 million. The Court had denied two
prior applications by defendants and cross-complainants for Writs of Attachment.
CTC immediately filed a Notice of Appeal on April 14, 2005 and an Emergency Writ
on April 18, 2005 with the California Courts of Appeal to challenge the Court's
decision to grant the Writs of Attachment and to stay the Writs of Attachment.
Trial date was set for May 9, 2005, but was vacated as a result of the
bankruptcy filing. The bankruptcy court has ordered that the trial be re-set in
Orange County Superior Court. On October 31, 2005, CTC agreed to a complete
settlement of the claims of Acquvest, Inc., Paul R. Koch, Victoria Koch and
Patricia Manolis (the "Acquvest Parties"). CTC agreed to transfer 6.5 million
shares (the "Settlement Shares") to settle all of the Acquvest Parties claims.
There is an existing dispute over one of the settlement terms. CTC contends that
an additional term of the settlement was that the Acquvest Parties would be
responsibility for settling any claims of Michael Tarbox against CTC. An
evidentiary hearing on this issue is set for February, 2006 in the bankruptcy
court. On November 18, 2005, CTC entered into a Mutual Release Agreement to
settle claims made by Acquvest, Inc., Paul R. Koch, Victoria Koch and Patricia
Manolis against CTC and Benton H. Wilcoxon, CTC's CEO, in consideration for the
issuance of 6,500,000 shares of CTC's common stock. As part of this settlement,
it was recorded that Acquvest, Inc., Paul R. Koch, Victoria Koch and Patricia
Manolis would be responsible for resolving CTC's issues with Michael Tarbox (see
"Tarbox v. Koch"). Acquvest, Inc., Paul R. Koch, Victoria Koch and Patricia
Manolis now claim that no such agreement was reached. Resolution of this matter
will have no effect on the main release of CTC in the Acquvest, Inc., Paul R.
Koch, Victoria Koch and Patricia Manolis litigation. One half of the Settlement
Shares were transferred to the Acquvest Parties on delivery of the Mutual
Release Settlement with the remaining shares being released 45 days thereafter.
As of September 30, 2005, the Company recorded an accrual under SFAS 5 for
$12,675,000 representing the shares to be issued in the settlement valued at
$1.95 per share, the market price on the date immediately prior to the
settlement date. On November 21, 2005, the Company issued the 6,500,000 shares.

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

On October 13, 2004, Michael Tarbox ("Tarbox") filed an action in Orange County
Superior Court (Case No. 04-CC-10345) against Paul Koch, Acquvest, CTC and Doe
Defendants. Tarbox alleges that Koch made fraudulent transfers to Acquvest and
the Doe Defendants for the purpose of avoiding the debt owed to Tarbox. Tarbox
alleges that CTC securities were intended to serve as security for a debt owed
by Koch to Tarbox. Tarbox alleges that Koch was not a bona fide purchaser of the
CTC securities since they received such securities for the benefit of Tarbox.
Tarbox further alleges that CTC breached an agreement to pay him a finder's fee
in connection with investments made by Koch, since the finder's fees was given
to Koch for the benefit of Tarbox. Tarbox alleges that CTC's breach has caused
him to suffer damages in excess of $750,000. On November 14, 2004, CTC filed a
demurrer to the Complaint, and the other defendants also filed a demurrer. The
Court granted leave to amend, and Tarbox then filed an amended Complaint. A
demurrer filed by the other Defendants was granted on February 22, 2005, and
Tarbox was again granted leave to amend. Tarbox filed a Second Amended
Complaint. CTC has answered to Second Amended Complaint. However, since CTC
delivered to Koch the finder's fee which Tarbox might have otherwise been
entitled to, on April 11, 2003, Tarbox executed a written release, whereby
Tarbox released CTC of any obligation to pay him a finder's fee in connection
with the introductions made to Paul Koch and Acquvest, Inc. Based on the fact
that Tarbox has released his claims against CTC for any finder's fee, CTC will
vigorously defend this litigation and will seek to have the court expeditiously
adjudicated, in CTC's favor, the portions of the lawsuit alleged against CTC. An
evidentiary hearing on this issue is set for February, 2006 in the bankruptcy
court.

                                       55

<PAGE>

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

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

David S. Shields v. Composite Technology Corporation:

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

                                       56

<PAGE>

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

On January 31, 2006, the Composite Technology Corporation issued 3,870,972
shares of its common stock to seven accredited investors for the conversion of
$6,000,000 of note principal at $1.55 per share. The notes were originally
issued in October 13, 2005. The Registrant relied upon the exemption from
registration under the Securities Act by reason of Bankruptcy Code Section 1145
for the issuance of these securities.

