**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**FORM
      10-Q**





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





**FOR
      THE QUARTERLY PERIOD ENDED JUNE 30, 2007**





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





*COMMISSION
      FILE NUMBER 0-10999*





**COMPOSITE
      TECHNOLOGY CORPORATION**


(Exact
      Name of Registrant as Specified in Its Charter)


NEVADA
              
              59-2025386(State
                  or Other Jurisdiction of
                Incorporation
                  or Organization)
              
              (I.R.S.
                  Employer Identification No.)2026
                  McGaw Avenue, Irvine,
                  California
              
              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 o





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




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


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





APPLICABLE
      ONLY TO ISSUERS INVOLVED IN BANKRUPTCY


PROCEEDING
      DURING THE PRECEDING FIVE YEARS:





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





APPLICABLE
      ONLY TO CORPORATE ISSUERS:





Indicate
      the number of shares outstanding of each of the issuer's classes of common
      stock
      as of: August 6, 2007


CLASS
              
              NUMBER
                  OF SHARES OUTSTANDINGCommon
                  Stock, parvalue$0.001
                  per share
              
              215,390,723
                  shares















**COMPOSITE
      TECHNOLOGY CORPORATION**


Form
      10-Q
      for the Quarter ended June 30, 2007


Table
      of
      Contents




**Page**PART
                  I - FINANCIAL INFORMATIONItem
                  1 Financial Statements
              
              3Item
                  2 Management's Discussion and Analysis of Financial Condition and
                  Results
                  of Operations
              
              27Item
                  3 Quantitative and Qualitative Disclosures About Market
                  Risk
              
              38Item
                  4 Controls and Procedures
              
              38PART
                  II - OTHER INFORMATIONItem
                  1 Legal Proceedings
              
              41Item
                  1A Risk Factors
              
              44Item
                  2 Unregistered Sales of Equity Securities and the Use of
                  Proceeds
              
              48Item
                  3 Defaults Upon Senior Securities
              
              48Item
                  4 Submission of Matters to a Vote of Security Holders
              
              48Item
                  5 Other Information
              
              48Item
                  6 Exhibits
              
              49SIGNATURE
              
              51




2


**ITEM
      1**





**PART
      1 - FINANCIAL STATEMENTS**


**COMPOSITE
      TECHNOLOGY CORPORATION**


**AND
      SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**




**June
                  30, 2007**
              ****
              **September
                  30, 2006**
              ********
              ****
              **Unaudited**
              ****ASSETSCURRENT
                  ASSETSCash
                  and Cash Equivalents
              
              $
              26,207,657
              
              $
              2,578,347Accounts
                  Receivable, net
              
              
              11,730,610
              
              
              9,473,863Inventory,
                  net
              
              
              24,588,029
              
              
              23,891,867Prepaid
                  expenses and other current assets
              
              
              2,343,368
              
              
              3,433,936Total
                  current assets
              
              
              64,869,664
              
              
              39,378,013Investment
                  in unconsolidated subsidiary
              
              
              2,188,851
              
              
              --Long
                  Term Trade Receivables
              
              
              --
              
              
              2,028,927Property
                  and Equipment, net
              
              
              7,782,244
              
              
              4,714,084Goodwill
                  and Intangible Assets
              
              
              49,469,496
              
              
              49,616,000Other
                  Assets
              
              
              389,514
              
              
              515,800TOTAL
                  ASSETS
              
              $
              124,699,769
              
              $
              96,252,824LIABILITIES
                  AND SHAREHOLDERS’ EQUITYCURRENT
                  LIABILITIESAccounts
                  Payable and Other Accrued Liabilities
              
              $
              15,309,237
              
              $
              12,965,468Deferred
                  Revenues and Customer Advances
              
              
              22,317,618
              
              
              17,808,209Warranty
                  Provision
              
              
              10,410,376
              
              
              11,594,876Convertible
                  Notes and Capital Leases, current
              
              
              4,890,407
              
              
              6,309,900Total
                  Current Liabilities
              
              
              52,927,638
              
              
              48,678,453LONG
                  TERM LIABILITIESLong
                  Term Portion of Warranty Provision
              
              
              3,857,369
              
              
              3,059,328Long-Term
                  Portion of Deferred Revenues
              
              
              960,593
              
              
              2,304,492Convertible
                  Notes
              
              
              16,532,984
              
              
              111,038Total
                  Long-Term Liabilities
              
              
              21,350,946
              
              
              5,474,858Total
                  Liabilities
              
              $
              74,278,584
              
              $
              54,153,311COMMITMENTS
                  AND CONTINGENCIESSHAREHOLDERS’
                  EQUITYCommon
                  Stock, $.001 par value 300,000,000 shares authorized 205,453,677
                  and
                  178,635,325 issued and outstanding
              
              
              205,454
              
              
              178,635Additional
                  Paid-in Capital
              
              
              171,835,669
              
              
              137,461,330Subscription
                  Receivable
              
              
              (378,000
              )
              
              (378,000
              )Accumulated
                  Deficit
              
              
              (121,272,085
              )
              
              (95,125,955
              )Accumulated
                  Other Comprehensive Income (Loss)
              
              
              30,147
              
              
              (36,497
              )Total
                  Shareholders’ Equity
              
              
              50,421,185
              
              
              42,099,513TOTAL
                  LIABILITIES AND SHAREHOLDERS’ EQUITY
              
              $
              124,699,769
              
              $
              96,252,824




The
      accompanying notes are an integral part of these financial statements




3





**COMPOSITE
      TECHNOLOGY CORPORATION**


**AND
      SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**FOR
      THE THREE MONTHS ENDED JUNE 30, 2007 AND 2006**


**(UNAUDITED)**


**AND
      FOR THE NINE MONTHS ENDED JUNE 30, 2007 AND 2006**


**(UNAUDITED)**




**Three
                  Months ended June 30, 2007**
              ****
              **Three
                  Months ended June 30, 2006**
              ****
              **Nine
                  Months ended June 30, 2007**
              ****
              **Nine
                  Months ended June 30, 2006**Revenue:Product
                  Sales
              
              $
              11,700,886
              
              $
              1,785,420
              
              $
              28,162,124
              
              $
              2,838,839Service
                  Revenue
              
              
              1,201,315
              
              
              --
              
              
              6,181,238
              
              
              --Consulting
                  Revenue
              
              
              --
              
              
              --
              
              
              --
              
              
              550,000Total
                  Revenue
              
              $
              12,902,201
              
              $
              1,785,420
              
              $
              34,343,362
              
              $
              3,388,839Cost
                  of Product Sold
              
              
              9,081,994
              
              
              1,252,203
              
              
              25,008,126
              
              
              2,245,994Cost
                  of Service Revenue
              
              
              3,275,297
              
              
              --
              
              
              7,750,323
              
              
              --Cost
                  of Consulting Revenue
              
              
              --
              
              
              --
              
              
              --
              
              
              304,787Gross
                  margin
              
              $
              544,910
              
              $
              533,217
              
              $
              1,584,913
              
              $
              838,058OPERATING
                  EXPENSESOfficer
                  compensation
              
              
              378,071
              
              
              149,034
              
              
              875,767
              
              
              363,528General
                  and administrative
              
              
              2,614,287
              
              
              1,238,751
              
              
              8,728,696
              
              
              4,707,684Research
                  and development
              
              
              1,379,476
              
              
              734,466
              
              
              4,156,498
              
              
              3,207,308Sales
                  and Marketing
              
              
              2,249,180
              
              
              406,334
              
              
              6,433,570
              
              
              1,304,312Depreciation
                  & Amortization
              
              
              700,410
              
              
              200,624
              
              
              2,132,583
              
              
              592,677Reorganization
                  Expense - Bankruptcy legal fees
              
              
              --
              
              
              61,911
              
              
              --
              
              
              635,140Total
                  operating expenses
              
              $
              7,321,424
              
              $
              2,791,120
              
              $
              22,327,114
              
              $
              10,810,649LOSS
                  FROM OPERATIONS
              
              $
              (6,776,514
              )
              $
              (2,257,903
              )
              $
              (20,742,201
              )
              $
              (9,972,591
              )OTHER
                  INCOME /(EXPENSE)Interest
                  expense
              
              
              (1,457,266
              )
              
              (1,249,676
              )
              
              (3,471,337
              )
              
              (1,947,448
              )Interest
                  income
              
              
              42,416
              
              
              106
              
              
              102,708
              
              
              15,817Other
                  income (expense)
              
              
              60,486
              
              
              3,529
              
              
              269,895
              
              
              10,586Expense
                  related to modification of warrants
              
              
              (88,121
              )
              
              --
              
              
              (373,709
              )
              
              (388,962
              )Expense
                  related to inducement of convertible debt
              
              
              --
              
              
              --
              
              
              --
              
              
              (2,250,005
              )Litigation
                  settlement expense
              
              
              (290,720
              )
              
              (702,000
              )
              
              (2,193,687
              )
              
              (802,000
              )Gain
                  (Loss) in Unconsolidated subsidiary
              
              
              294,439
              
              
              --
              
              
              212,239
              
              
              --Reorganization
                  item - adjustment to carrying value - Convertible Debt
              
              
              --
              
              
              --
              
              
              --
              
              
              (2,622,240
              )Total
                  other income/(expense)
              
              $
              (1,438,766
              )
              $
              (1,948,041
              )
              $
              (5,453,891
              )
              $
              (7,984,252
              )Loss
                  before Income Taxes
              
              $
              (8,215,280
              )
              $
              (4,205,944
              )
              $
              (26,196,092
              )
              $
              (17,956,843
              )Income
                  Taxes
              
              $
              (91,681
              )
              $
              --
              
              $
              (39,248
              )
              $
              2,656NET
                  LOSS before Minority Interest
              
              
              (8,123,599
              )
              
              (4,205,944
              )
              
              (26,156,844
              )
              
              (17,959,499
              )Minority
                  Interest in Consolidated Entity
              
              
              --
              
              
              --
              
              
              10,718
              
              
              --NET
                  LOSS
              
              
              (8,123,599
              )
              
              (4,205,944
              )
              
              (26,146,126
              )
              
              (17,959,499
              )OTHER
                  COMPREHENSIVE GAIN/(LOSS)Foreign
                  Currency Translation Adjustment net of tax of $0 , $0, $0, and
                  $0
              
              
              59,223
              
              
              --
              
              
              66,644
              
              
              --COMPREHENSIVE
                  GAIN/(LOSS)
              
              
              (8,064,376
              )
              
              (4,205,944
              )
              
              (26,079,482
              )
              
              (17,959,499
              )BASIC
                  AND DILUTED LOSS PER SHARE
              
              $
              (0.04
              )
              
              (0.03
              )
              
              (0.14
              )
              
              (0.14
              )TOTAL
                  BASIC AND DILUTED LOSS PER SHARE AVAILABLE TO COMMON
                  SHAREHOLDERS
              
              $
              (0.04
              )
              
              (0.03
              )
              
              (0.14
              )
              
              (0.14
              )WEIGHTED-AVERAGE
                  COMMON SHARES OUTSTANDING
              
              
              **185,004,408**
              
              
              **135,918,498**
              
              
              **180,884,695**
              
              
              **131,272,920**




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




4





**COMPOSITE
      TECHNOLOGY CORPORATION**


**AND
      SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**FOR
      THE NINE MONTHS ENDED JUNE 30, 2007 AND 2006**




**For
                  the Nine months ending June 30, 2007**
              ****
              **For
                  the Nine months ending June 30, 2006**
              ********
              ****
              **(unaudited)**
              ****
              **(unaudited)**CASH
                  FLOWS FROM OPERATING ACTIVITIESNet
                  loss
              
              $
              (26,146,126
              )
              $
              (17,959,499
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
                  & Amortization
              
              
              2,132,583
              
              
              592,677Amortization
                  of prepaid expenses paid in stock
              
              
              646,845
              
              
              275,738Interest
                  related to detachable warrants and fixed conversion
                  features
              
              
              2,101,979
              
              
              1,310,930Inventory
                  reserve expense
              
              
              --
              
              
              725,616Expense
                  related to fair value of vested options
              
              
              1,386,418
              
              
              627,375Issuance
                  of common stock for services
              
              
              248,500
              
              
              926,103Issuance
                  of common stock for settlement
              
              
              165,720
              
              
              702,000Issuance
                  of common stock for inducement of debt conversion
              
              
              --
              
              
              2,250,005Issuance
                  of warrants for services
              
              
              164,208
              
              
              410,386Compensation
                  expense related to modification of stock warrants
              
              
              373,709
              
              
              388,691Reorganization
                  item - adjustment to carrying value of convertible debt
              
              
              --
              
              
              2,622,240(Gain)
                  Loss in unconsolidated subsidiary
              
              
              (212,239
              )
              
              --Other
              
              
              --
              
              
              (31,062
              )(Increase)
                  Decrease in Assets:Accounts
                  Receivable
              
              
              (2,610,612
              )
              
              22,463Inventory
              
              
              (4,629,540
              )
              
              (1,678,852
              )Prepaid
                  expenses
              
              
              550,799
              
              
              (333,892
              )Capitalized
                  construction costs
              
              
              --
              
              
              304,787Other
                  assets
              
              
              723,741
              
              
              (72,269
              )Increase
                  (Decrease) in LiabilitiesAccounts
                  Payable and Accrued expenses
              
              
              6,362,394
              
              
              (653,891
              )Accrued
                  Warranty Liability
              
              
              (386,459
              )
              
              --Deferred
                  revenue
              
              
              3,337,227
              
              
              (387,213
              )Net
                  cash used in operating activities
              
              $
              (15,790,853
              )
              $
              (10,061,767
              )CASH
                  FLOW FROM INVESTING ACTIVITIESPurchase
                  of property and equipment
              
              
              (5,042,762
              )
              
              (371,102
              )Cash
                  investment in unconsolidated subsidiary
              
              
              (401,921
              )
              
              --Net
                  cash provided by (used in) investing activities
              
              $
              (5,444,683
              )
              $
              (371,102
              )CASH
                  FLOW FROM FINANCING ACTIVITIESProceeds
                  from issuance of convertible debentures
              
              
              21,455,500
              
              
              9,500,000Proceeds
                  from issuance of common stock
              
              
              23,455,745
              
              
              --Proceeds
                  from exercise of warrants
              
              
              115,000
              
              
              656,908Proceeds
                  from Factoring Arrangements
              
              
              1,800,000
              
              
              --Proceeds
                  from Notes Payable
              
              
              500,000
              
              
              --Proceeds
                  from exercise of options
              
              
              89,600
              
              
              30,263Payments
                  on capital lease assets
              
              
              (250,999
              )
              
              (300,922
              )Repayments
                  of Notes Payable and Factoring Arrangements
              
              
              (2,300,000
              )
              
              --Net
                  cash provided by financing activities
              
              $
              44,864,846
              
              $
              9,866,249Net
                  increase/(decrease) in cash and cash equivalents
              
              
              23,629,310
              
              
              (546,620
              )CASH
                  AND CASH EQUIVALENTS, BEGINNING OF PERIOD
              
              
              2,578,347
              
              
              807,815CASH
                  AND CASH EQUIVALENTS, END OF PERIOD
              
              $
              26,207,657
              
              $
              261,195SUPPLEMENTAL
                  DISCLOSURES OF CASH FLOW INFORMATIONCASH
                  PAID FOR BANKRUPTCY ITEMS
              
              $
              316,592
              
              $
              899,871INTEREST
                  PAID
              
              $
              714,348
              
              $
              486,979INCOME
                  TAX PAID
              
              $
              1,600
              
              $
              2,656




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




5




**Supplemental
      Schedule for Non Cash Financing Activities**


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


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


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


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


10,973,585
      warrants valued at the fair value of $5,169,656 at the issuance date as
      described in Note 8 were issued as part of the February, 2007 Senior Convertible
      Note transaction. We incorporated the fair value of these warrants into our
      beneficial conversion calculation for the debt discount described in Note
      4.


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


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


629,128
      warrants valued at the fair value of $194,573 at the issuance date as described
      in Note 8 were issued pursuant to anti-dilution protection provisions of our
      2005 DIP financing as the result of our February, 2007 Convertible Debt
      offering.


152,341
      warrants valued at the fair value of $61,868 at the issuance date as described
      in Note 8 were issued pursuant to anti-dilution protection provisions of our
      2006 Bridge Notes financing as the result of anti-dilution of our February,
      2007
      Convertible Debt offering.


300,000
      warrants valued at the fair value of $165,720 were issued in settlement of
      a
      legal dispute. The expense was recorded to other expense during the three and
      nine months ended June 30, 2007.


6,301,219
      warrants valued at the fair value of $4,062,565 at the issuance date as
      described in Note 8 were issued in conjunction with the two PIPE equity
      placements.


1,511,358
      warrants valued at the fair value of $974,524 at the issuance date as described
      in Note 8 were issued for services related to the two PIPE equity
      placements.


288,462
      shares of common stock were issued for the conversion of $300,000 of our
      February, 2007 Convertible debt at the conversion price of $1.04 per
      share.


691,816
      shares of common stock were issued for the conversion of $1,010,050 of our
      August, 2004 Convertible debt at the conversion price of $1.46 per
      share.


87,374
      warrants valued at the fair value of $76,243 at the issuance date as described
      in Note 8 were issued for the anti-dilution impact of the 2006 Series A and
      the
      2005 DIP warrants as a result of our June, 2007 PIPE equity
      issuances.





The
      Company had the following balances consolidated with the September 30, 2006
      balance sheet figures related to the assets and liabilities of the Service
      business that was subsequently deconsolidated, as discussed in note 9. The
      cash
      balance at September 30, 2006 is included in the statement of cash flows as
      a
      cash investment in unconsolidated subsidiary for the nine months ending June
      30,
      2007:




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




6





**COMPOSITE
      TECHNOLOGY CORPORATION**


**AND
      SUBSIDIARIES**


**NOTES
      TO FINANCIAL STATEMENTS**





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





*Company*




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




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





*Accounting*




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





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





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





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





7





*Estimates*




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




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





Except
      as
      noted in this document, the methodology and assumptions used for the estimates
      pertaining to the activity during the quarter ended and nine months ended June
      30, 2007 is consistent with the estimates included in our Form 10-K for the year
      ended September 30, 2006 and filed on December 26, 2006.





*Reclassifications*




Certain
      balances were reclassified to conform with current period
      presentation.





