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 DECEMBER 31, 2008





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




(949)
428-8500


(Registrant's
Telephone Number, Including Area Code)





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





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





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





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





APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY


PROCEEDING
DURING THE PRECEDING FIVE YEARS:





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





APPLICABLE
ONLY TO CORPORATE ISSUERS:





Indicate
the number of shares outstanding of each of the issuer's classes of common stock
as of: February 14, 2009





CLASS
                
                NUMBER OF SHARES
  OUTSTANDINGCommon
      Stock, par value $0.001 per share
                
                287,988,370
      shares





COMPOSITE
TECHNOLOGY CORPORATION


Form 10-Q
for the Quarter ended December 31, 2008


Table of
Contents





PagePART
      I – FINANCIAL INFORMATIONItem
      1    Financial Statements
                
                3Item
      2    Management's Discussion and Analysis of Financial
      Condition and Results of Operations
                
                26Item
      3    Quantitative and Qualitative Disclosures About Market
      Risk
                
                35Item
      4    Controls and Procedures
                
                35PART
      II – OTHER INFORMATIONItem
      1    Legal Proceedings
                
                37Item
      1A Risk Factors
                
                37Item
      2    Unregistered Sales of Equity Securities and the Use of
      Proceeds
                
                39Item
      3    Defaults Upon Senior Securities
                
                39Item
      4    Submission of Matters to a Vote of Security
      Holders
                
                39Item
      5    Other Information
                
                39Item
      6    Exhibits
                
                41SIGNATURE
                
                42INDEX
      TO EXHIBITS


2





ITEM
1


PART
1 - FINANCIAL STATEMENTS


COMPOSITE
TECHNOLOGY CORPORATION


AND
SUBSIDIARIES


CONSOLIDATED,
CONDENSED BALANCE SHEETS


(IN
THOUSANDS)





December 31, 2008
                                            
                                            
                                            September 30, 2008(unaudited)
                                            
                                            
                                            (restated)ASSETSCURRENT
      ASSETSCash
      and Cash Equivalents
                                            
                                            $
                                            9,751
                                            
                                            
                                            $
                                            22,594Restricted
      Cash
                                            
                                            
                                            —
                                            
                                            
                                            
                                            693Accounts
      Receivable, current, net of reserve of $679 and $687
                                            
                                            
                                            8,102
                                            
                                            
                                            
                                            11,773Inventory,
      net
                                            
                                            
                                            52,984
                                            
                                            
                                            
                                            42,088Advance
      Payments for Turbine Inventory
                                            
                                            
                                            23,580
                                            
                                            
                                            
                                            31,245Prepaid
      Expenses and Other Current Assets
                                            
                                            
                                            1,930
                                            
                                            
                                            
                                            1,425Total
      Current Assets
                                            
                                            
                                            96,347
                                            
                                            
                                            
                                            109,818Long
      Term Trade Receivables
                                            
                                            
                                            245
                                            
                                            
                                            
                                            248Property
      and Equipment, net
                                            
                                            
                                            11,782
                                            
                                            
                                            
                                            7,955Goodwill
                                            
                                            
                                            24,218
                                            
                                            
                                            
                                            24,218Intangible
      Assets, net
                                            
                                            
                                            21,454
                                            
                                            
                                            
                                            21,549Other
      Assets
                                            
                                            
                                            769
                                            
                                            
                                            
                                            1,289TOTAL
      ASSETS
                                            
                                            $
                                            154,815
                                            
                                            
                                            $
                                            165,077LIABILITIES
      AND SHAREHOLDERS’ EQUITYCURRENT
      LIABILITIESAccounts
      Payable and Other Accrued Liabilities
                                            
                                            $
                                            32,499
                                            
                                            
                                            $
                                            34,607Deferred
      Revenues and Customer Advances
                                            
                                            
                                            39,564
                                            
                                            
                                            
                                            33,525Warranty
      Provision
                                            
                                            
                                            933
                                            
                                            
                                            
                                            1,462Provision
      for Loss on Turbine Contracts
                                            
                                            
                                            —
                                            
                                            
                                            
                                            7,597Net
      Liabilities for Deconsolidated Subsidiary in Liquidation
                                            
                                            
                                            18,923
                                            
                                            
                                            