On January 31, 2006, the Composite Technology Corporation issued 1,362,142
shares of its common stock to seven accredited investors in exchange for the
settlement of certain claims and for the amendment of the Convertible Notes and
Convertible Note Warrant agreements dated October 13, 2005. The Company relied
upon the exemption from registration as set forth in Section 4 (2) of the
Securities Act for the issuance of these securities. The recipient took its
securities for investment purposes without a view to distribution and had access
to information concerning the Company and its business prospects, as required by
the Securities Act. In addition, there was no general solicitation or
advertising for the acquisition of these securities.

On January 31, 2006, the Composite Technology Corporation issued 78,489 shares
of its common stock to Lane Capital Markets, an accredited investor, in
consideration for services earned in connection with the settlement agreement
resulting in the conversion of the $6,000,000 Senior Convertible Notes on
January 30, 2006. Such stock was assigned and issued to Ryan M. Lane, a
principal of Lane Capital Markets. The recipient took its securities for
investment purposes without a view to distribution and had access to information
concerning the Company and its business prospects, as required by the Securities
Act. In addition, there was no general solicitation or advertising for the
acquisition of these securities.

ITEM 3 - DEFAULTS ON SENIOR SECURITIES

None

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

None

ITEM 5 - OTHER INFORMATION

See the description of unregistered sales of equity securities under Item 2
above, which is incorporated by reference herein.

                                       57

<PAGE>

ITEM 6 - EXHIBITS

EXHIBIT INDEX

Number       Description
2.1(1)       Articles of Merger of ElDorado Financial Group, Inc., a Florida
             corporation, into ElDorado Financial Group, Inc., a Nevada
             corporation.

2.2(2)       Agreement and Plan of Reorganization By and Among Transmission
             Technology Corporation, Certain of its Stockholders, and ElDorado
             Financial Group, Inc. dated November 3, 2001.

2.3(3)       Third Amended Chapter 11 Plan of Reorganization with non-material
             modifications of Composite Technology Corporation.

2.4(3)       Order confirming Debtor's Third Amended Chapter 11 Plan of
             Reorganization with Non-material Modifications.

3.1(1)       Articles of Incorporation of the Company, as amended.

3.2(4)       Bylaws as revised January 13, 2005 and January 10, 2006.

10.1(1)      2001 Transmission Technology Corporation Incentive Compensation
             Stock Option Plan.

10.2(5)      Technology License Agreement by and between W.B.G., Inc. and
             Transmission Technology Corporation dated May 7, 2001.

10.3(6)      Composite Technology Corporation 2002 Non-Qualified Stock
             Compensation Plan.

10.4(7)      Consulting Agreement by and between Composite Products Development,
             Inc., George Korzeniowski and Composite Technology Corporation,
             dated March 1, 2002.

10.5(7)      License Agreement between Composite Technology Corporation and W.
             Brandt Goldsworthy & Associates, Inc., dated February 6, 2003.

10.6(7)      Firm Fixed Price Billable Services Agreement Terms and Conditions
             between EPRI Solutions, Inc. and Composite Technology Corporation,
             dated February 2003.

10.7(7)      Consulting Agreement between David C. Bryant and Composite
             Technology Corporation, dated February 21, 2003.

10.8(7)      Consulting Agreement by and between Composite Technology
             Corporation, CTC Cable Corporation and Global American Energy Inc.,
             dated March 31, 2003.

10.9(7)      Research Agreement between University of Southern California and
             Composite Technology Corporation, dated June 23, 2003.

10.10(8)     Composite Technology Corporation Option Agreement - Dominic J.
             Majendie dated August 11, 2003.

10.11(9)     Composite Technology Corporation Option Agreement - Benton Wilcoxon
             dated August 13, 2003.

10.12(9)     Composite Technology Corporation Option Agreement - William
             Arrington dated August 13, 2003.

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10.13(8)     Employment Agreement between Composite Technology Corporation and
             Dominic J. Majendie, dated October 1, 2003.

10.14(7)     Joint Development Agreement between FCI SA and Composite Technology
             Corporation, dated November 5, 2003.

10.15(9)     Lease Agreement between Composite Technology Corporation and CNH,
             LLC dated November 7, 2003.

10.16(8)     Letter Agreement between the Registrant and the City of Kingman,
             Kansas, dated November 11, 2003.

10.17(11)    Form of Securities Purchase Agreement, Registration Rights
             Agreement and Common Stock Purchase Warrants, dated as of December
             16, 2003.

10.18(8)     Form of Securities Purchase Agreement including form of the
             Debenture attached as Exhibit A, form of the Registration Rights
             Agreement attached as Exhibit B thereto, form of the Common Stock
             Purchase Warrant attached as Exhibit C thereto, form of legal
             opinion attached as Exhibit D, form of Custodial and Security
             Agreement attached as Exhibit E, dated August 17, 2004.