*Recent
      Pronouncements*




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




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




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


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





8


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


In
      November, 2006 the Emerging Issues Task Force (EITF) approved EITF Issue No.
      06-7. EITF 06-7 provides clarification and guidance for bifurcated conversion
      options in convertible debt instruments where the bifurcation criteria of SFAS
      133 are no longer met. EITF 06-7 is effective for changes to such criteria
      after
      November 29, 2006. We will use the guidance provided in EITF 06-7 on a
      prospective basis. The adoption of EITF 06-7 had no impact to our financial
      statements for the period ending June 30, 2007.





**EITF
      Issue No. 07-3** *,* " *Accounting
      for Advance Payments for Goods or Services to Be Used in Future Research and
      Development Activities* ."


In
      June
      2007, the EITF ratified EITF Issue No. 07-3 *,* " *Accounting
      for Advance Payments for Goods or Services to Be Used in Future Research and
      Development Activities* ."
       EITF 07-3 provides that nonrefundable advance payments made for goods or
      services to be used in future research and development activities should be
      deferred and capitalized until such time as the related goods or services are
      delivered or are performed, at which point the amounts would be recognized
      as an
      expense. This issue is effective for fiscal years beginning after December
      15,
      2007.  We are currently evaluating the potential impact these standards may
      have on our financial position and results of operations, but do not believe
      the
      impact will be material.





**FASB
      Interpretation No. 48** , *“Accounting
      for Uncertainty in Income Taxes.”*


In
      June
      2006, the FASB issued FASB Interpretation No. 48  (“FIN 48”), *“Accounting
      for Uncertainty in Income Taxes.”* This interpretation clarifies the accounting for uncertainty in income taxes
      recognized in an enterprise’s financial statements in accordance with SFAS No.
      109, *“Accounting
      for Income Taxes.”* This
      interpretation prescribes a recognition threshold and measurement attribute
      for
      the financial statement recognition and measurement of a tax position taken
      or
      expected to be taken in a tax return. FIN 48 will become effective for the
      Company in fiscal year 2008. Management of the Company does not expect the
      impact of this pronouncement to be material on the Company’s consolidated
      results of operations and financial condition.




**NOTE
      2 BANKRUPTCY**





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





As
      discussed in Note 3, for financial reporting purposes, the consolidated
      financial statements have been prepared on a going concern basis.





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





**NOTE
      3 - GOING CONCERN**





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





During
      the year ended September 30, 2006, the Company incurred a net loss of
      $(28,523,192) and negative cash flows from operations of $(6,263,703). In
      addition, the Company had an accumulated deficit of $(95,125,955) at September
      30, 2006. For the nine month period June 30, 2007, the Company incurred a net
      loss of $(26,146,126) and had an accumulated deficit of $(121,272,085). The
      Company's ability to continue as a going concern is dependent upon its ability
      to generate profitable operations in the future and/or to obtain the necessary
      financing to meet its obligations and repay its liabilities arising from normal
      business operations when they come due. The outcome of these matters cannot
      be
      predicted with any certainty at this time.




9




Commercial
      orders - cable: In January, 2007 we announced a minimum stocking order from
      Jiang-su Far East in China for 600 kilometers of cable valued between $7 million
      and $12 million per calendar quarter for twelve months at the minimum order
      levels. At the minimum order quantities anticipated from China under the
      stocking order, we anticipate that our sales under this contract alone at the
      minimum order levels will generate positive cash flows. We further expect that
      our ACCC products will continue to gain acceptance in the marketplace resulting
      in additional sales orders and positive cash flows from operations. Through
      August 9, 2007 we have firm orders representing revenues of approximately $11.2
      million which are expected to be recognized within the next two fiscal
      quarters.





Commercial
      orders - wind turbines: Through August 9, 2007, we have received firm orders
      totaling approximately $53 million for expected delivery of wind turbines in
      late fiscal 2007 or fiscal 2008. Due to the capital required to produce our
      wind
      turbines related to required advance payments on turbine parts, we have
      attempted to provide for cash advances from our customers in our turbine supply
      agreements upon reaching certain milestones prior to delivery of the turbines
      to
      the customer. We may, however, require additional investment capital or use
      cash
      provided by our other business segments to source our turbine parts and produce
      the turbines.





Due
      to
      the increased demand for working capital in our turbine division, we believe
      our
      cash position as of June 30, 2007 of $26.2 million and expected cash flows
      from
      revenue orders are sufficient to fund operations for the next four calendar
      quarters. The nature of our wind turbine business is capital intensive,
      especially to fund future wind orders. The Company may issue stock,
      debt or other financial instruments for cash or for payment of services until
      our cash flows from the sales of our primary products is sufficient to sustain
      our operations or if we believe such a financing event would be a sound business
      strategy.





**NOTE
      4 - BALANCE SHEET DETAILS**





*Accounts
      Receivable*




Accounts
      Receivable consisted of the following at June 30, 2007:


**June
                  30, 2007**
              ****
              **September
                  30, 2006**Turbine
                  products and service receivables
              
              $
              10,387,832
              
              $
              11,320,185Cable
                  products receivables
              
              
              4,386,778
              
              
              2,682,605Reserves
              
              
              (3,044,000
              )
              
              (2,500,000
              )Net
                  Receivables
              
              $
              11,730,610
              
              $
              11,502,790





*Inventories*




Inventories
      consisted of the following at June
      30,
      2007:




**June
                30, 2007**
            ****
            **September
                30, 2006**Raw
                Materials and Turbine Parts
            
            $
            13,731,670
            
            $
            15,614,107Work-in-Progress
            
            
            7,098,155
            
            
            6,714,281ACCC
                Finished Core, Cable, & Related Hardware
            
            
            4,014,836
            
            
            1,821,857Gross
                Inventory
            
            
            24,844,661
            
            
            24,150,245Reserves
            
            
            (256,632
            )
            
            (258,378
            )Net
                Inventory
            
            $
            24,588,029
            
            $
            23,891,867




10




*Deferred
      Revenues and Customer Deposits*




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




The
      following table sets forth an analysis of deferred revenues and customer
      deposits as of June
      30,
      2007 :




**June
                  30, 2007**
              ****
              **September
                  30, 2006**Customer
                  advances on turbines and turbine parts sales
              
              $
              12,686,005
              
              $
              10,807,423Deferred
                  revenues - Other Turbine related
              
              
              7,948,714
              
              
              8,969,852Deferred
                  revenues - Cable Sales
              
              
              2,643,492
              
              
              335,426Total,
                  Deferred revenues & customer advances
              
              $
              23,278,211
              
              $
              20,112,701Balance
                  included in current liabilities
              
              
              (22,317,618
              )
              
              (17,808,209
              )Long
                  Term Deferred Revenues
              
              $
              960,593
              
              $
              2,304,492




*Warranty
      Reserve*




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




**June
                  30, 2007**
              ****
              **September
                  30, 2006**Warranty
              
              $
              5,186,126
              
              $
              5,568,973Retrofit
              
              
              4,443,871
              
              
              4,739,594Availability
              
              
              4,637,748
              
              
              4,345,637Total
              
              $
              14,267,745
              
              $
              14,654,204Balance
                  included in current liabilities
              
              
              (10,410,376
              )
              
              (11,594,876
              )Long
                  Term
              
              $
              3,857,369
              
              $
              3,059,328




The
      following table sets forth an analysis of warranty reserve activity for the
      nine
      months ended June 30, 2007 and the fiscal year ended September 30,
      2006:




**June
                  30, 2007**
              ****
              **September
                  30, 2006**Beginning
                  balance
              
              $
              14,654,204
              
              $
              15,773,362Additional
                  reserves recorded to expense
              
              
              4,040,441
              
              
              440,226Reserves
                  utilized
              
              
              (4,426,900
              )
              
              (1,559,384
              )Ending
                  balance
              
              $
              14,267,745
              
              $
              14,654,204





*Convertible
      Debt, Notes Payable, and Capital Leases*




The
      following table sets forth an analysis of the company’s debt structure as of June
      30,
      2007 :




**June
                  30, 2007**
              ****
              **September
                  30, 2006**Convertible
                  Debentures due August, 2007 net of discount of $268,857 and
                  $0
              
              $
              4,744,343
              
              $
              6,023,250Senior
                  Convertible Debentures due January, 2010 net discount of $5,992,641
                  and
                  $0
              
              
              16,532,359
              
              
              --Capital
                  Leases
              
              
              146,689
              
              
              397,688Total
                  Debt
              
              
              21,423,391
              
              
              6,420,938Balance
                  included in current liabilities
              
              
              (4,890,407
              )
              
              (6,309,900
              )Long
                  Term Debt
              
              $
              16,532,984
              
              $
              111,038




11




The
      following table reconciles the discount recorded for the two convertible note
      series




**August,
                2004**
            ****
            **February,
                2007**Balance
                at September 30, 2006
            
            $
            --
            
            $
            --Discount
                recorded at issuance
            
            
            --
            
            
            6,708,401Intrinsic
                value of additional shares issuable upon debt conversion
            
            
            381,704
            
            
            243,922Fair
                value of warrants due to warrant price reset
            
            
            127,138
            
            
            52,600Amortization
                of discount to interest expense
            
            
            (239,985
            )
            
            (1,012,282
            )Discount
                balance at June 30, 2007
            
            $
            268,857
            
            $
            5,992,641





In
      February, 2007 we sold $22,825,000 of Senior Convertible Notes to a group of
      private investors and valued the discount at issuance at $6,708,401 described
      in
      greater detail in our Form 10-Q filed May 9, 2007. The notes were originally
      convertible into common stock of the Company at a price of $1.04 and bear
      interest at the rate of 8% per year. In June, 2007, as a result of the Private
      Equity placements described in Note 8 we triggered anti-dilution provisions
      on
      the conversion feature from $1.04 to $1.03 and reset the price of the 10,973,585
      detachable warrants issued with the convertible notes frrom $1.13 to $1.11.
      We
      recorded additional debt discount for the intrinsic value of the additional
      shares issuable upon conversion, valued on the date of the anti-dilution event
      and for the difference in the fair value of the warrants as described in Note
      8.




During
      the quarter ended June 30, 2007 $300,000 of principal of the February, 2007
      Senior Convertible Notes were converted at $1.04 per share into 288,462 shares
      of common stock.




As
      a
      result of our February, 2007 and June, 2007 financings we triggered the
      anti-dilution provisions for the August, 2004 Notes. We reduced the conversion
      price of our August, 2004 convertible debt from $1.55 at September 30, 2006
      to
      $1.40 at June 30, 2007. We also reduced the warrant exercise price for the
      4,307,725 related Debenture warrants from $1.55 to $1.40 per warrant. We
      recorded the intrinsic value of the additional shares issuable as additional
      discount valued at the market price of the shares on the date of the price
      reset
      and we valued the difference in fair value of the warrants as described in
      Note
      8.




The
      note
      discount recorded will be amortized to interest expense over the expected life
      of the Notes, currently 2.7 years for the February, 2007 Notes and 1.5 months
      for the August, 2004 Notes. During the three and nine months ended June 30,
      2007
      the company recognized $879,571 and $1,252,267 in amortization expense against
      the combined debt discounts.




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




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




**Wind******
              
              **Segment**Balance
                  as of September 30, 2006
              
              $
              25,469,000Adjustment
                  to DeWind pre-acquisition inventory
              
              
              831,496Balance
                  as of June 30, 2007
              
              $
              26,300,496




We
      recorded an adjustment of $831,496 to goodwill to reflect a decrease in the
      recoverable value of the turbine inventory acquired during the EU acquisition
      dated July 3, 2006 by $642,496 and to increase the estimate of the turbine
      retrofit accrual by $189,000 at the July 3, 2006 acquisition date. As of
      September 30, 2006 we had made estimates of the liquidation value of the the
      remaining turbine inventory and during the 9 months ending June 30, 2007,
      certain turbines required additional costs to refurbish and we revalued the
      estimated recovery value of the remaining turbines. All remaining turbines
      are
      expected to be shipped by the end of our fiscal year ending September 30, 2007.
      The change in the retrofit accrual represents an increase in the estimated
      replacement of certain components that are projected to be replaced for certain
      of our D6 turbine models installed prior to the acquisition date, for which
      costs were undeterminable at the acquisition date. We do not expect to record
      any further adjustments to our goodwill balances related to the acquistion
      of EU
      Energy on July 3, 2006.




12




There
      were no additions to our acquisition-related intangible assets during the 9
      month period ending June 30, 2007. Information regarding our other
      acquisition-related intangible assets is as follows:




**Gross
                  Carrying Amount**
              
              **Accumulated
                  Amortization**
              
              **Net
                  Carrying Amount******
              
              **September
                  30,**
              
              **Sept 30,**
              
              ****
              
              **June
                  30,**
              
              **June
                  30,******
              
              **2006**
              
              **2006**
              
              **Amortized**
              
              **2007**
              
              **2007**Supply
                  Agreements
              
              $
              12,347,000
              
              $
              --
              
              $
              --
              
              $
              --
              
              $
              12,347,000Tech
                  Transfer Agreements
              
              
              3,131,000
              
              
              --
              
              
              --
              
              
              --
              
              
              3,131,000Tradename
              
              
              7,553,000
              
              
              (94,400
              )
              
              (283,200
              )
              
              (377,600
              )
              
              7,175,400Service
                  Contracts
              
              
              1,442,000
              
              
              (231,600
              )
              
              (694,800
              )
              
              (926,400
              )
              
              515,600$
              24,473,000
              
              $
              (326,000
              )
              $
              (978,000
              )
              $
              (1,304,000
              )
              $
              23,169,000







Amortization
      expense of other acquisition-related intangible assets was $978,000 and $0
      for
      the nine months ended
      June 30, 2007 and 2006, respectively. Our acquisition-related intangible assets
      are amortized on a per turbine unit shipped basis for the Supply and Technology
      Transfer Agreements, over the life of the underlying service contracts expiring
      through 2009, and on a 20 year straight line basis for the
      tradename.




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




Remainder
                  of 2007
              
              $
              326,0002008
              
              
              3,872,0002009
              
              
              4,379,0002010
              
              
              4,546,0002011
              
              
              3,595,000Thereafter
              
              
              6,451,000$
              23,169,000





**NOTE 6
      -** **OPERATING
      SEGMENTS**




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




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




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




CTC
      Cable Division


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




13




DeWind
      Turbine Division


The
      Wind
      division operates under the brand name DeWind. Located in Lubeck Germany with
      sales operations in Dallas, Texas, the DeWind Division produces, services,
      and
      sells DeWind turbines in the 1.25 and 2.0 Megawatt range. Prior to the
      acquisition of EU Energy on July 3, 2006, the DeWind Division had been inactive
      with no fiscal 2005 operating activity. For the quarter ending December 31,
      2006, the DeWind segment consolidated the operations of the E Services VIE.
      For
      the quarter ending June 30, 2007 DeWind did not consolidate the operations
      of
      the E Services VIE as described in Note 9. Revenues and Operating Income for
      the
      E Services VIE for the quarter ending December 31, 2006 were $3,890,000 and
      $51,000 respectively.





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




**Three
                Months Ending June 30**
            
            **Nine
                months Ending June 30****2007**
            
            **2006**
            
            **2007**
            
            **2006**Cable
                SegmentRevenues
            
            $
            7,396,781
            
            $
            1,785,420
            
            $
            11,743,783
            
            $
            3,388,839Interdivision
                Revenues
            
            
            --
            
            
            --
            
            
            --
            
            
            --Operating
                Income (Loss)
            
            
            210,836
            
            
            (1,142,635
            )
            $
            (1,829,680
            )
            $
            (5,270,151
            )DeWind
                SegmentRevenues
            
            $
            5,505,420
            
            $
            --
            
            $
            22,599,579
            
            $
            --Interdivision
                Revenues
            
            
            --
            
            
            --
            
            
            --
            
            
            --Operating
                Income (Loss)
            
            
            (5,219,550
            )
            
            --
            
            
            (13,530,136
            )
            
            --CorporateRevenues
            
            $
            --
            
            $
            --
            
            $
            --
            
            $
            --Interdivision
                Revenues
            
            
            --
            
            
            --
            
            
            --
            
            
            --Operating
                Income (Loss)
            
            
            (1,767,800
            )
            
            (1,115,268
            )
            
            (5,382,385
            )
            
            (4,702,440
            )TotalRevenues
            
            $
            12,902,200
            
            $
            1,785,420
            
            $
            34,343,362
            
            $
            3,388,839Interdivision
                Revenues
            
            
            --
            
            
            --
            
            
            --
            
            
            --Operating
                Income (Loss)
            
            
            (6,776,514
            )
            
            (2,257,903
            )
            
            (20,742,201
            )
            
            (9,972,591
            )





**NOTE
      7.  EQUITY BASED COMPENSATION**





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




14




The
      values of the derivative financial instruments are estimated using the
      Black-Scholes-Merton (Black-Scholes) option pricing model. Key assumptions
      used
      during the three months ended June 30, 2007 and 2006 to value options and
      warrants granted are as follows:


**Three
                  Months Ended June 30,****2007**
              
              **2006**Risk
                  Free Rate of Return
              
              
              4.97
              %
              
              4.28-4.36
              %Volatility
              
              
              98
              %
              
              107
              %Dividend
                  yield
              
              
              0
              %
              
              0
              %




Our
      computation of expected volatility for the quarter ended June 30, 2007 is based
      on historical and expected volatility over the expected life of the options
      granted. Our computation of expected life is based on historical exercise
      patterns. The interest rate for periods within the contractual life of the
      award
      is based on the U.S. Treasury yield curve in effect at the time of grant.




On
      March
      29, 2005, the Securities and Exchange Commission published Staff Accounting
      Bulletin No. 107 (SAB 107), which provides the Staff’s views on a variety of
      matters relating to stock-based payments. SAB 107 requires stock-based
      compensation to be classified in the same expense line items as cash
      compensation. Information about stock-based compensation included in the results
      of operations for the quarters and nine months ending June 30, 2007 and 2006
      is
      as follows:




**Three
                Months Ended June 30,**
            
            **Nine
                Months Ended June 30****2007**
            
            **2006**
            
            **2007**
            
            **2006**Cost
                of Product Sold
            
            $
            7,434
            
            $
            --
            
            $
            53,455
            
            $
            --Officer
                Compensation
            
            
            118,017
            
            
            87,373
            
            
            228,280
            
            
            161,068Selling
                and marketing
            
            
            223,052
            
            
            17,014
            
            
            421,878
            
            
            23,331Research
                and development
            
            
            18,935
            
            
            15,253
            
            
            109,231
            
            
            145,459General
                and administrative
            
            
            295,282
            
            
            371,949
            
            
            573,574
            
            
            991,611Totals
            
            $
            662,720
            
            $
            491,589
            
            $
            1,386,418
            
            $
            1,321,469





As
      of
      June 30, 2007, there was $7.7 million of total unrecognized compensation cost
      related to non-vested share-based compensation arrangements related to stock
      options consisting of $7.1 million related to employee grants and $0.6 million
      related to consultant and director grants. The costs are expected to be
      recognized over a weighted-average period of 2.4 years.