                                            19,145Total
      Current Liabilities
                                            
                                            
                                            91,919
                                            
                                            
                                            
                                            96,336LONG
      TERM LIABILITIESLong
      Term Portion of Deferred Revenues
                                            
                                            
                                            611
                                            
                                            
                                            
                                            727Long-Term
      Portion of Warranty Provision
                                            
                                            
                                            275
                                            
                                            
                                            
                                            496Convertible
      Notes – Long-Term
                                            
                                            
                                            8,063
                                            
                                            
                                            
                                            7,838Total
      Liabilities
                                            
                                            
                                            100,868
                                            
                                            
                                            
                                            105,397COMMITMENTS
      AND CONTINGENCIESSHAREHOLDERS’
      EQUITYCommon
      Stock, $.001 par value 600,000,000 shares authorized 287,988,370
      (unaudited) and 287,988,370 issued and outstanding
                                            
                                            
                                            288
                                            
                                            
                                            
                                            288Additional
      Paid-in Capital
                                            
                                            
                                            254,019
                                            
                                            
                                            
                                            252,445Accumulated
      Deficit
                                            
                                            
                                            (201,456
                                            )
                                            
                                            
                                            (193,123
                                            )Accumulated
      Other Comprehensive Income
                                            
                                            
                                            1,096
                                            
                                            
                                            
                                            70Total
      Shareholders’ Equity
                                            
                                            
                                            53,947
                                            
                                            
                                            
                                            59,680TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY
                                            
                                            $
                                            154,815
                                            
                                            
                                            $
                                            165,077





The
accompanying notes are an integral part of these financial
statements


3





COMPOSITE
TECHNOLOGY CORPORATION


AND
SUBSIDIARIES


CONSOLIDATED,
CONDENSED STATEMENTS OF OPERATIONS


FOR THE
THREE MONTHS ENDED DECEMBER 31, 2008 AND 2007


(IN
THOUSANDS, EXCEPT PER SHARE AMOUNTS)


(UNAUDITED)





Three Months ended
                                                                  December 31, 2008
                                                                
                                                                
                                                                Three Months ended
                                                                  December 31, 2007Revenue:Product
      Sales
                                                                
                                                                $
                                                                10,308
                                                                
                                                                
                                                                $
                                                                17,071Service
      Revenue
                                                                
                                                                
                                                                110
                                                                
                                                                
                                                                
                                                                515Total
      Revenue
                                                                
                                                                
                                                                10,418
                                                                
                                                                
                                                                
                                                                17,586Cost
      of Product Sold
                                                                
                                                                
                                                                8,082
                                                                
                                                                
                                                                
                                                                12,906Cost
      of Service Revenue
                                                                
                                                                
                                                                813
                                                                
                                                                
                                                                
                                                                640Gross
      margin
                                                                
                                                                
                                                                1,523
                                                                
                                                                
                                                                
                                                                4,040OPERATING
      EXPENSESOfficer
      compensation
                                                                
                                                                
                                                                743
                                                                
                                                                
                                                                
                                                                254General
      and administrative
                                                                
                                                                
                                                                4,023
                                                                
                                                                
                                                                
                                                                3,307Research
      and development
                                                                
                                                                
                                                                2,613
                                                                
                                                                
                                                                
                                                                3,159Sales
      and Marketing
                                                                
                                                                
                                                                1,828
                                                                
                                                                
                                                                
                                                                1,055Depreciation
      & Amortization
                                                                
                                                                
                                                                269
                                                                
                                                                
                                                                
                                                                552Total
      operating expenses
                                                                
                                                                
                                                                9,476
                                                                
                                                                
                                                                
                                                                8,327LOSS
      FROM OPERATIONS
                                                                
                                                                
                                                                (7,953
                                                                )
                                                                
                                                                
                                                                (4,287
                                                                )OTHER
      EXPENSEInterest
      expense, net
                                                                
                                                                
                                                                (460
                                                                )
                                                                
                                                                
                                                                (896
                                                                )Total
      other expense
                                                                
                                                                
                                                                (460
                                                                )
                                                                
                                                                
                                                                (896
                                                                )Net
      Loss from Continuing Operations before Income Taxes
                                                                