10.19(12)    Manufacturing Agreement between Composite Technology Corporation
             and General Cable Corp dated October 2, 2004.

10.20(12)    Distribution Agreement between Composite Technology Corporation and
             General Cable Corp dated October 2, 2004.

10.21(13)    Letter Agreement between Composite Technology Corporation and
             Feldman Weinstein LLP, dated November 23, 2004.

10.22(14)    Engagement Agreement between Composite Technology Corporation and
             Brian Brittsan, dated December 18, 2004.

10.23(7)     Letter Agreement between Composite Technology Corporation and
             Midsummer Investment, Ltd., Bristol Investment Fund, Ltd.,
             Islandia, L.P. and Omicron Trust dated January 21, 2005.

10.24(7)     Employee Confidentiality and Assignment Agreement between David C.
             Bryant and Composite Technology Corporation, dated February 21,
             2005.

10.25(15)    Exclusive Brokerage and Risk Management Agreement by and between
             Brakke Snafnitz Insurance Brokers, Inc. and Composite Technology
             Corporation dated June 29, 2005.

10.26(16)    Securities Purchase Agreement including form of the Convertible
             Note, Registration Rights Agreement and the Common Stock Purchase
             Warrant, dated September 23, 2005.

10.27(3)     Settlement Agreement entered into by and between Composite
             Technology Corporation and Ronald Morris and American China
             Technology Systems, LLC.

10.28(3)     Settlement and Mutual Release Agreement entered into by and between
             Composite Technology Corporation and Ascendiant Capital Group.

10.29(3)     Settlement Agreement entered into by and between Composite
             Technology Corporation and City of Kingman, Kansas.

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10.30(3)     Settlement and Mutual Release Agreement entered into by and between
             Composite Technology Corporation and David S. Shields, M.D.

10.31(3)     Settlement Agreement entered into by and between Composite
             Technology Corporation and Richard. O. Weed.

10.32(3)     Settlement Agreement entered into by and between Composite
             Technology Corporation and Frank Bishop.

10.33(3)     Settlement Agreement entered into by and between Composite
             Technology Corporation and G.S. Schwartz & Co.

10.34(3)     Settlement Agreement entered into by and between Composite
             Technology Corporation and Clem Hiel and Composite Support
             Solutions, Inc.

10.35(3)     Settlement Agreement entered into by and between Composite
             Technology Corporation and John Nunley.

10.36(3)     Mutual Release Agreement entered into by and between Composite
             Technology Corporation and Acquvest, Inc., Paul R. Koch, Victoria
             Koch, and Patricia Manolis.

10.37(3)     Confidential Information and Invention Assignment Agreement entered
             into by and between Composite Technology Corporation and Dominic
             J.G.G. Majendie.

10.38(17)    Second Amendement to securities Purchase Agreement dated October 7,
             2005.

10.39(18)    Agreement between City of Kingman, Kansas and Composite Technology,
             dated as of september 23, 2005.

10.40(19)    Amendement to Securities Purchase Agreement, dated October 3, 2005.

10.41(19)    Form of Senior Convertible Note.

10.42(20)    Agreement between Composite Wind Systems and EU Energy,  dated as
             of December 15, 2005

10.43(21)    Public and Media Relations Strategy and Services Consulting
             Agreement

10.44(4)     Letter Agreement with Michael D. McIntosh

10.45(4)     Letter Agreement with D. Dean McCormick III

10.46(4)     Confidential Information and Invention Assignment Agreement with
             Benton H Wilcoxon

10.47(4)     Confidential Information and Invention Assignment Agreement with
             Michael D. McIntosh

10.48(4)     Confidential Information and Invention Assignment Agreement with D.
             Dean McCormick III

10.49(4)     Option Agreement with Michael D. McIntosh

10.50(4)     Option Agreement with D. Dean McCormick III

10.51(4)     Modified Bylaws of Composite Technology Corporation

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10.52(4)     Legal Services Agreement with The McIntosh Group

10.53(4)     Consulting Agreement with Technology Management Advisors, LLC

14           Code of Ethics.

21(7)        Subsidiaries of the Registrant.

23.1         Consent of Independent Registered Public Accounting Firm.

31.1         Rule 13a-14(a) / 15d-14(a)(4) Certification

32.1         Section 1350 Certification

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

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

(3)   Incorporated 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 January 11, 2002.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(20)  Incorporated by reference to Form 8-K filed with the U.S. Securities and
      Exchange Commission on December 21, 2005.

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

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                                    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

February 3, 2006

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