Our
      stock
      options vest on an annual or a quarterly basis. For the remainder of fiscal
      2007, we expect stock based compensation expense related to employee stock
      options of approximately $900,000 before income taxes. Such amounts may change
      as a result of additional grants, forfeitures, modifications in assumptions
      and
      other factors.





The
      following table summarizes the Stock Plan stock option activity as of June
      30,
      2007.





**Number**
              **of
                Options**
            ****
            **Average**
              **Exercise**
              **Price**Outstanding,
                September 30, 2006
            
            
            15,965,336
            
            $
            0.82Granted
            
            
            3,555,000
            
            $
            1.15Exercised
            
            
            (293,600
            )
            $
            0.31Cancelled
            
            
            (3,776,600
            )
            $
            1.04OUTSTANDING,
                June 30, 2007
            
            
            15,450,136
            
            $
            0.84EXERCISABLE,
                June 30, 2007
            
            
            6,644,485
            
            $
            0.59




15




The
      weighted-average remaining contractual life of the options outstanding at June
      30, 2007 was 4.2 years. The exercise prices of the options outstanding at June
      30, 2007 ranged from $0.25 to $1.42, and information relating to these options
      is as follows:





**Range
                of Exercise Prices**
            ****
            **Stock
                Options Outstanding**
            ****
            **Stock
                Options Exercisable**
            ****
            **Weighted
                Average Remaining Contractual Life in years**
            ****
            **Weighted
                Average Exercise Price of Options
                Outstanding**
            ****
            **Weighted
                Average Exercise Price of Options
                Exercisable**$0.25-0.49
            
            
            2,448,432
            
            
            2,398,432
            
            
            4.26
            
            $
            0.30
            
            $
            0.30$0.50-$0.99
            
            
            2,775,000
            
            
            2,520,833
            
            
            4.26
            
            $
            0.59
            
            $
            0.58$1.00-$1.49
            
            
            10,226,704
            
            
            1,725,220
            
            
            4.25
            
            $
            1.07
            
            $
            1.03Total
            
            
            15,450,136
            
            
            6,644,485




**NOTE
      8**-**EQUITY**




**COMMON
      STOCK**





During
      the nine months ended June 30, 2007, two employees and one consultant exercised
      293,600 options for gross proceeds of $89,600 and one warrant holder exercised
      115,000 warrants for gross proceeds of $115,000.





In
      June,
      2007 the Company closed two private equity placements. Both of these placements
      constituted a dilutive issuance as defined in certain of the Company’s past
      financing agreements. The issuances resulted in exercise price adjustments
      to
      certain of our previously issued warrant series as well as the conversion price
      of our convertible debt.





June
      Private Equity Placements





On
      June
      9, 2007, a total of 20,151,446 Units were sold to 17 institutional investors
      at
      a price of $0.99 per Unit for gross proceeds of $19,952,920. Each Unit consisted
      of one share of common stock and one-quarter of a warrant to purchase a
      share of common stock at an exercise price of $1.40 per warrant. A total of
      20,151,446 shares of Common Stock and 5,038,590 warrants valued at the fair
      value of $0.6448 per warrant or $3,248,424 were issued. Capstone Investments
      acted as the primary investment advisor for this transaction and received cash
      fees of $1,197,175 in cash and 1,209,086 warrants at an exercise price of $1.40
      per warrant valued at $0.6448 per warrant or $779,619. The cash and warrants
      issued to Capstone were recorded as offering costs.





On
      June
      19, 2007, a total of 5,050,505 Units were sold to 1 institutional investor
      at a
      price of $0.99 per Unit for gross proceeds of $5,000,000. Each Unit consisted
      of
      one share of common stock and one-quarter of a warrant to purchase a share
      of common stock at an exercise price of $1.40 per warrant. A total of 5,050,505
      shares of Common Stock and 1,262,626 warrants valued at the fair value of
      $0.6448 per warrant or $814,141 were issued. Capstone Investments acted as
      the
      primary investment advisor for this transaction and received cash fees of
      $300,000 in cash and 302,272 warrants at an exercise price of $1.40 per warrant
      or $194,905. The cash and warrants issued to Capstone were recorded as offering
      costs.





**WARRANTS**





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




16




The
      following table summarizes the Warrant activity for the nine months ending June
      30 ,
      2007:




**Number**
              **of
                Warrants**
            ****
            **Weighted-Average
                Exercise Price**Outstanding,
                September 30, 2006
            
            
            11,488,393
            
            $
            1.58Granted
            
            
            23,291,849
            
            $
            1.13Exercised
            
            
            (115,000
            )
            $
            1.00Cancelled
            
            
            --
            
            $
            --OUTSTANDING,
                June 30, 2007
            
            
            34,665,242
            
            $
            1.28EXERCISABLE,
                June 30, 2007
            
            
            34,665,242
            
            $
            1.28





During
      the nine months ended June 30, 2007 we issued the following warrants exercisable
      to purchase an equal number of shares of common stock of the
      Company:





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





In
      February, 2007, in conjunction with the issuance of our $22,825,000 convertible
      debt offering, we issued 10,973,585 warrants to purchase an equal number of
      shares of common stock at an exercise price of $1.13 per warrant. The fair
      value
      of the warrants of $0.4711 per warrant or $5,169,656 was incorporated into
      the
      beneficial conversion feature as debt discount against the convertible
      debentures as described in Note 4. We also issued 1,316,827 warrants with an
      exercise price of $1.04 per warrant to Capstone Investments as part of their
      placement fee which were valued at $0.4637 per warrant for $610,613. The fair
      value of both sets of warrants was incorporated into the debt discount to our
      convertible debentures as described in Note 4 and which will be amortized to
      interest expense over the life of the convertible debt. We valued the warrants
      using the Black Scholes option pricing model with a volatility of 90.5%, a
      risk
      free rate of 4.85%, a life of 3 years, a 0% dividend rate and a market price
      of
      $0.87 per share.





In
      June,
      2007 in conjunction with the issuance of $24,952,920 for our private equity
      units, we issued a total of 6,247,676 warrants on June 9, 2007 and 1,564,898
      on
      June 19, 2007. We valued the warrants using the Black Scholes option pricing
      model with a volatility of 90%, a risk free rate of 4.97%, a life of 3 years,
      a
      0% dividend rate and a market price of $1.16 at $0.6448 per warrant.





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





Volatility
      82.9% - 91.4%


Risk
      free
      rate 4.6%-4.85%


Life
      -
      remaining life of warrant series ranging between 1.2 and 2.8 years


Dividend
      rate of 0%


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




17




The
      following table describes the total $335,179 fair value impact of the February,
      2007 dilutive issuances on warrants subject to anti-dilution
      provisions:





**Warrants,
                after dilution**
            
            **Additional
                warrants issued**
            
            **Exercise
                price prior to dilution**
            
            **Exercise
                price after dilution**
            
            **Fair
                value of dilution impact**
            
            **Notes**August,
                2004 Debenture & Debenture Amend warrants
            
            
            4,307,275
            
            
            --
            
            $
            1.55
            
            $
            1.47
            
            $
            49,591
            
            
            (1
            )Other
                Expense:October,
                2005 DIP Series 1
            
            
            988,365
            
            
            310,946
            
            $
            1.22
            
            $
            1.22
            
            $
            99,092
            
            
            (2
            )October,
                2005 DIP Series 2
            
            
            995,601
            
            
            318,182
            
            $
            1.33
            
            $
            1.32
            
            $
            96,677
            
            
            (2
            )2006
                Series A2
            
            
            1,117,793
            
            
            152,341
            
            $
            1.55/$1.06
            
            $
            1.04
            
            $
            89,819
            
            
            (3
            )Subtotal,
                other expense impact at fair value
            
            
            
            
            
            
            $
            285,588Total
                impact at fair value
            
            
            
            
            
            
            $
            335,179





(1)
                The
                    $49,591 recorded related to these warrants was recorded as additional
                    debt
                    discount to the August, 2004 Debentures and will be amortized
                    ratably to
                    interest expense through August, 2007, the due date of the convertible
                    debentures.(2)
                The
                    combined $195,769 was recorded to other expense as a warrant
                    modification
                    during the quarter ended March 31, 2007 and the nine months ended
                    June 30,
                    2007.(3)
                We
                    issued additional 2006 Series A2 warrants and reset the price
                    of
                    previously existing Series A2 warrants. We recorded $89,819 to
                    other
                    expense as a warrant modification during the quarter ended March
                    31, 2007
                    and the nine months ended June 30,
                    2007.


In
      March,
      2007 we issued 1,800,000 warrants at $1.06 per warrant pursuant to a receivable
      factoring arrangement. We calculated the fair value of these warrants at $0.4688
      per warrant or $843,840 using the Black Scholes option pricing model with a
      market price of $0.97, a dividend yield of 0%, a risk free rate of 4.7% and
      a
      volatility of 91.4%. We recorded this value as debt discount which was fully
      amortized to interest expense during the three months ended March 31, 2007
      and
      the nine months ended June 30, 2007 since the debt was repaid in March, 2007.





In
      March,
      2007, we agreed to modify the 600,000 warrants issued in May, 2006 to Media
      Relations Services. In exchange for extending their services contract by one
      year to June 30, 2009 we extended the life of all 600,000 warrants issued by
      one
      year to December 31, 2009 and we reduced the exercise prices of the 200,000
      $2.00 warrants to $1.25 per warrant; the 200,000 $2.50 warrants to $1.50 per
      warrant, and the 200,000 $3.00 warrants to $1.75 per warrant. We calculated
      a
      fair value difference of $0.2317, $0.2420, and $0.2453 for the $1.25, $1.50,
      and
      $1.75 warrants respectively. The difference in fair value for the 600,000
      warrants in total was $143,805 and was recorded as additional prepaid expense
      which will be combined with the remaining unamortized and previously recorded
      prepaid warrant and stock expense balance and the revised total will be
      amortized ratably over the remaining revised contract life through December
      31,
      2009. The fair values were calculated using the Black Scholes option pricing
      model with a market price of $0.97 per share, a volatility of 90%, a risk free
      rate of 4.85%, and a dividend yield of 0%.





In
      May,
      2007 we settled a dispute with one holder of our Series A2 warrants. We issued
      300,000 additional Series A2 warrants at an exercise price of $1.04 per warrant
      and an expiration of March 1, 2009. We recorded an expense of $165,720, the
      fair
      value of the warrants on the issuance date. We valued the warrants using the
      Black-Scholes option pricing model with a volatility of 91%, a market price
      of
      $1.12 per share, a risk free rate of 4.85% and a 1.75 year life at $0.5524
      per
      warrant.




18




In
      June,
      2007 we had two private equity issuances that resulted in the issuance of
      warrants, as described above, and which resulted in the triggering of certain
      anti-dilution protection provisions of past warrant series.’ Our Black-Scholes
      calculations used the following assumptions for the June, 2007 anti-dilution
      re-pricings and fair value calculations:





Volatility
      82.9% - 98%


Risk
      free
      rate 4.6%-4.97%


Life
      -
      remaining life of warrant series ranging between 1.2 and 3.0 years


Dividend
      rate of 0%


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





The
      following table describes the $221,351 fair value impact resulting from our
      warrant anti-dilution provisions triggered by the two combined June, 2007
      dilutive issuances:





**Warrants,
                after dilution**
            
            **Additional
                warrants issued**
            
            **Exercise
                price prior to dilutive event**
            
            **Exercise
                price after dilutive event**
            
            **Fair
                value of dilution impact**
            
            **Notes**August,
                2004 Debenture & Debenture Amend warrants
            
            
            4,307,275
            
            
            --
            
            $
            1.47
            
            $
            1.40
            
            $
            77,547
            
            
            (4
            )February,
                2007 Convertible Debt warrants
            
            
            10,973,585
            
            
            --
            
            $
            1.13
            
            $
            1.11
            
            $
            52,600
            
            
            (5
            )February,
                2007 services warrants
            
            
            1,316,833
            
            
            --
            
            $
            1.04
            
            $
            1.03
            
            $
            3,083
            
            
            (6
            )Subtotal,
                Additional Debt Discount
            
            
            
            
            
            
            $
            133,230October,
                2005 DIP Series 1
            
            
            996,534
            
            
            8,168
            
            $
            1.22
            
            $
            1.21
            
            $
            6,397
            
            
            (7
            )October,
                2005 DIP Series 2
            
            
            1,003,201
            
            
            7,600
            
            $
            1.32
            
            $
            1.31
            
            $
            5,656
            
            
            (7
            )2006
                Series A2
            
            
            1,489,399
            
            
            71,606
            
            $
            1.04
            
            $
            0.99
            
            $
            64,280
            
            
            (8
            )June,
                2007 PIPE warrants series 1
            
            
            6,246,964
            
            
            --
            
            $
            1.40
            
            $
            1.39
            
            $
            11,789
            
            
            (9
            )Subtotal,
                Other expense
            
            
            
            
            
            
            $
            88,121Total
                dilutive impact at fair value
            
            
            
            
            
            
            $
            221,351







(4)
              The
                  August 2004 Debenture warrants and the Debenture Amendment had
                  their price
                  reset to $1.40 per warrant. The difference in fair value as a result
                  of
                  the exercise price change of $77,547 was recorded as additional
                  debt
                  discount and will be amortized to interest expense through August,
                  2007,
                  the due date of the convertible debentures.(5)
              The
                  February, 2007 Debenture warrants had their exercise price reset
                  to $1.12
                  for the first PIPE and to $1.11 per warrant for the second. The
                  combined
                  difference in fair value was $0.00457 per warrant as a result of
                  the
                  exercise price changes and $52,600 was recorded as additional debt
                  discount and will be amortized to interest expense through January,
                  2010,
                  the due date of the convertible debentures.(6)
              The
                  February, 2007 Services warrants had their exercise price reset
                  to $1.03
                  per warrant. The difference in fair value of $0.0023 per warrant
                  as a
                  result of the exercise price change or $3,083 was recorded to additional
                  debt discount.(7)
              We
                  reset the exercise prices of our October, 2005 DIP warrants resulting
                  in
                  the issuance of 8,168 Series 1 and 7,600 of Series 2 warrants at
                  $1.21 and
                  $1.31 exercise prices respectively and repriced 988,366 and 995,601
                  warrants to $1.21 and $1.31 respectively. The fair value of the
                  warrants
                  issued was $0.3957 and $0.3651 per warrant for the $1.21 and $1.31
                  warrants respectively and the fair value difference for the repriced
                  warrants was approximately $0.003 per warrant. The fair value of
                  the
                  dilution impact, consisting of was recorded to other expense during
                  the
                  quarter and nine months ended June 30, 2007.(8)
              We
                  issued additional 2006 Series A2 warrants and reset the exercise
                  price of
                  previously existing Series A2 warrants. We recorded $64,280 to
                  other
                  expense during the quarter and nine months ended June 30, 2007
                  representing the fair value of the following: 1,417,793 warrants
                  had their
                  exercise price reset from $1.04 per warrant to $0.99 per warrant
                  at a fair
                  value difference of $0.0166 per warrant and 71,606 additional warrants
                  were issued at $0.99 per warrant at a fair value of $0.5690 per
                  warrant.(9)
              The
                  June, 2007 PIPE Series 1 warrants had their price reset to $1.39
                  per
                  warrant. The difference in fair value of $0.0018 per warrant as
                  a result
                  of the exercise price change or $11,789 was recorded to other expense
                  as a
                  warrant modification.