                                                                
                                                                (8,413
                                                                )
                                                                
                                                                
                                                                (5,183
                                                                )Income
      Taxes
                                                                
                                                                
                                                                8
                                                                
                                                                
                                                                
                                                                8NET
      LOSS from Continuing Operations
                                                                
                                                                
                                                                (8,421
                                                                )
                                                                
                                                                
                                                                (5,191
                                                                )Discontinued
      Operations (Note 4)Loss
      from Discontinued Operations (including a net loss on sales of $0 for the
      three months ending December 31, 2008 and net loss on sales of $599
      for the three months ending  December 31, 2007)
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                2,170Minority
      interest in loss of consolidated subsidiary
                                                                
                                                                
                                                                (87
                                                                )
                                                                
                                                                
                                                                —NET
      LOSS
                                                                
                                                                
                                                                (8,334
                                                                )
                                                                
                                                                
                                                                (7,361
                                                                )OTHER
      COMPREHENSIVE LOSSForeign
      Currency Translation Adjustment net of tax of $0 and $0
                                                                
                                                                
                                                                1,026
                                                                
                                                                
                                                                
                                                                (123
                                                                )COMPREHENSIVE
      LOSS
                                                                
                                                                $
                                                                (7,308
                                                                )
                                                                
                                                                $
                                                                (7,484
                                                                )BASIC
      AND DILUTED LOSS PER SHARELoss
      from continuing operations
                                                                
                                                                $
                                                                (0.03
                                                                )
                                                                
                                                                $
                                                                (.02
                                                                )Loss
      from discontinued operations
                                                                
                                                                $
                                                                —
                                                                
                                                                
                                                                $
                                                                (.01
                                                                )WEIGHTED-AVERAGE
      COMMON SHARES OUTSTANDING
                                                                
                                                                
                                                                287,988,370
                                                                
                                                                
                                                                
                                                                223,566,431





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


4


COMPOSITE
TECHNOLOGY CORPORATION


AND
SUBSIDIARIES


CONSOLIDATED,
CONDENSED STATEMENTS OF CASH FLOWS


FOR
THE THREE MONTHS ENDED DECEMBER 31, 2008 AND 2007


(IN
THOUSANDS)





For the Three
                                                                          Months ending
                                                                          December 31,
                                                                          2008
                                                                        
                                                                        
                                                                        For the Three
                                                                          Months ending
                                                                          December 31,
                                                                          2007(unaudited)
                                                                        
                                                                        
                                                                        (unaudited)CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                                                                        
                                                                        $
                                                                        (8,334
                                                                        )
                                                                        
                                                                        $
                                                                        (7,361
                                                                        )(Income)/Loss
      from discontinued operations
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        2,170Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      & amortization
                                                                        
                                                                        
                                                                        604
                                                                        
                                                                        
                                                                        
                                                                        865Amortization
      of prepaid expenses paid in stock
                                                                        
                                                                        
                                                                        82
                                                                        
                                                                        
                                                                        
                                                                        129Interest
      amortization related to detachable warrants and fixed conversion
      features
                                                                        
                                                                        
                                                                        272
                                                                        
                                                                        
                                                                        
                                                                        685Expense
      related to fair value of vested options
                                                                        
                                                                        
                                                                        1,552
                                                                        
                                                                        
                                                                        
                                                                        216Issuance
      of warants for services
                                                                        
                                                                        
                                                                        22
                                                                        
                                                                        
                                                                        
                                                                        —Inventory
      reserve expense
                                                                        
                                                                        
                                                                        245
                                                                        
                                                                        
                                                                        
                                                                        62Changes
      in Assets / Liabilities:Accounts
      receivable
                                                                        
                                                                        
                                                                        3,675
                                                                        
                                                                        
                                                                        
                                                                        (2,573
                                                                        )Inventory
                                                                        
                                                                        
                                                                        (10,778
                                                                        )
                                                                        
                                                                        
                                                                        (10,349
                                                                        )Advanced
      payments for inventory
                                                                        
                                                                        
                                                                        68
                                                                        
                                                                        
                                                                        
                                                                        3,072Prepaid
      expenses
                                                                        
                                                                        
                                                                        (175
                                                                        )
                                                                        