19




The
      following table summarizes the warrants issued, outstanding, and exercisable
      as
      of June 30, 2007:




**Warrant
                  Series**
              ****
              **Grant
                  Date**
              ****
              **Strike
                  Price**
              ****
              ****
              ****
              **Expiration
                  Date**
              ****
              **Warrants
                  remaining**
              ****
              **Proceeds
                  if Exercised**
              ****
              **Call
                  feature**“December
                  2003”
              
              Dec.,
                  2003
              
              $2.04
              
              
              
              December,
                  2008
              
              120,000
              
              $
                  244,800
              
              (F)August,
                  2004 Debenture warrants
              
              Aug,
                  2004
              
              $1.40
              
              (A)
              
              August,
                  2008
              
              3,223,683
              
              4,513,156
              
              NoneDebenture
                  Amend
              
              Nov,
                  2004
              
              $1.40
              
              (A)
              
              November,
                  2008
              
              1,083,592
              
              1,517,029
              
              NoneSeries
                  S
              
              Sept,
                  2004
              
              $1.00
              
              
              
              July,
                  2007
              
              1,012,000
              
              1,012,000
              
              (G)Series
                  T
              
              Sept,
                  2004
              
              $1.00
              
              
              
              July,
                  2008
              
              160,000
              
              160,000
              
              NoneSeries
                  U
              
              Sept,
                  2004
              
              $1.83
              
              
              
              August,
                  2008
              
              512,362
              
              937,622
              
              (H)October,
                  2005 DIP Series 1
              
              Oct,
                  2005
              
              $1.21
              
              (B)
              
              October,
                  2008
              
              996,538
              
              1,205,811
              
              NoneOctober,
                  2005 DIP Series 2
              
              Oct,
                  2005
              
              $1.31
              
              (C)
              
              October,
                  2008
              
              1,003,207
              
              1,314,201
              
              None2006
                  Series A1
              
              Mar,
                  2006
              
              $1.55
              
              
              
              March,
                  2009
              
              150,000
              
              232,500
              
              None2006
                  Series A2
              
              Mar,
                  2006
              
              $0.99
              
              (D)
              
              March,
                  2009
              
              1,489,399
              
              1,474,505
              
              None2006
                  Series B
              
              Various
                  2006
              
              $2.00
              
              
              
              May,
                  2009
              
              2,191,466
              
              4,382,932
              
              (I)2006
                  Series C
              
              May,
                  2006
              
              $1.25
              
              
              
              December,
                  2009
              
              200,000
              
              250,000
              
              None2006
                  Series D
              
              May,
                  2006
              
              $1.50
              
              
              
              December,
                  2009
              
              200,000
              
              300,000
              
              None2006
                  Series E
              
              May,
                  2006
              
              $1.75
              
              
              
              December,
                  2009
              
              200,000
              
              350,000
              
              None2007
                  Series F
              
              Nov,
                  2006
              
              $1.10
              
              
              
              November,
                  2009
              
              220,000
              
              242,000
              
              None2007
                  Convertible Debt
              
              Feb,
                  2007
              
              $1.11
              
              (E)
              
              February,
                  2010
              
              10,973,585
              
              12,180,679
              
              None2007
                  Convertible Debt Fees
              
              Mar,
                  2007
              
              $1.03
              
              (E)
              
              February,
                  2010
              
              1,316,833
              
              1,356,338
              
              None2007
                  Factoring
              
              Mar,
                  2007
              
              $1.06
              
              
              
              February,
                  2009
              
              1,800,000
              
              1,908,000
              
              NoneJune
                  PIPE Series 1
              
              Jun,
                  2007
              
              $1.39
              
              (E)
              
              June,
                  2010
              
              6,247,676
              
              8,684,270
              
              NoneJune
                  PIPE Series 2
              
              Jun,
                  2007
              
              $1.40
              
              (E)
              
              June,
                  2010
              
              1,564,901
              
              2,190,862
              
              NoneTotal
              
              
              
              
              
              
              
              
              
              34,665,242
              
              $44,456,705
  
 (A)
                Subject
                    to anti-dilution provisions. Price reset under a 100% of “new issue price”
                    price reset in October, 2005 that converted to a weighted average
                    formula
                    in August, 2006. Certain future equity or equity equivalent issuances
                    below $1.40 per share may result in additional price
                    resets.(B)
                Subject
                    to anti-dilution provisions. Price reset under a weighted average
                    115% of
                    “new issue price” reset in June, 2007. Certain future warrant issuances
                    with exercise prices below $1.05 per warrant may result in weighted
                    average price re-set and additional issuances of
                    warrants.(C)
                Subject
                    to anti-dilution provisions. Price reset under a weighted average
                    125% of
                    “new issue price” reset in February, 2007. Certain future warrant
                    issuances with exercise prices below $1.05 per warrant may result
                    in
                    weighted average price re-set and additional issuances of
                    warrants.(D)
                Subject
                    anti-dilution provisions. Certain future equity or equity equivalent
                    issuances below $0.99 per share may result in a price reset of
                    100% of the
                    new issue price and additional issuances of warrants.(E)
                Subject
                    to anti-dilution provisions. Certain future equity or equity
                    equivalent
                    issuances below the current exercise price per warrant may result
                    in a
                    weighted average price reset of the exercise price.(F)
                Callable
                    if closing market price is 200% of strike price for 20 consecutive
                    trading
                    days(G)
                Callable
                    if closing market price is 300% of strike price for 5 consecutive
                    trading
                    days(H)
                Callable
                    if closing market price is 200% of strike price for one trading
                    day(I)
                Callable
                    if trading price is greater than $2.50 for 10 consecutive
                    days
 20




**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 and nine months ended June 30, 2007 and 2006 since
      their effect would have been anti-dilutive:




**June
                30**
            ********
            ****
            **2007**
            ****
            **2006**Options
                for common stock
            
            
            15,450,136
            
            
            9,815,171Warrants
            
            
            34,665,242
            
            
            13,253,935Convertible
                Debentures, if converted
            
            
            25,449,791
            
            
            6,204,03375,565,169
            
            
            29,273,139




21




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





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





On
      January 19, 2007 and as described in a Form 8-K filed on January 25, 2007,
      an
      amendment was ratified on the original agreement dated October 1, 2006. The
      January 19, 2007 amendment called for an immediate need to invest additional
      cash into E Service of 4,950,000 Euros ($6,600,000 at June 30, 2007 exchange
      rates). During this recapitalization, the share capital of the Company’s
      investment in E Service decreased from 50% to 24.9% and under the January,
      2007
      amendment we were required to invest 1,232,550 Euros ($1,595,782 at January
      19,
      2007 exchange rates). Subsequent to January 25, 2007 we amended the
      recapitalization agreement to require only the investment of 224,000 Euros
      ($298,704 at June 30, 2007 exchange rates). The Company has concluded that
      accounting for E Service as a VIE is no longer required since the Company is
      no
      longer the primary beneficiary. As a result, for the quarter ending June 30,
      2007 we have not included the revenues and expenses in our statement of
      operations and we have not included the assets and liabilities in our balance
      sheet. The Company has accounted for our investment in E Service for the quarter
      ended June 30, 2007 under the equity method of accounting, which requires us
      to
      recognize to adjust our investment each quarter to reflect our ownership share
      of the operating income or loss of the investment. We have eliminated all
      intercompany profits related to our investment in this entity for the quarter
      ended June 30, 2007 and we have shown the carrying value of our investment
      of
      $2,188,851 as an asset on our balance sheet as of June 30, 2007.





As
      of
      June 30, 2007, the Company’s maximum exposure to loss is limited to the
      investment balance of $2,188,851. We have amounts payable to the entity of
      approximately $1,845,654 and which are included in Accounts Payable in the
      June,
      2007 balance sheet. Excluding the June, 2007 balance due to the entity, no
      creditors or beneficial interest holders have any recourse to the general credit
      of the Company as a result of this variable interest entity.





**NOTE
      10 - COMMITMENT AND CONTINGENCIES**





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





During
      the quarter and nine months ended June 30, 2007 we began to negotiate supply
      contracts with numerous vendors for the purchase of wind turbine components
      for
      delivery beginning in fiscal 2008. These contracts are considered to be in
      the
      ordinary course of business under ordinary payment terms. Except for cash
      payments made as deposits on these contracts recorded to prepaid expenses and
      other current assets, we are not contractually obligated to make any material
      payments on these contracts until delivery. Except as described in Note 9
      Variable Interest Entities and Note 11, Litigation, we made no material
      commitments and incurred no material contingencies.





22





**NOTE
      11 - LITIGATION**




**Enable
      v. Composite Technology Corporation**




On
      May
      11, 2007, Enable Growth Partners, Enable Opportunity Partners, and Pierce
      Diversified Strategy Master Fund (collectively “Enable”) filed a Complaint in
      the Supreme Court of the State of New York, County of New York, Index No.
      601598/2007 (the “Claim”). Enable had previously invested $1,000,000 in the
      October, 2005 DIP financing and $1,000,000 in the March, 2006 Bridge Notes
      Financing. The Claim states that the Company failed to properly calculate the
      fair value of certain consideration that was given in September, 2006 as an
      inducement to convert the March, 2006 Bridge Notes of certain other investors.
      The Company represents that the market value on the date of the issuance of
      $1.06 was equal to the fair value of the consideration. Enable alleges that
      the
      fair value of the consideration was approximately $0.02 per share and thereby
      triggers additional anti-dilution protection for the warrants still held by
      the
      former convertible debt holders. If the Claim figure were to be upheld, a
      consideration of $0.02 per share would result in the required issuance of
      approximately 40,000,000 additional common shares and common share equivalents,
      representing approximately 20% of the current issued and outstanding share
      amount and further trigger additional anti-dilution for subsequent financing
      rounds resulting in further warrant price reductions and reductions of existing
      conversion prices for existing convertible debt. The Company believes the Claim
      has no merit and has not recorded a liability. The Company promptly filed a
      claim under its E&O insurance policy to cover potential damages and legal
      costs, retained legal counsel and intends to vigorously defend its position.
      On
      July 11,2007 the Company filed a motion to dismiss the claim. On July 31, 2007
      Enable filed an opposition to the motion to dismiss. The Company is required
      to
      file a response to Enable’s opposition filing by August 10, 2007. No hearing has
      been set before the court and the presiding judge has not ruled on our motion
      to
      dismiss. On July 31, 2007 the Company received confirmation that the matter
      is
      covered under our primary E&O policy. We are awaiting notification of
      coverage under our supplemental E&O policy. Coverage is subject to a
      $200,000 retention for legal fees. Amounts in excess of this up to our policy
      limits are covered. We currently have primary coverage of $5,000,000 and
      supplemental coverage of an additional $5,000,000.




**FKI
      Litigation**





On
      May 3,
      2007,  the Company and certain of its wind division subsidiaries (here
      referred to as “DeWind”) entered into a settlement agreement with FKI
      Engineering Ltd., FKI plc, and Brush Electrical Machines Ltd (collectively
      “FKI”) Under the terms of the agreement, the DeWind and FKI agreed to take all
      necessary steps to effect a stay of all of the disputes listed below effective
      until September 15, 2007 or other such date as the parties agree to in writing
      in order to allow sufficient time to effect the settlement agreement.  As
      part of the settlement agreement, the parties have agreed to use their best
      efforts to cause or procure the auditors of a German subsidiary of the Company
      to complete their audit of such German subsidiary’s statutory accounts for the
      fiscal years ending March 31, 2003, 2004, and 2005. It is expected that as
      part
      of the process of the completion of such audits, the auditors will identify
      any
      issues relating to the capital reserve accounts of the German subsidiary that
      are the subject of the disputes listed in 2 below and the counterclaim listed
      in
      1.b&c below.  The De Wind and FKI parties have further agreed as part
      of the settlement agreement that if further assurance is required on possible
      legal issues regarding the German subsidiary’s capital structure and / or in
      relation to payments made into and / or out of the capital reserve account,
      then, the legal counsel of DeWind and FKI shall meet with a view to preparing
      a
      mutually acceptable statement regarding the capital account or hire an
      independent reputable and suitably experienced German law firm to prepare the
      statement that sets out the capital reserve accounts issues.  The
      resolution of the capital reserve accounts issues is not reasonably estimable
      at
      this time and no contingent asset has been recorded to date for any future
      funds
      potentially receivable from FKI, if any, to resolve the capital reserve account
      issues.   Assuming De Wind’s satisfaction with the statement referred
      to above, then,DeWind has agreed to make payments totaling 1,500,000 Euros
      ($2,024,850 at June 30, 2007 exchange rates) in two equal installments, one
      within seven days after the agreed upon capital account statements have been
      issued and one 90 days after the first installment.   These payments
      shall serve to settle all remaining claims currently existing between FKI and
      DeWind.  In the event that the auditors cannot complete their audit due to
      issues relating to the capital account of the German subsidiary or in the event
      that no statement as referred to above, and if required, is forthcoming, then
      the payments referred to above will not be made and the German subsidiary will
      have to pursue litigation to correct discrepancies in its capital reserve
      accounts. During the quarter ended June 30, 2007, since the balance due was
      probable and reasonably estimable, the Company recorded a litigation settlement
      accrual under the guidance of SFAS 5 and expensed the accrual to other expense
      in the statement of operations  of 1,452,000 Euros ($1,956,570 at June 30,
      2007 exchange rates) to properly accrue for the settlement balance of 1,500,000
      Euros ($2,024,850 at June 30, 2007 exchange rates).




23




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





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





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





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


a.
              FKI
                  Engineering Ltd. claims against DeWind Holdings Ltd.: (1) $2,113,555,
                  further or alternatively damages for breach of contract; and (2)
                  Interest
                  in the amount of $112,355;b.
              FKI
                  Engineering Ltd. and FKI plc claim against DeWind GmbH: (1) a declaration
                  that neither FKI Engineering Ltd. nor FKI plc is liable to DeWind
                  GmbH as
                  set out in the Draft Proceedings or at all; (2) damages; (3) a
                  declaration
                  that FKI Ltd. and/or FKI plc would be entitled to repayment upon
                  demand
                  from DeWind GmbH of any amount which they may be ordered to pay
                  to DeWind
                  GmbH by reason of the matters set out in the second action commenced
                  by
                  DeWind GmbH in Germany as described below) or otherwise; and
                  finally,c.
              FKI
                  Engineering Ltd. further claims against DeWind Holdings Ltd.: (1)
                  damages,
                  alternatively payment of $72,095,285; and (2) interest to be
                  assessed.d.
              On
                  September 22, 2006 DeWind Holdings Ltd. filed a counterclaim claiming
                  against FKI Engineering Ltd. as follows: (1) payment of $430,000;
                  alternatively damages for breach of contract; (2) contractual interest;
                  alternatively statutory interest to be
                  assessed.




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





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





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





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





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




24




2.
      DeWind GmbH v. FKI Engineering Ltd.





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





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





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





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




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





On
      January 06, 2006 Zephyr filed a suit against DeWind GmbH with the District
      Court
      of Düsseldorf, Germany for payment of an amount of $1,300,533 plus interest
      based on the argument that DeWind GmbH had allegedly failed to comply with
      a
      guarantee of availability under a turbine sales contract. Furthermore, Zephyr
      sought a declarative judgment that DeWind GmbH had to come up for a potential
      purchase tax obligation in an amount of $208,085. On August 08, 2006, the
      District Court rendered a judgment by default against Zephyr dismissing the
      case. Zephyr filed an objection against this judgment on August 29, 2006. DeWind
      GmbH responded by filing a written pleading on October 04, 2006. The Company
      has
      fully reserved net receivables of $914,690 in respect of this dispute and has
      assumed that the $720,590 cash paid to Zephyr as a result of their calling
      of
      performance bonds will not be recovered.


**EU
        Energy plc Indemnification Claim**
  On
        June
        29, 2007 the Company filed a Claim Notice of Indemnification (the “Claim”)
        pursuant to the terms of the Share Exchange Agreement (the “Agreement) by and
        among Composite Technology Corporation and the shareholders of EU Energy
        plc and
        Michael Porter (EUE). The Claim asserts that the principals of EUE
        misrepresented the net assets of the date of acquisition of EU Energy by
        approximately $14.2 million. Under the terms of the Agreement, if the value
        of
        the net assets acquired under the transaction was misrepresented, the Company
        may make a claim against the shares issued to the majority holders. The Company
        believes that the values of certain assets were overstated and certain
        liabilities were not properly recorded as of the date of the acquisition.
        Any
        amount of claims determined to be valid are recoverable in shares of the
        Company’s common stock at a rate of $1.55 per share. If upheld in total, the
        claim would result in approximately 9.6 million shares of common stock returned
        to the Company by the two majority shareholders of EU Energy plc. The value
        of
        any returned shares, if any, will be recorded as a reduction of goodwill
        acquired. The Company has not recorded any goodwill adjustment for the quarter
        ended June 30, 2007 for this action and no shares have been returned to the
        Company as of August 8, 2007. The Company must resolve the matter with EUE
        within 90 days of the Claim date or file for adjudication in the appropriate
        court of law. To date, the Company has not filed for
        adjudication.




25




**NOTE
      12 - RELATED PARTIES**





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




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


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





For
      the
      three and nine months ended June 30, 2007, we recorded consulting fees of
      $125,000 and $375,000, respectively. In addition, we paid $43,581 and $140,581
      of reimburseable expenses for the three and nine months ended June 30, 2007,
      representing pass-through expenses for incidental expenses as well as patent
      and
      intellectual property related fees. All balances were expensed to Research
      and
      Development expenses. As of June 30, 2007 we had a balance due of $59,735 to
      TMA
      and TMG combined.





**NOTE
      13 - SUBSEQUENT EVENTS**





Between
      July 1, 2007 and August 7, 2007, holders of $9,067,227 of our convertible debt
      converted their debt into 8,549,831 shares of common stock. Holders of $987,200
      of the August, 2004 convertible debt converted at $1.40 per share and holders
      of
      $8,080,027 of the February, 2007 convertible debt converted at $1.03 per
      share.





On
      August
      7, 2007, we accepted a change order to our June, 2007 order for wind turbines.
      The change order increased the total turbines sold under the order to 10
      turbines and was accompanied by an additional $4.7 million cash payment. The
      turbines sold under this order are expected to be shipped in 2008.





26




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





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




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




27




**OVERVIEW**





The
      financial results for the quarter ending June 30, 2007 represented a key
      milestone in the Company’s drive to profitability and represented the successful
      execution on the Company’s growth strategy in the Cable division and progress on
      our growth strategy for the Wind division. In particular, our substantial
      revenue growth in the cable business resulted in our first fiscal quarter of
      operating income for that segment and which demonstrates proof of the viability
      of our cable business model. The Cable segment generated operating profits
      during the quarter of $210,836 including non cash charges (stock option and
      depreciation) of $356,772. Our Wind segment losses were in line with our
      expectations of this transition period after our 2006 acquisition of that
      business unit in that revenues consisted primarily of turbines in inventory
      and
      revenues and costs related to our legacy turbine installation base. We believe
      that we are executing our market strategy for our next generation turbine and
      substantial progress was made in our turbine development and operations
      including advances in the development of the turbine supply chain and the
      successful technical certification of our model D8.2 turbine. While our Wind
      segment did suffer from the cancellation of our initial commercial sale of
      D8.2
      turbines to XRG due to non-payment, our management team believes that we will
      be
      able to successfully replace this order with new turbine orders in the fourth
      fiscal quarter of 2007 as discussed on page 29.





The
      Company made some key management changes during the quarter. In April, 2007
      Michael Porter, the Company’s President and formerly the majority owner of
      DeWind retired and the Company promoted Marv Sepe to Chief Operating Officer
      of
      the Company. Mr. Sepe joined the Company in 2006 as President of CTC Cable,
      a
      position that he continues to hold. In April, the Company promoted Domonic
“DJ”
Carney as Chief Financial Officer. Mr. Carney joined the Company in 2005 and
      was
      formerly VP of Finance.





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





**CTC
      Cable Division**


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





**RECENT
      DEVELOPMENTS**





During
      the quarter, we recognized ACCC cable revenues of $7.4 million representing
      an
      increase of 174% sequentially over the March, 2007 quarter, an increase of
      314%
      over the June, 2006 quarter and our fiscal year to date revenues of $11.7
      million represent an increase of 244% over the $3.4 million recognized for
      the
      nine months ended June 30, 2006. The $7.4 million of revenues consisted of
      $6.5
      million representing 389 kilometers of ACCC conductor sold to our Chinese
      distribution partner and $0.9 million in the United States. At August 7, 2007,
      we had a non-cancelable order backlog for our conductor products of $11.3
      million, primarily for ACCC conductor for delivery to our Chinese distributor.
      Our relations with our Chinese distributor are excellent and to date they have
      purchased nearly 1,300 kilometers under our contract of which we have shipped
      and recognized approximately 450 kilometers to date.





In
      January, 2007 we announced a three year distribution agreement with Jiangsu
      New
      Far East Cable Corporation’s subsidiary, Far East Composite Technology Company,
      where they agreed to purchase of a minimum of 600 kilometers of ACCC conductor
      or ACCC core per quarter for year one with increases to 900 kilometers and
      1,200
      kilometers per quarter in years two and three. During the first six months,
      the
      partner ordered over 1,280 kilometers of ACCC conductor and exceeded their
      minimum order required under the contract. We expect the minimum value of this
      contract to represent approximately $35.0 million of orders for the first
      calendar year beginning in February, 2007. Expected revenues per quarter under
      the contract are dependent on the size of the conductor ordered, whether it
      is
      ACCC conductor or ACCC core, and the timing of delivery but we expect revenues
      to average between $7 and 12 million per quarter for the first year of this
      arrangement for ACCC conductor sales and between $3.5 and 6 million per quarter
      for higher margin ACCC core sales, once Jiangsu is qualified to strand ACCC
      with
      aluminum wire. Jiangsu is currently beginning the process and is purchasing
      the
      necessary equipment required to strand ACCC core. The process includes a
      certification and quality control review that, once completed, will change
      the
      relationship from a sale of ACCC conductor to ACCC core. We expect their
      certification to be complete in early fiscal 2008.




28




We
      achieved gross margins of 28.6% for the June quarter, in line with our expected
      gross margin percentages and which reflect a drop of 4.0% from the March, 2007
      quarter. Our margins were negatively impacted by two reasons. The primary reason
      was due to a change in product mix between the quarters and an increase in
      the
      revenue recognized to China. The March quarter included a greater proportion
      of
      revenues from our higher margin ACCC core product and the June quarter was
      nearly all lower margin ACCC conductor and related ACCC hardware sales. We
      were
      also impacted by an increase in the cost of aluminum. While we have price
      protection in our Chinese distribution agreement from significant swings in
      aluminum prices, we do not hedge the price of this commodity so price changes
      below our price protection thresholds impact our product costs since the cost
      of
      aluminum comprises a significant portion of the overall cost of ACCC conductor.
      During the quarter we also began to see additional operational efficiencies
      and
      cost savings due to better labor and materials utilization related to the
      production of our ACCC core product which is the precursor to the finished
      ACCC
      conductor product.





The
      Cable
      division’s sales focus continues to be on obtaining new and repeat orders from
      our US conductor customers, developing new relationships in targeted
      international markets including Europe and the Middle East and on fulfilling
      the
      orders and growth related to our long term supply agreement with our Chinese
      conductor distributor Jiangsu.





We
      continue to aggressively sell and market our ACCC products in the US. In March,
      2007 we continued to leverage our internal sales efforts by announcing that
      we
      had signed sales representation agreements with three separate sales
      organizations which focus on selling products into the US transmission market.
      These agreements add an additional 21 sales people across 17 states and allow
      us
      to sell our product in areas that we previously had little or no sales coverage.
      We are beginning to see a greater volume of qualified sales leads from this
      relationship.





During
      the June, 2007 quarter we began to focus our marketing message on the efficiency
      of our ACCC conductor as compared to the traditional ACSR competitor. We are
      enhancing this message by creating sales and marketing tools that demonstrate
      that our ACCC conductor can reduce by over 30% the line losses typical of
      current ACSR conductors in transmission lines. We are also beginning to lobby
      governmental entities to present this message that ACCC conductors promotes
      greenhouse gas emission reduction by improving the power throughput of power
      lines since less generation is required to deliver the same amount of power
      to
      customers. We continue to focus on the engineering and design firms often
      responsible for the overall line design and component selection for transmission
      and electrical distribution projects. These firms are usually engaged by smaller
      utilities and providers that do not possess extensive in house engineering
      groups. We believe their understanding of the uses and benefits of ACCC
      conductor will provide a number of design-in opportunities. In April, 2007
      we
      announced that our ACCC conductor’s design polynomials would be installed in the
      next version of PLS CADD transmission design software. This software is used
      by
      transmission design engineers during the design phase of transmission projects.
      The inclusion of ACCC conductors will allow our conductors to be compared
      directly with other conductor products during transmission line
      design.





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




29




The
      focus
      of our CTC cable operations during the three and nine month period ending June
      30, 2007 has been to increase production to manage the large influx of orders
      from our China agreement and to continue to manage our key materials suppliers.
      We continue to work with our key carbon supplier and actively improve our
      relationship with that supplier and other carbon suppliers. We have received
      increased carbon allocations from our primary supplier during the June quarter
      and we believe that we will be able to source sufficient quantities of carbon
      to
      meet our expected ACCC conductor demand for the next six months. In April,
      2007,
      we certified Midal in Bahrain as a certified conductor strander as our third
      supplier and successfully shipped ACCC conductor in April, 2007 with this
      supplier. We currently have three stranding suppliers available and we are
      working with our distributor in China to begin the procedures required for
      them
      to become a certified strander so that there is additional stranding
      capacity.




**DeWind
      Division**


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





**RECENT
      DEVELOPMENTS**





The
      DeWind division continues to identify and target near and long term sales
      opportunities for sales of DeWind wind turbines in the US and International
      locations. As of August 7, 2007 we have $53 million in firm turbine and turbine
      parts orders. Most recently, in June, 2007 we signed a contract to deliver
      five
      D8 turbines to a customer located in Chile. The turbines are scheduled for
      delivery in June, 2008 and will be produced out of the TECO facility in Texas.
      We received a cash deposit of $4.7 million upon the signature of this order,
      recorded to customer deposits as of June 30, 2007. With this order, we currently
      have firm turbine orders for approximately $40 million representing deliveries
      of thirteen D8 units, one D8.2 unit, and seven D6 units primarily scheduled
      for
      delivery in fiscal 2008. In addition to our turbine backlog, we have orders
      for
      approximately $13 million for D6 parts that will be sold to existing DeWind
      customers and to our Chinese licensing partners.





The
      $53
      million order book does not include the turbines for XRG Development Partners
      LLC. In March, 2007, we signed our first order for D8.2 turbines for delivery
      in
      the United States with XRG Development Partners LLC. The order was for 18 D8.2
      turbines at $2.2 million per turbine for a total order of approximately $40
      million and the contract called for payments of $6 million in April, 2007 and
      $4
      million in May, 2007. XRG did not make any payments and DeWind formally notified
      XRG of a payment default in May, 2007. Under the terms of the contract, after
      30
      days notice the contract can be cancelled by DeWind and contract was cancelled
      in June, 2007. The loss of this contract was a primary reason why CTC needed
      to
      raise additional funds through the private equity placements in June. Beginning
      in March, 2007, upon signature of the contract, DeWind began to commit to the
      supply chain for these units and spent a significant amount of working capital
      to ensure that sufficient materials would be delivered in time to complete
      the
      turbines for the XRG order.





Our
      revenues during the quarter ended June 30, 2007, consisted of sales of our
      turbine inventory acquired as part of the acquisition of EU Energy, now known
      as
      DeWind. Under US GAAP accounting rules, we are required to revalue acquired
      turbine inventory to “liquidation” value, which approximates sales value and
      which results in little or no income statement profit margin. Our revenues
      also
      included sales of parts for our D6 model to our licensee partners in China.
      The
      sale of these parts carried normal profit margin, but also provided strategic
      benefits by providing for much needed purchasing flow through our supply chain
      which in turn helped improve our relationships with our D8 and D8.2 supply
      chain
      vendors through increased purchasing activity. We do not expect that sales
      of
      turbine parts will be a substantial portion of our business past the middle
      of
      fiscal 2008.




30




Our
      operational focus for the DeWind division during the quarter was to position
      ourselves to demonstrate and produce our next generation D8.2 wind turbine
      to
      fulfill the XRG order and additional expected orders from other wind farm
      operators and utilities for delivery in 2008 and beyond. The effort consisted
      of
      continued testing of our D8.2 prototype at the Cuxhaven, Germany test site
      of
      the DEWI-Offshore Certification Centre and working with our TECO Westinghouse
      strategic relationship, as well as our supply chain vendors, to secure adequate
      turbine parts for our D8.2, D8, and D6 turbines. Testing continues on our
      prototype, which to date has passed all of the technical tests required and
      recently achieved type certification. The certification is important since
      it is
      often required by financial backers of our potential wind turbine customers
      prior to obtaining financing for their wind farms. We are currently building
      a
      prototype for the United States and expect that it will be completed and
      commissioned in September of 2007.





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





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





**RESULTS
      OF OPERATIONS**





Revenues,
      Cost of Revenues, and Gross Margins:




During
      the quarter ended June 30, 2007, the geographical allocation of consolidated
      revenues was:




Europe
              
              
              18.4
              %China
              
              
              72.7
              %Americas
              
              
              8.9
              %




During
      the quarter, one customer in China represented 50.4% of revenues, one customer
      in China with 20.2% of revenues, one customer in Europe with 8.5% of revenues
      and one customer in North America with 7.0% of revenues. No other customer
      represented greater than 5% of consolidated revenues.





31




Our
      revenues and gross margin analysis are listed in the table below. All of the
      revenues and margins for the quarter ended June 30, 2006 relate to Cable sales
      since our DeWind segment was acquired from EU Energy in July, 2006.


**Three
                  Months Ended June 30,**
              ****
              **Nine
                  months Ended June 30,**
              ********
              ****
              **2007**
              ****
              **2006**
              ****
              **2007**
              ****
              **2006**
              ****(unaudited)
              ****
              **Cable
                  Segment**
              ****
              **DeWind
                  Segment**
              ****
              **Total**
              ****
              **Total**
              ****
              **Cable
                  Segment**
              ****
              **DeWind
                  Segment**
              ****
              **Total**
              ****
              **Total**Product
                  Sales -Cable
              
              $
              7,396,781
              
              $
              --
              
              $
              7,396,781
              
              $
              1,785,420
              
              $
              11,743,783
              
              $
              --
              
              $
              11,743,783
              
              $
              2,838,839Product
                  Sales - Turbines
              
              
              --
              
              
              4,304,105
              
              
              4,304,105
              
              
              --
              
              
              --
              
              
              16,394,856
              
              
              16,394,856
              
              
              --Other
                  Turbine Related Revenue
              
              
              --
              
              
              1,201,315
              
              
              1,201,315
              
              
              --
              
              
              --
              
              
              6,204,723
              
              
              6,204,723
              
              
              --Consulting
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              550,000Total
                  Revenues
              
              
              7,396,781
              
              
              5,505,420
              
              
              12,902,201
              
              
              1,785,420
              
              
              11,743,783
              
              
              22,599,579
              
              
              34,343,362
              
              
              3,388,839Cost
                  of Sales - Cable
              
              $
              5,281,480
              
              $
              --
              
              $
              5,281,480
              
              $
              1,252,203
              
              $
              8,446,855
              
              $
              --
              
              $
              8,446,855
              
              $
              2,245,994Cost
                  of Sales - Turbines
              
              
              --
              
              
              3,800,514
              
              
              3,800,514
              
              
              --
              
              
              --
              
              
              16,561,271
              
              
              16,561,272
              
              
              --Cost
                  of Sales - Other turbine related
              
              
              --
              
              
              3,275,297
              
              
              3,275,297
              
              
              --
              
              
              --
              
              
              7,750,323
              
              
              7,750,323
              
              
              --Cost
                  of Sales - Consulting
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              304,787Total
                  Cost of Sales
              
              
              5,281,480
              
              
              7,075,811
              
              
              12,357,291
              
              
              1,252,203
              
              
              8,446,855
              
              
              24,311,594
              
              
              33,758,449
              
              
              2,550,781Gross
                  Margin - Cable
              
              
              2,115,301
              
              
              --
              
              
              2,115,301
              
              
              533,217
              
              
              3,296,928
              
              
              --
              
              
              3,296,928
              
              
              592,845Gross
                  Margin % - Cable
              
              
              28.6
              %
              
              --
              
              
              28.6
              %
              
              29.9
              %
              
              28.1
              %
              
              --
              
              
              28.1
              %
              
              20.9
              %Gross
                  Margin - Turbines
              
              
              --
              
              
              503,591
              
              
              503,591
              
              
              --
              
              
              --
              
              
              (166,415
              )
              
              (166,415
              )
              
              --Gross
                  Margin % - Turbines
              
              
              --
              
              
              11.7
              %
              
              11.7
              %
              
              --
              
              
              --
              
              
              -0.9
              %
              
              -0.9
              %
              
              --Gross
                  Margin - Other turbine related
              
              
              --
              
              
              (2,073,982
              )
              
              (2,073,982
              )
              
              --
              
              
              --
              
              
              (1,545,600
              )
              
              (1,545,600
              )
              
              --Gross
                  Margin % - Other turbine
              
              
              --
              
              
              -172.6
              %
              
              -172.6
              %
              
              --
              
              
              --
              
              
              -25.4
              %
              
              -25.4
              %
              
              --Gross
                  Margin - Consulting
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              245,213Gross
                  Margin % - Consulting
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              44.5
              %Total
                  Gross Margin
              
              $
              2,115,301
              
              $
              (1,570,391
              )
              $
              544,910
              
              $
              533,217
              
              $
              3,296,928
              
              $
              (1,712,015
              )
              $
              1,584,913
              
              $
              838,058Total
                  Gross Margin %
              
              
              28.6
              %
              
              -28.5
              %
              
              4.2
              %
              
              29.9
              %
              
              28.1
              %
              
              -7.6
              %
              
              4.6
              %
              
              24.7
              %




CABLE
      REVENUES. Cable revenues increased $5,611,361 or 314% from $1,785,420 at the
      three months ended June 30, 2006 to $7,396,781 for the three months ended June
      30, 2007. Cable revenues increased $8,904,944 or 314 % from $2,838,839 for
      the
      nine months ended June 30, 2006 to $11,743,783 for the nine months ended June
      30, 2007. This is primarily due to an increase in sales to China of $4.8 million
      for the quarter and $7.5 million for the nine months ended June 30,
      2007.





Cost
      of
      Sales and resultant Gross Margin on cable revenues for the three and nine months
      ended June 30, 2007 represent materials, labor, freight, and allocated overhead
      costs to produce ACCC cable and related hardware. For the three months ended
      June 30, 2007, cable cost of sales increased $4,029,277 or 322% from $1,252,203
      for the three months ended June 30, 2006 to $5,281,480. For the nine months
      ended June 30, 2007, cable cost of sales increased $6,200,861 or 276% from
      $2,245,994 for the nine months ended June 30, 2006 to $8,446,855. Costs of
      sales
      increases are reflective of increased revenue levels.





For
      the
      three months ended June 30, 2007, cable gross margin increased $1,582,084 or
      297% from $533,217 to $2,115,301. For the nine months ended June 30, 2007,
      the
      cable gross margin increased $2,704,083 or 456% from $592,845 to $3,296,928
      for
      the nine months ended June 30, 2006. Margin percentages improved over the
      previous year due to improvements in production processes and since the 2006
      balances include the City of Kingman sale made under a bankruptcy settlement
      that carried very low profit margins. In addition, margin percentages for the
      three months and nine months ended June 30, 2007 were slightly lower than
      expected due to air freight expediting costs in order to meet our delivery
      schedule and increasing aluminum raw material costs.





TURBINE
      REVENUES Turbine revenues and related services were $4,304,105 and $16,394,856
      for the three and nine months ended June 30, 2007 respectively. There are no
      comparable sales for the same periods in 2006 as we did not acquire the turbine
      group until July, 2006. Turbine revenues for the quarter ended June 30, 2007
      consisted of $2.3 million of turbine sales, $2.0 million of turbine parts sales
      primarily to our Chinese license partners.





32




Cost
      of
      revenues for the turbines and related revenues is determined under the guidance
      of SFAS 141 acquisition accounting which requires us to record cost of sales
      at
      liquidation value less a nominal profit margin. As a result, our gross profit
      for the quarter is largely this nominal profit margin in addition to the margin
      generated by the sale of other turbine parts and related services for the three
      months and nine months ended June 30, 2007. During the quarter, this nominal
      margin was improved by the higher margin parts to our partners in China. We
      do
      not believe that these margin percentages are necessarily indicative of future
      profit margins of turbines produced by DeWind subsequent to the acquisition
      for
      our projected D6 or D8.2 sales.





There
      are
      no comparable costs of revenue numbers for the three and six month period ended
      June 30, 2006 as we did not acquire the turbine group until July,
      2006.




OTHER
      TURBINE RELATED REVENUE AND COST OF REVENUES Other turbine related revenues
      and
      services were $1,201,315 and $6,204,723 for the three and nine months ended
      June
      30, 2007. In October, 2006 we sold 50% of our turbine service division and
      created a 50% owned joint venture as described in Note 9. In January, 2007
      we
      sold an additional share of E Services, reduced our ownership percentage to
      24.9% and we no longer consolidate the revenues or cost of revenues for the
      turbines that were as had occurred in the December, 2006 fiscal quarter. Prior
      to the sale, we had recognized approximately $4.8 million of service revenues
      through December 31, 2006. Revenues recorded since January, 2007 consist of
      service and maintenance billings on turbines that are no longer under warranty
      and for amortization of deferred maintenance billings for turbines under
      warranty. Costs of revenue represent personnel and materials costs to service
      turbines including additional warranty and availability penalty expenses for
      turbines under warranty. A substantial portion of the remaining turbines under
      warranty have their warranty periods expire in 2008.





DeWind’s
      share of the gains related to E Services, were $294,439 and $212,239 for the
      three and nine months ended June 30, 2007, respectively and are included in
      other income/expenses. There are no comparable revenue or cost of revenue
      numbers for the three and nine months ended June 30, 2006 since we acquired
      DeWind in July, 2006.





CONSULTING
      REVENUES. Consulting revenues for the nine months ended June 30, 2006 consisted
      of consulting and technical services performed in fiscal 2004 and fiscal 2005
      to
      the City of Kingman but which were recognized in November, 2005 after the
      contract was modified in our Chapter 11 bankruptcy. We do not expect any
      significant future consulting revenues and there were no comparable revenues
      during the quarters ended June 30, 2007 and 2006 respectively.





OPERATING
      EXPENSES





Operating
      expenses that are specifically identifiable for a given segment are included
      in
      that segment and are describe in further detail below. Operating expenses that
      are related to corporate governance are included in the Corporate
      classification. Corporate expenses are generally expenses related to our
      corporate officers and related compensation, corporate finance and expenses
      related to our public company status including securities related legal expenses
      and settlements, audit fees, and also for general corporate business development
      expenses and strategic intellectual property consulting fees.





Consolidated
      operating expenses increased $4.5 million or 162.3% from $2,791,119 in the
      three
      month period ended June 30, 2006 to $7,321,423 in the three months ended June
      30, 2007. The increase was due to the addition of DeWind operating expenses
      of
      $3.6 million and increases in Corporate expenses of $0.7 million and Cable
      expenses of $0.2 million. The Corporate expenses were primarily related to
      increased officer compensation and general and administrative expenses. Cable
      expense increased due to increased sales and marketing expenses to support
      a
      higher revenue base. Operating expenses included SFAS 123R option expenses
      of
      $662,820 and $491,589 for the three months ended June 30, 2007 and 2006
      respectively.





33




Operating
      expenses increased $11.5 million or 106.5% from $10,810,648 to $22,327,114
      for
      the nine month period ended June 30, 2007. The increase was due to the addition
      of, DeWind operating expenses of $11.8 million, an increase of Corporate
      expenses of $0.4 million and a decrease of Cable expenses of $0.7 million.
      The
      Corporate expense increase was due to higher officer compensation and other
      corporate overhead expenses. The Cable expense decrease was due to lower R&D
      expenses which included a decrease in outsourced quality assurance expenses
      and
      decreased cable production related R&D which for much of 2006 were expensed
      to R&D but with full production beginning in 2007, these personnel related
      costs were classified into inventory and cost of sales costs. Operating expenses
      included SFAS 123R option expenses of $1,386,418 and $1,321,469 for the nine
      months ended June 30, 2007 and 2006 respectively.





The
      following table provides a comparative analysis of operating
      expenses.





**Three
                Months Ended June 30, 2007**
            ****
            **Three
                Months Ended June 30, 2006**
            ********
            ****
            **Corporate**
            ****
            **Cable**
            ****
            **DeWind**
            ****
            **Total**
            ****
            **Corporate**
            ****
            **Cable**
            ****
            **DeWind**
            ****
            **Total**Officer
                Compensation
            
            $
            378,071
            
            $
            --
            
            $
            --
            
            $
            378,071
            
            $
            149,034
            
            $
            --
            
            $
            --
            
            $
            149,034General
                and Administrative
            
            
            1,173,515
            
            
            498,312
            
            
            942,459
            
            
            2,614,287
            
            
            793,214
            
            
            445,537
            
            
            --
            
            
            1,238,751Research
                and Development
            
            
            82,268
            
            
            590,324
            
            
            706,885
            
            
            1,379,476
            
            
            68,382
            
            
            666,084
            
            
            --
            
            
            734,466Sales
                and Marketing
            
            
            133,946
            
            
            625,351
            
            
            1,489,883
            
            
            2,249,180
            
            
            42,727
            
            
            363,607
            
            
            --
            
            
            406,334Depreciation
                and Amortization
            
            
            --
            
            
            190,478
            
            
            509,932
            
            
            700,410
            
            
            --
            
            
            200,624
            
            
            --
            
            
            200,623Reorganization
                Expense and Fees
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            61,911
            
            
            --
            
            
            --
            
            
            61,911Total
                Operating Expenses
            
            $
            1,767,800
            
            $
            1,904,465
            
            $
            3,649,159
            
            $
            7,321,424
            
            $
            1,115,268
            
            $
            1,675,852
            
            $
            --
            
            $
            2,791,120








**Nine
                Months Ended June 30, 2007**
            ****
            **Nine
                Months Ended June 30, 2006**
            ********
            ****
            **Corporate**
            ****
            **Cable**
            ****
            **DeWind**
            ****
            **Total**
            ****
            **Corporate**
            ****
            **Cable**
            ****
            **DeWind**
            ****
            **Total**Officer
                Compensation
            
            $
            875,767
            
            $
            --
            
            $
            --
            
            $
            875,767
            
            $
            363,528
            
            $
            --
            
            $
            --
            
            $
            363,528General
                and Administrative
            
            
            3,793,265
            
            
            1,290,703
            
            
            3,644,728
            
            
            8,728,696
            
            
            3,380,677
            
            
            1,327,007
            
            
            --
            
            
            4,707,684Research
                and Development
            
            
            233,226
            
            
            1,891,180
            
            
            2,032,092
            
            
            4,156,498
            
            
            203,196
            
            
            3,004,112
            
            
            --
            
            
            3,207,308Sales
                and Marketing
            
            
            224,350
            
            
            1,604,395
            
            
            4,604,825
            
            
            6,433,570
            
            
            119,896
            
            
            1,184,416
            
            
            --
            
            
            1,304,312Depreciation
                and Amortization
            
            
            --
            
            
            596,107
            
            
            1,536,476
            
            
            2,132,583
            
            
            --
            
            
            592,677
            
            
            --
            
            
            592,677Reorganization
                Expense and Fees
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            635,140
            
            
            --
            
            
            --
            
            
            635,140Total
                Operating Expenses
            
            $
            5,126,608
            
            $
            5,382,385
            
            $
            11,818,121
            
            $
            22,327,114
            
            $
            4,702,437
            
            $
            6,108,212
            
            $
            --
            
            $
            10,810,649




OFFICER
      COMPENSATION. Officer compensation expense consists of salaries and SFAS 123R
      option expenses for our Chief Executive, Chief Financial Officer, Chief
      Operating Officer, and Secretary. Officer compensation expenses increased
      $229,037 or 154% from $149,034 for the three months ended June 30, 2006 to
      $378,071 for the three months ended June 30, 2007 and increased $512,239 or
      141%
      from $363,528 for the nine months ended June 30, 2006 to $875,767 for the nine
      months ended June 30, 2007. The dollar increase was primarily due to the
      addition of the our Chief Operating Officer and Chief Financial Officers in
      the
      June 2007 quarter offset by the decrease in expenses related to our President,
      Michael Porter, who resigned in early April.





GENERAL
      AND ADMINISTRATIVE EXPENSE. General and administrative expenses consist
      primarily of salaries and employee benefits for administrative personnel,
      facilities costs, stock exchange fees, audit and Sarbanes Oxley compliance
      fees,
      insurance expenses, and legal, professional, and consulting expenses. Bankruptcy
      related legal expenses are captured in reorganization costs. General and
      administrative increased approximately $1,375,535 or 111% from $1,238,751 for
      the three months ended June 30, 2006 to $2,614,286 for the three months ended
      June 30, 2007. General and administrative expenses increased approximately
      $4,021,012 or 85% from $4,707,684 for the nine months ended June 30, 2006 to
      $8,728,696 for the nine months ended June 30, 2007. DeWind general and
      administrative expenses were $3,644,728 for the nine months ended June 30,
      2007.





34




For
      the
      three months ended June 30, 2007, the dollar increase was due to the inclusion
      of the DeWind general and administrative costs of $942,000 and an increase
      of
      $380,000 for Corporate related activities. The Corporate increase was due to
      $92,000 in additional Corporate headcount related costs, $173,000 in SFAS 123R
      expense increases, and $207,000 in additional costs related to the debt and
      equity financings. These increases were offset by a decrease in legal
      professional fees of $95,000.





For
      the
      nine months ended June 30, 2007 the dollar increase was due to the inclusion
      of
      the DeWind general and administrative costs of $3,645,000 and an increase of
      $413,000 for Corporate related activities. The Corporate increase was due to
      an
      increase of $431,000 in SFAS 123R expenses, $359,000 in increased headcount
      related costs, $291,000 increase in professional fees related to additional
      audit and fees associated with the audit of DeWind’s operations in Germany, a
      $73,000 increase in amortized public relations fees paid in stock, and a $31,000
      increase in outside director costs. These increases were offset by a $718,000
      decrease in one time charges in 2006 related to the issuance of our 2005 Debtor
      in Possession financing in October, 2005 and the related induced conversion
      of
      this debt in January, 2006.





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 $645,011 or 87.8% from $734,466 for the three
      months ended June 30, 2006 to $1,379,477 for the three months ended June 30,
      2007. Research and development expense increased $949,190 or 29.5% from
      $3,207,308 for the nine months ended June 30, 2006 to $4,156,498 for the nine
      months ended June 30, 2007.





For
      the
      three months ending June 30, 2007 the increase was due to the inclusion of
      DeWind expenses of $706,885 offset by a decrease in CTC Cable development
      expenses of $76,000. The decrease was due mainly to a decrease in overhead
      and
      headcount related costs of $71,000. For the nine months ending June 30, 2007
      the
      increase was due to the inclusion of DeWind’s development of $2,032,092 offset
      by a decrease in CTC Cable expenses of $1,083,000. The CTC Cable decrease was
      due to a decrease in headcount and overhead related costs of $679,000 which
      are
      incorporated in production costs through inventory and costs of sales in 2007
      but expensed in 2006, a decrease of $585,000 in quality testing expenses which
      were contracted out in 2006 and are now performed internally and a reduction
      of
      $40,000 of SFAS 123R expenses.





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 $1,842,846 or 454% from $406,334 for the three months ended
      June 30, 2006 to $2,249,180 for the three months ended June 30, 2007. Sales
      and
      marketing expense increased $5,129,258 or 393% from $1,304,312 for the nine
      months ended June 30, 2006 to $6,433,570 for the nine months ended June 30,
      2007.





DeWind
      sales and marketing expenses represented significantly all of the increase
      including $1,489,883 and $4,604,825 for the three and nine month periods ending
      June 30, 2007 respectively. CTC Cable increases of $262,000 and $420,000 for
      the
      three and nine months periods ending June 30 represent increases in SFAS 123R
      expenses, increased commissions on the higher sales volume, and increased travel
      expenses. Corporate increases of $91,000 and $104,000 for the three and nine
      months periods ending June 30 represent increases in SFAS 123R expenses and
      corporate business development headcount related costs.





DEPRECIATION
      & AMORTIZATION EXPENSE. Depreciation expense consisted of depreciation on
      capitalized equipment, leasehold improvements, and other capital assets and
      amortization of acquired intangibles. Depreciation and amortization expense
      increased $499,787 or 249% from $200,623 for the three months ended June 30,
      2006 to $700,410 for the three months ended June 30, 2007. Depreciation and
      amortization expense increased $1,539,906 or 260% from $592,677 for the nine
      month period ended June 30, 2006 to $2,132,583 for the nine months ended June
      30, 2007. The dollar increase was primarily due to $509,932 and $1,536,476
      attributable to DeWind fixed asset depreciation and intangible amortization
      for
      the three and nine months ending June 30, 2007, respectively.





35




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





INTEREST
      INCOME. Interest income increased $42,310 or 40,177% from $105 for the three
      months ended June 30, 2006 to $42,416 for the three months ended June 30, 2007.
      Interest income increased $86,891 or 549.4% from 15,817 for the nine months
      ended June 30, 2006 to $102,708 for the nine months ended June 30, 2007. The
      increase was due to the higher cash balances on hand as a result of the
      additional financing resources obtained in February, 2007.





INTEREST
      EXPENSE. Interest expense increased $207,590 or 16.6% from $1,249,676 for the
      three months ended June 30, 2006 to $1,457,266 for the three months ended June
      30, 2007 and increased $1,523,889 or 78.3% from $1,947,448 for the nine months
      ended June 30, 2006 to $3,471,337 for the nine months ended June 30, 2007.
      The
      increase is due to the closing of our $22.8 million convertible debt offering
      in
      February, 2007 and the related cash and non-cash interest charges offset by
      a
      $0.7 million reduction in cash and non-cash interest related to the $3.5 million
      Bridge Notes from the June, 2006 quarter.





OTHER
      INCOME AND EXPENSES During the three months ended June 30, 2007, we recorded
      $290,720 as litigation settlement expense representing a settlement of an
      employment related matter and the issuance of 300,000 warrants valued at the
      fair value of $165,720 as described in Note 8 for the settlement of a dispute
      with an investor over warrant pricing. For the nine months ended June 30, 2007,
      we recorded an additional $1,902,967 and which represents a SFAS 5 accrual
      of
      estimated balances due under a tentative settlement of the FKI litigation
      negotiated in May, 2007 and accrued into the March, 2007 quarter. See also
      Note
      11. As a result of warrant re-pricings pursuant to anti-dilution protections
      in
      certain of our warrant and convertible note agreements, we recorded $88,121
      and
      $373,709 for the three and nine months ending June 30, 2007 respectively as
      expense for the modification of warrants and which reflects the difference
      in
      fair values before and after the re-pricings. See Notes 7 and 8.





INCOME
      TAXES. We made no provision for income taxes in the three months and nine months
      ended June 30, 2007 due to net losses incurred. Due to our continuing operating
      losses as well as the uncertainty of the timing of profitability in future
      periods, we have fully reserve our deferred tax assets. Tax expense represents
      statutory minimum tax payments, primarily in Europe for DeWind. As of June
      30,
      2007, our deferred tax assets continued to be fully reserved. We will continue
      to evaluate, on a quarterly basis, the positive and negative evidence affecting
      the realization of our deferred tax assets.





**Net
      Loss**





Our
      net
      income (losses) may be summarized as follows:




**Three
                Months Ended June 30,**
            
            **Nine
                months Ended June 30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Corporate
            
            $
            (3,251,556
            )
            $
            (3,063,310
            )
            $
            (9,045,076
            )
            $
            (12,589,348
            )Cable
            
            
            210,836
            
            
            (1,142,634
            )
            
            (2,085,457
            )
            
            (5,370,151
            )DeWind
            
            
            (5,082,879
            )
            
            --
            
            
            (15,015,593
            )
            
            --Total
            
            $
            (8,123,599
            )
            $
            (4,205,944
            )
            $
            (26,146,126
            )
            $
            (17,959,499
            )




36




For
      the
      three months ended June 30 2007, the increase in our net loss of $3.9 million
      from $4,205,944 to $8,123,599 was the result of the impact of our DeWind
      acquisition, which amounted to an increase of $5.1 million of net loss offset
      by
      a movement to profitability for the Cable segment representing a $1.4 million
      improvement and additional Corporate losses of $0.2 million. The Cable segment
      improvement was due to increased gross margin of $1.6 million, the result of
      significant revenue growth and an increase in operating expenses of $0.2 million
      to support the revenue growth. Corporate expense increase represents an increase
      in operating expenses of $0.6 million, an increase in interest expense of $0.2
      million offset by a decrease in other expenses and litigation related
      settlements of $0.6 million.





For
      the
      nine months ended June 30, 2007, the increase in our net loss of $8.1 million
      from $17,959,499 to $26,146,126 was the result of the impact of our DeWind
      acquisition, which amounted to an increase of $15.0 million of losses offset
      by
      $3.2 million lower net losses for our Cable segment and $3.6 million for the
      Corporate expenses. The Cable loss reduction was the result of additional gross
      margin of $2.7 million caused by increased revenue volume and a reduction of
      operating expenses of $0.7 million. The Corporate loss reduction was the net
      effect of $4.9 million reduction of non-cash charges related to convertible
      debt
      conversions and bankruptcy accounting expense acceleration related to
      convertible debt, offset by an increase of net interest expense of $1.4 million,
      an increase in operating expenses of $0.4 million and a decrease in securities
      and corporate related litigation settlements of $0.5 million.





**LIQUIDITY
      AND CAPITAL RESOURCES**





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





For
      the
      nine months ended June 30, 2007, we had a net loss of $26.1 million. At June
      30,
      2007 we had $26.2 million of cash and cash equivalents, which represented an
      increase of $23.7 million from September 30, 2006. The increase was due to
      cash
      used by operations of $15.8 million and cash used in investing activities of
      $5.4 million, primarily the purchase of our prototype turbine offset by $44.9
      million in net proceeds provided by financing activities, primarily net proceeds
      from our $22.8 million convertible note offering in February, 2007 and our
      $25.0
      million PIPE equity offerings in June, 2007.





Cash
      used
      by operations during the nine months ended June 30, 2007 of $15,790,853 was
      the
      result of operating losses, offset by depreciation, amortization, and non-cash
      compensation expenses and working capital requirements. During the first six
      months ending March, 2007, cash used from operations was $13.5 million and
      consisted of considerable investments in both our CTC Cable and Turbine
      businesses to purchase key raw materials and turbine parts. While our turbine
      component purchases continue, during the June, 2007 quarter, we reduced our
      cash
      usage to $2.3 million, primarily the result of cash generated by the cable
      segment and a $4.7 million customer deposit on a 5 unit wind turbine order
      offset by cash used in our turbine segment for operations and component
      purchases and for corporate activities including our debt service on our $27.5M
      of debt remaining at June 30, 2007. Cash used by investing activities of
      $5,444,683 was primarily the capitalization of our prototype turbine and the
      cash investment required by our E Services entity. Cash provided by financing
      of
      $44,864,846 was primarily due to the net cash proceeds from the $22.8 million
      Convertible Note offering in February, 2007 and our $25 million PIPE
      equity financings in June, 2007.





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





37




**CAPITAL
      EXPENDITURES**





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





**EFFECTS
      OF INFLATION**





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





**OFF
      BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS**





There
      are
      no off **** balance
      sheet arrangements. The following table summarizes our contractual obligations
      and commitments as of June 30, 2007:





**Contractual
                Obligations**
            
            **Total**
            
            **Less
                than 1 year**
            
            **1-3
                years**
            
            **More
                than 3 Years**Debt
                Obligations
            
            $
            27,538,200
            
            $
            5,013,200
            
            $
            22,525,000
            
            $
            --Capital
                Lease Obligations
            
            $
            155,268
            
            $
            155,268
            
            $
            --
            
            $
            --Operating
                Lease Obligations
            
            $
            4,416,653
            
            $
            1,519,205
            
            $
            2,897,448
            
            $
            --





**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
      June 30, 2007 we did not hold any derivative financial instruments for
      speculative or trading purposes. The primary objective of our investment
      activities is the preservation of principal while maximizing investment income
      and minimizing risk. As of June 30, 2007, we had $26.2 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.





We
      currently purchase a substantial portion of our turbine materials from suppliers
      in Europe under purchase agreements denominated in Euros. We currently do not
      hedge against the Euro.





**ITEM
      4: CONTROLS AND PROCEDURES**





Based
      on
      an evaluation under the supervision and with the participation of the Company's
      management, including the Chief Executive Officer, the Chief Financial Officer
      and the Chief Operating Officer, the Company's principal executive officer
      and
      principal financial officer have concluded that the Company's disclosure
      controls and procedures (as defined under the Securities Exchange Act of 1934,
      as amended (Exchange Act)) were not effective as of June 30, 2007 to ensure
      that
      information required to be disclosed by the Company in reports that it files
      or
      submits under the Exchange Act is recorded, processed, summarized and reported
      within the time periods specified in Securities and Exchange Commission rules
      and forms.





38




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





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


l
              Proper
                  segregation of duties and inadequate training did not exist as
                  well as an
                  inadequate number of accounting and finance personnel staff at
                  fiscal year
                  end.l
              The
                  Company had a one member Audit Committee, a one member Compensation
                  Committee, and had a designated financial expert on the Board of
                  Directors
                  since January of 2006. Until December, 2005 we only had a two person
                  non-independent Board of Directors and from January, 2006 through
                  November, 2006 we had one independent director and two non-independent
                  directors comprising our Board of Directors.l
              The
                  Company did not have an independent internal audit function due
                  to the
                  small size of the
                  organization.




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





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




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


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




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


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




i)
              An
                  effective purchasing function did not exist during the entire fiscal
                  year.ii)
              There
                  were inadequate system driven matching controls over the receiving
                  function for inventory parts and supplies. Receiving tolerances
                  for
                  inventory related pricing and quantities received are not established
                  systematically.iii)
              There
                  was a lack of segregation of duties between the purchasing and
                  payable
                  processing functions.iv)
              There
                  were inadequate vendor management duties and responsibilities during
                  the
                  yearv)
              There
                  was a lack of sufficient purchasing reports for management
                  review.
  39




During
      the nine months ended June 30, 2007 the Company improved the internal control
      structure and addressed the identified material weaknesses existing in 2006
      described above, as follows:




(1)
              The
                  Company promoted an individual to be Chief Financial Officer who
                  will be
                  tasked with further section 404 compliance responsibility and provide
                  additional oversight to financial transactions.(2)
              Hiring
                  additional accounting and operations personnel with CPA certifications
                  and
                  public reporting experience and engaged outside contractors with
                  additional technical accounting expertise, as needed, and reorganizing
                  the
                  accounting and finance department to ensure that accounting personnel
                  with
                  adequate experience, skills and knowledge relating to complex,
                  non-routine
                  transactions are directly involved in the review and accounting
                  evaluation
                  of our complex, non-routine transactions;(3)
              Involving
                  both internal accounting and operations personnel and outside contractors
                  with technical accounting expertise, as needed, early in the evaluation
                  of
                  a complex, non-routine transaction to obtain additional guidance
                  as to the
                  application of generally accepted accounting principles to such
                  a proposed
                  transaction;(3)
              Documenting
                  to standards established by senior accounting personnel and the
                  principal
                  accounting officer the review, analysis and related conclusions
                  with
                  respect to complex, non-routine transactions; and(4)
              Requiring
                  senior accounting personnel and the principal accounting officer
                  to review
                  complex, non-routine transactions to evaluate and approve the accounting
                  treatment for such transactions.(5)
              Interviewing
                  prospective new independent Directors for our Board including members
                  willing to serve on the Audit and Compensation
                  committees.(6)
              Evaluating
                  the internal audit function in relation to the Company’s financial
                  resources and requirements. We expect to pursue a strategy of outsourcing
                  our internal audit function in late fiscal 2007.(7)
              Continuing
                  the evaluation of the DeWind accounting and financial systems including
                  documentation and implementation of accounting policies and
                  procedures.(8)
              Initiating
                  an Enterprise software system enhancement project to improve the
                  tracking
                  of inventory and further automate the sales order to cash, inventory
                  and
                  production, and procure to pay system processes for our US and
                  European
                  operations and to provide for additional ITC controls. These improvements
                  are projected for completion in fiscal
                  2008.


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





There
      were no changes in our internal control over financial reporting during the
      quarter ended June 30, 2007 that has materially affected, or is reasonably
      likely to materially affect, our internal control over financial reporting,
      other than the remediation measures which are described above.





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





40




**PART
      II - OTHER INFORMATION**





**ITEM
      1 - LEGAL PROCEEDINGS**





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




**Enable
        et al v. Composite Technology Corporation**
  On
        May
        11, 2007, Enable Growth Partners, Enable Opportunity Partners, and Pierce
        Diversified Strategy Master Fund (collectively “Enable”) filed a Complaint in
        the Supreme Court of the State of New York, County of New York, Index No.
        601598/2007 (the “Claim”). Enable had previously invested $1,000,000 in the
        October, 2005 DIP financing and $1,000,000 in the March, 2006 Bridge Notes
        Financing. The Claim states that the Company failed to properly calculate
        the
        fair value of certain consideration that was given in September, 2006 as
        an
        inducement to convert the March, 2006 Bridge Notes of certain other investors.
        The Company represents that the market value on the date of the issuance
        of
        $1.06 was equal to the fair value of the consideration. Enable alleges that
        the
        fair value of the consideration was approximately $0.02 per share and thereby
        triggers additional anti-dilution protection for the warrants still held
        by the
        former convertible debt holders. If the Claim figure were to be upheld, a
        consideration of $0.02 per share would result in the required issuance of
        approximately 40,000,000 additional common shares and common share equivalents,
        representing approximately 20% of the current issued and outstanding share
        amount and further trigger additional anti-dilution for subsequent financing
        rounds resulting in further warrant price reductions and reductions of existing
        conversion prices for existing convertible debt. The Company believes the
        Claim
        has no merit and has not recorded a liability. The Company promptly filed
        a
        claim under its E&O insurance policy to cover potential damages and legal
        costs, retained legal counsel and intends to vigorously defend its position.
        On
        July 11,2007 the Company filed a motion to dismiss the claim. On July 31,
        2007
        Enable filed an opposition to the motion to dismiss. The Company is required
        to
        file a response to Enable’s opposition filing by August 10, 2007. No hearing has
        been set before the court and the presiding judge has not ruled on our motion
        to
        dismiss. On July 31, 2007 the Company received confirmation that the matter
        is
        covered under our primary E&O policy. We are awaiting notification of
        coverage under our supplemental E&O policy. Coverage is subject to a
        $200,000 retention for legal fees. Amounts in excess of this up to our policy
        limits are covered. We currently have primary coverage of $5,000,000 and
        supplemental coverage of an additional $5,000,000.
  FKI
        Litigation
  On
        May 3,
        2007,  the Company and certain of its wind division subsidiaries (here
        referred to as “DeWind”) entered into a settlement agreement with FKI
        Engineering Ltd., FKI plc, and Brush Electrical Machines Ltd (collectively
        “FKI”) Under the terms of the agreement, the DeWind and FKI agreed to take all
        necessary steps to effect a stay of all of the disputes listed below effective
        until September 15, 2007 or other such date as the parties agree to in writing
        in order to allow sufficient time to effect the settlement agreement.  As
        part of the settlement agreement, the parties have agreed to use their best
        efforts to cause or procure the auditors of a German subsidiary of the Company
        to complete their audit of such German subsidiary’s statutory accounts for the
        fiscal years ending March 31, 2003, 2004, and 2005. It is expected that as
        part
        of the process of the completion of such audits, the auditors will identify
        any
        issues relating to the capital reserve accounts of the German subsidiary
        that
        are the subject of the disputes listed in 2 below and the counterclaim listed
        in
        1.b&c below.  The De Wind and FKI parties have further agreed as part
        of the settlement agreement that if further assurance is required on possible
        legal issues regarding the German subsidiary’s capital structure and / or in
        relation to payments made into and / or out of the capital reserve account,
        then, the legal counsel of DeWind and FKI shall meet with a view to preparing
        a
        mutually acceptable statement regarding the capital account or hire an
        independent reputable and suitably experienced German law firm to prepare
        the
        statement that sets out the capital reserve accounts issues.  The
        resolution of the capital reserve accounts issues is not reasonably estimable
        at
        this time and no contingent asset has been recorded to date for any future
        funds
        potentially receivable from FKI, if any, to resolve the capital reserve account
        issues.   Assuming De Wind’s satisfaction with the statement referred
        to above, then,DeWind has agreed to make payments totaling 1,500,000
        Euros ($2,024,850 at June 30, 2007 exchange rates) in two equal
        installments, one within seven days after the agreed upon capital account
        statements have been issued and one 90 days after the first
        installment.   These payments shall serve to settle all remaining
        claims currently existing between FKI and DeWind.  In the event that the
        auditors cannot complete their audit due to issues relating to the capital
        account of the German subsidiary or in the event that no statement as referred
        to above, and if required, is forthcoming, then the payments referred to
        above
        will not be made and the German subsidiary will have to pursue litigation
        to
        correct discrepancies in its capital reserve accounts. During the quarter
        ended
        June 30, 2007, since the balance due was probable and reasonably estimable,
        the
        Company recorded a litigation settlement accrual under the guidance of SFAS
        5
        and expensed the accrual to other expense in the statement of operations
         of 1,452,000 Euros ($1,956,570 at June 30, 2007 exchange rates) to
        properly accrue for the settlement balance of 1,500,000 Euros ($2,024,850
        at
        June 30, 2007 exchange rates).
  41
  **FKI
        Engineering Ltd. and FKI plc. (the FKI Companies”) v. Dewind Holdings Ltd and
        Dewind GmbH; and DeWind GmbH v. FKI Engineering Ltd.**
 
 There
        are
        two related legal actions against subsidiaries of the Company: the first
        action
        is by FKI Engineering and FKI plc commenced in England against Dewind Holdings
        Ltd and Dewind GmbH (“first action”) and the second action is by DeWind GmbH
        against FKI Engineering Ltd commenced in Germany (“second action”).
 
 1.
        FKI
        Engineering Ltd. and FKI plc. v. DeWind Holdings Ltd and DeWind
        GmbH
 
 On
        July
        6, 2006 FKI Engineering Ltd. and FKI plc. (the “FKI Companies”) filed a suit
        with the High Court of Justice, Queen’s Bench Division, Commercial Court, Royal
        Court of Justice   in England against both DeWind Holdings Ltd. and DeWind
        GmbH claiming as follows:
 a.
                FKI
                    Engineering Ltd. claims against DeWind Holdings Ltd.: (1) $2,113,555,
                    further or alternatively damages for breach of contract; and
                    (2) Interest
                    in the amount of $112,355;b.
                FKI
                    Engineering Ltd. and FKI plc claim against DeWind GmbH: (1) a
                    declaration
                    that neither FKI Engineering Ltd. nor FKI plc is liable to DeWind
                    GmbH as
                    set out in the Draft Proceedings or at all; (2) damages; (3)
                    a declaration
                    that FKI Ltd. and/or FKI plc would be entitled to repayment upon
                    demand
                    from DeWind GmbH of any amount which they may be ordered to pay
                    to DeWind
                    GmbH by reason of the matters set out in the second action commenced
                    by
                    DeWind GmbH in Germany as described below) or otherwise; and
                    finally,c.
                FKI
                    Engineering Ltd. further claims against DeWind Holdings Ltd.:
                    (1) damages,
                    alternatively payment of $72,095,285; and (2) interest to be
                    assessed.d.
                On
                    September 22, 2006 DeWind Holdings Ltd. filed a counterclaim
                    claiming
                    against FKI Engineering Ltd. as follows: (1) payment of $430,000;
                    alternatively damages for breach of contract; (2) contractual
                    interest;
                    alternatively statutory interest to be
                    assessed.
  In
        respect of this claim, the Company had previously accrued 100% of the FKI
        Engineering Ltd. claim for $1,662,900 or $2,092,900 net of the $430,000
        counterclaim and had recorded a deferred purchase consideration asset of
        $2,537,300.
 
 In
        formulating the claims mentioned under letter “b.” above, the FKI Companies are
        seeking a negative declaratory judgment against DeWind GmbH in connection
        with
        the claims delivered by DeWind GmbH against FKI Engineering Ltd, that are
        now
        the subject of the second action filed by DeWind GmbH against FKI Engineering
        Ltd in Lübeck Germany. This action is further described below. The FKI Companies
        are seeking declaration that DeWind GmbH has no claims against them out of
        capital reserve agreements or unlawful repayments. Furthermore, the FKI
        Companies seek declaration that any payment obligations towards DeWind GmbH
        would result in a claim of repayment of the FKI Companies against DeWind
        GmbH in
        the same amount. In this connection, the Company has contested the
        jurisdictional competency of the English court since it is not apparent that
        it
        does have jurisdiction according to Art. 2 et seqq. and Art. 6 Nr. 1 of the
        European Council Regulation (EC) No. 44/2001.
 
 The
        claims mentioned under letter “c.” above are contingent on the finding that the
        claims that are now the subject of the above mentioned second action filed
        by
        DeWind GmbH against FKI Engineering Ltd in Lübeck, Germany for payment of $95.8
        million, as further described below, are valid.
 
 The
        counterclaim mentioned under letter “d.” above is based on the argument that FKI
        Engineering Ltd. has failed to pay DeWind Holdings Ltd. the sum of $430,000
        although it was obliged to do so under the SSA, by reason whereof DeWind
        Holdings Ltd. has suffered loss and damage in such sum.
 
 In
        respect of all claims mentioned, Dewind GmbH and DeWind Holdings Ltd. have
        filed
        their defense. The FKI Companies, in turn, have filed and served a Reply
        to
        Defense and a Defense to the counterclaim. From December 11, 2006 until December
        13, 2006, an oral hearing was held in front of the English High Court regarding
        the competency of the English court to hear the cases. On January 25, 2007
        the
        High Court rendered a judgment holding that it had competence to hear also
        the
        claim against DeWind GmbH. DeWind GmbH sought leave to appeal this decision
        and
        put its submissions in writing by February 8, 2007. The High Court furthermore
        held that DeWind GmbH had to pay a maximum of 90 % of FKI's costs of the
        application contesting jurisdiction. All hearings under this case have been
        delayed or adjourned pending the settlement and capital accounts statement
        described above.
  42
  2.
        DeWind GmbH v. FKI Engineering Ltd.
 
 On
        July
        20, 2006 DeWind GmbH filed a claim against FKI Engineering Ltd. (with FKI
        plc
        being a “third party noticed”) at the District Court of Lübeck, Germany seeking
        that: a. FKI Engineering Ltd. shall be ordered to pay to DeWind GmbH the
        sum of
        $72,525,350; b. FKI Engineering Ltd. shall be ordered to pay to DeWind GmbH
        interest on the above mentioned sum of a value of 5 per cent point above
        the
        respective base lending rate since the pending of the action; and c. it shall
        be
        declared that FKI Engineering Ltd. has the obligation to refund possible
        taxes
        to DeWind GmbH, which may be evaluated against DeWind GmbH, if the tax
        authorities deem the aforementioned claim for payment as extraordinary gains
        liable to tax, which cannot be settled with DeWind’s accumulated
        deficit.
 
 The
        claim
        was filed based on a review of DeWind GmbH’s March 31, 2006 year end audit which
        indicated that FKI Engineering Ltd. as a former shareholder of DeWind GmbH
        had
        not duly paid capital reserves in the amount of the claim. The Company asserts
        that FKI either did not pay the capital reserves as in accordance with the
        Capital Reserve Agreement signed pursuant to the acquisition of DeWind by
        EU
        Energy in July, 2005 or had, after receipt of money by DeWind GmbH, immediately
        claimed the funds back on the grounds of undefined loans. Such practices
        are
        illegal under German law. The Company further asserts that loan contracts
        of
        this magnitude were never concluded between DeWind GmbH and FKI Engineering
        Ltd.
        On September 12, 2006 FKI Engineering Ltd. filed its acknowledgement of defense
        and filed its detailed statement of defense during the quarter ended March
        31,
        2007. All hearings under this case have been delayed or adjourned pending
        the
        settlement and capital accounts statement described above.
 
 **Brush
        Electrical Machines Ltd. v. Dewind GmbH**
 
 On
        October 6, 2006, Brush Electrical Machines Ltd., an FKI Engineering Ltd.
        affiliate, served a notice of an action with the High Court of Justice, Queen’s
        Bench Division, Commercial Court, Royal Court of Justice   in England on
        DeWind GmbH. According to this notice of action, Brush is claiming payment
        of an
        amount of GBP 692,438 (approximately $1.36 million at December 31, 2006 exchange
        rates) from DeWind GmbH. The claim is based on an alleged breach of contract
        with regard to an agreement between the parties dated 30 June 2005 concerning
        the asset transfer to DeWind GmbH resulting from the sale of DeWind UK by
        agreement dated July 4, 2005 and/or a further agreement concluded on 13 July
        2005. The Company received the particulars of this claim on November 24,
        2006.
        On January 11, 2007 DeWind GmbH filed its defense and a contingent counterclaim
        for damages. In the defense, DeWind GmbH admitted to owe an amount of at
        least €
143,000 ($184,755) to Brush and paid this sum in January, 2007.
  **Zephyr
        GmbH & Co. KG v. DeWind GmbH**
 
 On
        January 06, 2006 Zephyr filed a suit against DeWind GmbH with the District
        Court
        of Düsseldorf, Germany for payment of an amount of $1,300,533 plus interest
        based on the argument that DeWind GmbH had allegedly failed to comply with
        a
        guarantee of availability under a turbine sales contract. Furthermore, Zephyr
        sought a declarative judgment that DeWind GmbH had to come up for a potential
        purchase tax obligation in an amount of $208,085. On August 08, 2006, the
        District Court rendered a judgment by default against Zephyr dismissing the
        case. Zephyr filed an objection against this judgment on August 29, 2006.
        DeWind
        GmbH responded by filing a written pleading on October 04, 2006. The Company
        has
        fully reserved net receivables of $914,690 in respect of this dispute and
        has
        assumed that the $720,590 cash paid to Zephyr as a result of their calling
        of
        performance bonds will not be recovered.
  **EU
          Energy plc Indemnification Claim**
  On
          June
          29, 2007 the Company filed a Claim Notice of Indemnification (the “Claim”)
          pursuant to the terms of the Share Exchange Agreement (the “Agreement) by and
          among Composite Technology Corporation and the shareholders of EU Energy
          plc and
          Michael Porter (EUE). The Claim asserts that the principals of EUE
          misrepresented the net assets of the date of acquisition of EU Energy by
          approximately $14.2 million. Under the terms of the Agreement, if the value
          of
          the net assets acquired under the transaction was misrepresented, the Company
          may make a claim against the shares issued to the majority holders. The
          Company
          believes that the values of certain assets were overstated and certain
          liabilities were not properly recorded as of the date of the acquisition.
          Any
          amount of claims determined to be valid are recoverable in shares of the
          Company’s common stock at a rate of $1.55 per share. If upheld in total, the
          claim would result in approximately 9.6 million shares of common stock
          returned
          to the Company by the two majority shareholders of EU Energy plc. The value
          of
          any returned shares, if any, will be recorded as a reduction of goodwill
          acquired. The Company has not recorded any goodwill adjustment for the
          quarter
          ended June 30, 2007 for this action and no shares have been returned to
          the
          Company as of August 8, 2007. The Company must resolve the matter with
          EUE
          within 90 days of the Claim date or file for adjudication in the appropriate
          court of law. To date, the Company has not filed for adjudication.
  43




**ITEM
      1A. RISK FACTORS**





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





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





WE
      EXPECT
      FUTURE LOSSES AND OUR FUTURE PROFITABILITY IS UNCERTAIN.


Prior
      to
      acquiring Transmission Technology Corporation, or TTC, in November 2001, we
      were
      a shell corporation having no operating history, revenues from operations,
      or
      assets since December 31, 1989. We have recorded approximately $15.7 million
      in
      ACCC product sales since inception and we have $29.2 million in Turbine and
      related services revenues since the acquisition of DeWind on July 3, 2006.
      Historically, we have incurred substantial losses and we may experience
      significant quarterly and annual losses for the foreseeable future. We may
      never
      become profitable. If we do achieve profitability, we may not be able to sustain
      or increase profitability on a quarterly or annual basis. We expect the need
      to
      significantly increase our product development and product prototype and
      equipment prototype production expenses, as necessary. As a result, we will
      need
      to generate significant revenues and earnings to achieve and maintain
      profitability.





WE
      HAVE A
      SIGNIFICANT PORTION OF OUR CURRENT REVENUES AND ORDER BOOKINGS WITH A SMALL
      NUMBER OF CUSTOMERS. WE HAVE A HISTORY OF CUSTOMERS WITH NON PAYMENT OR PAYMENT
      DELAYS UNDER OUR CONTRACTS.


For
      both
      our cable and turbine business units, revenues recognized over the past three
      fiscal quarters and order bookings received to date are concentrated with a
      very
      small number of customers, primarily our ACCC conductor distribution partner
      in
      China and our initial wind turbine contracts consisting substantially of one
      US
      contract for our D8.2 turbine model for approximately $40M and one contract
      for D8 turbines for approximately $19M. Further, our first D8.2 turbine
      customer missed the payment deadline for their initial payments required under
      their wind turbine purchase contract and in June, 2007 we terminated the
      contract for non-payment. We can provide no assurance that this customer or
      any
      other turbine customers will make the advance payments required under our
      turbine contracts that are necessary to provide us with sufficient capital
      to
      build our wind turbines. The loss of one or more of our customers or material
      changes to the contracts with or payment terms of these customers may result
      in
      a significant business interruption through reduced revenues, reduced cash
      flows, delays in revenues or cash flows and such delays or reductions could
      have
      a material impact on the future revenue growth and profitability of the Company.
      Such loss of customers or material adverse changes to these contracts may also
      force us to such debt or equity financings that may be dilutive to shareholder's
      interests.




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


Since
      inception, our accountants have issued a report relating to our audited
      financial statements which contains a qualification with respect to our ability
      to continue as a going concern because, among other things, our ability to
      continue as a going concern is dependent upon our ability to generate profitable
      operations in the future or to obtain the necessary financing to meet our
      obligations and repay our liabilities from normal business operations when
      they
      come due. There is no guarantee that the products will be accepted or provide
      a
      marketable advantage, and therefore, no guarantee that the commercialization
      will ever be profitable. For the nine months ended June 30, 2007 we had a net
      loss of $26,146,126 and negative cash flows from operations of $15,790,853.
      For
      the year ended September 30, 2006, we had a net loss of $28,523,192 and negative
      cash flows from operations of $6,263,703. For the fiscal year ended September
      30, 2005, we had a net loss of $40,163,407 and negative cash flows from
      operations of $2,439,151. For the fiscal year ended September 30, 2004, we
      had
      net losses of $14,687,875 and negative cash flows from operations of
      $18,735,430. As of June 30, 2007, our accumulated deficit was
      $121,272,085.





44


BECAUSE
        WE ARE IN AN EARLY STAGE OF COMMERCIALIZATION, OUR LIMITED HISTORY OF CABLE
        OPERATIONS AND OUR EARLY STAGE OF COMMERCIALIZATION FOR OUR NEW WIND PRODUCTS
        MAKES EVALUATION OF OUR BUSINESS AND FUTURE GROWTH PROSPECTS
        DIFFICULT.
 Since
        our
        reorganization in 2001, we have had a limited operating history and are at
        an
        early stage of commercialization of a new technology product to a market
        unused
        to using new technologies. We made our ACCC available and entered into our
        first
        commercial agreement in 2003. We acquired our wind energy division only in
        July
        2006.
 
 Our
        electric cable technology is a relatively new advance for the electrical
        utility
        industry technology and has not yet achieved widespread adoption. Our wind
        turbine technology for our next generation of wind turbines is commercially
        unproven and has not achieved commercial 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.
  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 Marv Sepe, our Chief Operating Officer. If Messrs. Wilcoxon,
        or
        Sepe were unable to provide services to us for whatever reason, our business
        would be adversely affected. Neither Mr. Wilcoxon nor Mr. Sepe has entered
        into
        an employment agreement with the Company. In addition, our ability to develop
        and market our products and to achieve profitability will depend on our ability
        to attract and retain highly talented personnel. We face intense competition
        for
        personnel from other companies in the electrical utility industry. The loss
        of
        the services of our key personnel or the inability to attract and retain
        the
        additional, highly-talented employees required for the development and
        commercialization of our products, may significantly delay or prevent the
        achievement of product development and could have a material adverse effect
        on
        us.
 
 INTERRUPTIONS
        OF SUPPLIES FROM OUR KEY SUPPLIERS MAY AFFECT OUR RESULTS OF OPERATIONS AND
        FINANCIAL PERFORMANCE.
 Interruptions
        or shortages of supplies from our key suppliers of raw materials or turbine
        parts suppliers could disrupt production or impact our ability to increase
        production and sales. We use a limited number of sources for most of the
        other
        raw materials and turbine parts. We do not have long-term or volume purchase
        agreements with most of our suppliers, and may have limited options in the
        short-term for alternative supply if these suppliers fail, for any reason,
        including their business failure or financial difficulties, to continue the
        supply of materials or components. Moreover, identifying and accessing
        alternative sources may increase our costs, extend the advance purchase time
        prior to delivery, or both.




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


As
      of
      August 4, 2007, Benton H Wilcoxon, our Chairman of the Board, Chief Executive
      Officer, and Michael Porter, former CTC President and former majority
      shareholder of EU Energy in the aggregate beneficially own or control
      approximately 18% of the outstanding common stock. As a result, these persons
      have controlling influence in determining the outcome of any corporate matters
      submitted to our shareholders for approval, including mergers, consolidations
      and the sale of all or substantially all of our assets, election of directors
      and other significant corporate actions. They also have the power to prevent
      or
      cause a change in control. The interests of these shareholders may differ from
      the interests of the other shareholders, and may limit the ability of other
      shareholders to affect our management and affairs.




45


WE
        HAVE
        AND WILL LIKELY CONTINUE TO EXPERIENCE CUSTOMER CONCENTRATION, WHICH MAY
        EXPOSE
        US TO ALL OF THE RISKS FACED BY OUR POTENTIAL MATERIAL CUSTOMERS.
 For
        our
        cable business segment, for the quarter ended June 30, 2007 one customer
        in
        China represented over 50% of our recorded revenues and this customer is
        expected to represent in excess of 50% of our cable revenue for the next
        two
        fiscal quarters. Another customer in China represented 20% of revenues, and
        one
        European customer and a North American customer represented 8.5% and 7.0%
        of our
        revenues, respectively. For our turbine business segment, we announced in
        March,
        2007 that we had signed a contract with one customer representing an approximate
        $40 million order for delivery in fiscal 2008. In June, 2007 we announced
        the
        due to non-payment of the required progress payments that this contract was
        declared in default by the Company.
 
 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.
 
 WE
        ARE
        CURRENTLY INVOLVED IN SECURITIES RELATED LITIGATION THAT MAY RESULT IN THE
        ISSUANCE OF COMMON SHARES OR COMMON SHARE DERIVATIVE INSTRUMENTS.
 On
        May
        11, 2007 Enable Growth Partners, Enable Opportunity Partners, and Pierce
        Diversified Strategy Master Fund (collectively “Enable”) filed a Complaint in
        the Supreme Court of the State of New York, County of New York, Index No.
        601598/2007 (the “Claim”). Enable had previously invested $1,000,000 in the
        October, 2005 DIP financing and $1,000,000 in the March, 2006 Bridge Notes
        Financing. The Claim states that the Company failed to properly calculate
        the
        fair value of certain consideration that was given in September, 2006 as
        an
        inducement to convert the March, 2006 Bridge Notes of certain other investors.
        The Company represents that the market value on the date of the issuance
        of
        $1.06 was equal to the fair value of the consideration. Enable alleges that
        the
        fair value of the consideration was approximately $0.02 per share and thereby
        triggers additional anti-dilution protection for the warrants still held
        by the
        former convertible debt holders. If the Claim figure were to be upheld, a
        consideration of $0.02 per share would result in the required issuance of
        approximately 40,000,000 additional common shares and common share equivalents,
        representing approximately 20% of the current issued and outstanding share
        amount. The Company believes the Claim has no merit and has not recorded
        a
        liability. The Company has retained legal counsel and intends to vigorously
        defend its position. If the Company were to lose the Claim, this would result
        in
        substantial dilution of your equity interests.
 
 THE
        ACQUISITION OF EU ENERGY MAY RESULT IN ADDITIONAL SARBANES-OXLEY ISSUES AND
        MATERIAL WEAKNESSES IN THE CONTROL STRUCTURE OF COMPOSITE TECHNOLOGY
        CORPORATION.
 EU
        Energy
        is a UK company that was not previously subject to the requirements of the
        Sarbanes-Oxley Act of 2002. The operations of EU Energy are expected to be
        material to the results of the post-acquisition combined entity and management
        may not have sufficient time to document, assess, test, and remedy the control
        structure of EU; to identify any material control weaknesses; and to disclose
        any such weaknesses in time to comply with the reporting requirements of
        Sarbanes-Oxley.
 
 We
        are
        currently assessing the control structure of EU Energy/DeWind, and we expect
        to
        conclude on its control structure at the end of our fiscal year ending September
        30, 2007.
  46


WE
      HAVE
      AN UNPROVEN BUSINESS MODEL FOR OUR WIND TURBINE SEGMENT, OUR TURBINE SUPPLY
      CHAIN IS NOT ROBUST AND THE WORLD MARKET FOR WIND TURBINE COMPONENTS IS BECOMING
      INCREASINGLY COMPETITIVE.


Our
      DeWind wind turbines involve an extensive and complicated supply chain to be
      intact and functioning under tight scheduling in order to deliver the required
      parts at the correct times to build our turbines. We are currently in the
      process of restarting the supply chain of our DeWind turbine business. Until
      June, 2007 the Company experienced a cash shortage which required us to tightly
      manage the cash payments to our suppliers. At the same time, we are competing
      with other wind turbine manufacturers for production of certain key components
      including bearings and other highly machined parts. There are a limited number
      of suppliers worldwide who can provide such parts and these suppliers are facing
      increasing demand for these parts due to the worldwide increase in wind turbine
      demand. While we have been able to maintain our relationships with our suppliers
      to date, we may be required to provide additional advance payments to secure
      our
      supply chain, there may be an increase in the price of such parts, or we may
      not
      be able to source the number of parts to fulfill the production requirements
      of
      our current and future turbine orders. This may impact our turbine business
      through increased cash requirements, reduced revenues, or reduced
      profitability.




**Risks
      Related To Our Securities**





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


The
      market price of our common stock may be subject to significant fluctuations
      in
      response to our operating results, announcements of new products or market
      expansions by us or our competitors, changes in general conditions in the
      economy, the financial markets, the electrical power transmission and
      distribution industry, or other developments and activities affecting us, our
      customers, or our competitors, some of which may be unrelated to our
      performance. The sale or attempted sale of a large amount of common stock into
      the market may also have a significant impact on the trading price of our common
      stock. During the last 12 months, the closing bid prices for our common stock
      have fluctuated from a high of $2.22 to a low of $0.77. Fluctuations in the
      trading price or liquidity of our common stock may adversely affect our ability
      to raise capital through future equity financings.





AS
      OF
      AUGUST 6, 2007, 62,796,511 COMMON SHARES ARE ISSUABLE UPON EXERCISE OF ALL
      OUTSTANDING OPTIONS, WARRANTS AND CONVERSION OF CONVERTIBLE NOTES FOR LESS
      THAN
      THE MARKET PRICE OF $1.60 PER SHARE. CASH PROCEEDS RESULTING FROM THE FULL
      EXERCISE AND CONVERSION OF THESE SECURITIES WOULD BE APPROXIMATELY $40,458,000.
      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 29.2% TO APPROXIMATELY
      278,187,000 SHARES.





47




The
      exercise price or conversion price of outstanding options, warrants and
      convertible notes may be less than the current market price for our common
      shares. In the event of the exercise of these securities, a shareholder could
      suffer substantial dilution of his, her or its investment in terms of the
      percentage ownership in us as well as the book value of the common shares held.
      At the August 6, 2007 market price of $1.60 per share, 62,796,511 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 $40,458,000 and would increase the outstanding common shares by
      29.2% to approximately 278,187,000 shares.




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




Between
      July 30 and August 7, 2007, the Company issued 1,104,583 shares of its common
      stock to two accredited investors upon the conversion of $1,137,720 of principal
      of the February, 2007 Convertible Debentures at a conversion price of $1.03
      per
      share. The Debentures were originally issued in February, 2007 and had been
      carried on the Company's balance sheet as long term debt prior to the
      conversion. 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.




**ITEM
      3 - DEFAULTS ON SENIOR SECURITIES**





None





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





None





**ITEM
      5 - OTHER INFORMATION**


None




48


**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.3.2(4)
              
              Bylaws
                  of Composite Technology Corporation, as modified January 6,
                  200610.1(5)
              
              Agreement
                  by and among Enertrag AG and EU Energy Ltd. dated as of September
                  27,
                  2006.10.2(6)
              
              Agreement
                  by and among EU Energy Inc., GE Infrastructure Technology, LLC
                  and GE
                  Infrastructure Technology International Inc. dated as of October
                  6,
                  2006.10.3(7)
              
              Strategic
                  Alliance Agreement by and between the Registrant and TECO-Westinghouse
                  Motor Company dated as of November 27, 2006.10.4(9)
              
              Modification
                  of Agreement dated September 27, 2006 by and among Enertrag and
                  the
                  Registrant’s wholly owned subsidiary DeWind Turbines regarding E. Service
                  GmbH dated as of January 19, 2007.10.5(10)
              
              Distribution
                  Agreement by and between the Registrant’s wholly owned subsidiary CTC
                  Cable Corporation and Far East Composite Technology Company dated
                  as of
                  January 30, 200710.6(11)
              
              Securities
                  Purchase Agreement dated as of June 11, 2007 by and among the Registrant
                  and the investors set forth therein10.7(11)
              
              Form
                  of Warrant10.8(11)
              
              Registration
                  Rights Agreement dated as of June 11, 2007 by and among the Registrant
                  and
                  the investors set forth therein10.9
                  (12)
              
              Securities
                  Purchase Agreement dated as of June 18, 2007 by and among the Registrant
                  and the other parties listed therein10.10(12)
              
              Form
                  of Warrant10.11(12)
              
              Registration
                  Rights Agreement dated as of June 18, 2007 by and among the Registrant
                  and
                  the other parties listed therein10.12(12)
              
              Wind
                  Turbine Agreement, dated as of June 15, 2007, by and between DeWind,
                  Inc.
                  and Enerserve Limited.14(8)
              
              Code
                  of Ethics.31.1(13)
              
              Rule
                  13a-14(a) / 15d-14(a)(4) Certification31.2(13)
              
              Rule
                  13a-14(a) / 15d-14(a)(4) Certification32.1(13)
              
              Section
                  1350 Certification32.2(13)
              
              Section
                  1350 Certification




49




(1)
                Incorporated
                    herein by reference to Form 10-KSB filed as a Form 10-KT with
                    the U. S.
                    Securities and Exchange Commission on February 14,
                    2002.(2)
                Incorporated
                    herein by reference to Form 8-K filed with the U. S. Securities
                    and
                    Exchange Commission on November 20, 2001.(3)
                Incorporated
                    herein by reference to Form 8-K filed with the U. S. Securities
                    and
                    Exchange Commission on November 25, 2005.(4)
                Incorporated
                    herein by reference to Form 8-K filed with the U.S. Securities
                    and
                    Exchange Commission on January 12, 2006.(5)
                Incorporated
                    herein by reference to Form 8-K filed with the U.S. Securities
                    and
                    Exchange Commission on September 27, 2006.(6)
                Incorporated
                    herein by reference to Form 8-K filed with the U.S. Securities
                    and
                    Exchange Commission on October 6, 2006.(7)
                Incorporated
                    herein by reference to Form 8-K filed with the U.S. Securities
                    and
                    Exchange Commission on November 30, 2006.(8)
                Incorporated
                    herein by reference to Form 10-K filed with the U.S. Securities
                    and
                    Exchange Commission on December 13, 2005.(9)
                Incorporated
                    herein by reference to Form 8-K filed with the U.S. Securities
                    and
                    Exchange Commission on January 25, 2007.(10)
                Incorporated
                    herein by reference to Form 8-K filed with the U.S. Securities
                    and
                    Exchange Commission on February 2, 2007.(11)
                Incorporated
                    herein by reference to Form 8-K filed with the U.S. Securities
                    and
                    Exchange Commission on June 14, 2007.(12)
                Incorporated
                    herein by reference to Form 8-K filed with the U.S. Securities
                    and
                    Exchange Commission on June 21, 2007.(13)
                Filed
                    herewith.


50





**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)Date: August
              9, 2007
            By:
            /s/ Benton
              H WilcoxonBenton
              H Wilcoxon
              Chief
                Executive Officer




51