                                                                        
                                                                        (846
                                                                        )Restricted
      cash
                                                                        
                                                                        
                                                                        693
                                                                        
                                                                        
                                                                        
                                                                        (200
                                                                        )Other
      assets
                                                                        
                                                                        
                                                                        63
                                                                        
                                                                        
                                                                        
                                                                        74Accounts
      payable and accrued expenses
                                                                        
                                                                        
                                                                        (5,331
                                                                        )
                                                                        
                                                                        
                                                                        (1,577
                                                                        )Accrued
      warranty liability
                                                                        
                                                                        
                                                                        (750
                                                                        )
                                                                        
                                                                        
                                                                        798Deferred
      revenue
                                                                        
                                                                        
                                                                        5,922
                                                                        
                                                                        
                                                                        
                                                                        746Net
      Liabilities of Discontinued Operations
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        396Cash
      used in operating activities
                                                                        
                                                                        
                                                                        (12,170
                                                                        )
                                                                        
                                                                        
                                                                        (13,693
                                                                        )CASH
      FLOW FROM INVESTING ACTIVITIESPurchase
      of property and equipment
                                                                        
                                                                        
                                                                        (925
                                                                        )
                                                                        
                                                                        
                                                                        (1,133
                                                                        )Cash
      used in investing activities
                                                                        
                                                                        
                                                                        (925
                                                                        )
                                                                        
                                                                        
                                                                        (1,133
                                                                        )CASH
      FLOW FROM FINANCING ACTIVITIESProceeds
      from exercise of warrants
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        3,721Proceeds
      from exercise of options
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        12Payments
      on capital lease assets
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        (39
                                                                        )Cash
      provided by financing activities
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        3,694Effect
      of exchange rate changes on cash from continuing
operations
                                                                        
                                                                        
                                                                        474
                                                                        
                                                                        
                                                                        
                                                                        65Net
      increase/(decrease) in cash and cash equivalents from continuing
      operations
                                                                        
                                                                        
                                                                        (12,621
                                                                        )
                                                                        
                                                                        
                                                                        (11,067
                                                                        )CASH
      FLOWS FROM DISCONTINUED OPERATIONS:Cash
      used in operating activities – discontinued
operations
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        (34
                                                                        )Effect
      of exchange rate changes on cash – discontinued
      operations
                                                                        
                                                                        
                                                                        (222
                                                                        )
                                                                        
                                                                        
                                                                        7Net
      increase/(decrease) in cash and cash equivalents from discontinued
      operations
                                                                        
                                                                        
                                                                        (222
                                                                        )
                                                                        
                                                                        
                                                                        (27
                                                                        )Total
      net increase/(decrease) in cash and cash equivalents
                                                                        
                                                                        $
                                                                        (12,843
                                                                        )
                                                                        
                                                                        $
                                                                        (11,094
                                                                        )Cash
      and cash equivalents at beginning of period – continuing
      operations
                                                                        
                                                                        
                                                                        22,594
                                                                        
                                                                        
                                                                        
                                                                        22,389Cash
      and cash equivalents at beginning of period – discontinued
      operations
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        268Cash
      and cash equivalents at beginning of period
                                                                        
                                                                        $
                                                                        22,594
                                                                        
                                                                        
                                                                        $
                                                                        22,657Cash
      and cash equivalents at end of period – continuing
      operations
                                                                        
                                                                        
                                                                        9,751
                                                                        
                                                                        
                                                                        
                                                                        11,322Cash
      and cash equivalents at end of period – discontinued
      operations
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        241Cash
      and cash equivalents at end of period
                                                                        
                                                                        $
                                                                        9,751
                                                                        
                                                                        
                                                                        $
                                                                        11,563SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONINTEREST
      PAID
                                                                        
                                                                        $
                                                                        191
                                                                        
                                                                        
                                                                        $
                                                                        330INCOME
      TAX PAID
                                                                        
                                                                        $
                                                                        3
                                                                        
                                                                        
                                                                        $
                                                                        —





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


5


Supplemental
Schedule for Non Cash Financing Activities





In
October, 2008 the Company issued 150,000 warrants at an exercise price of $0.96
per share in settlement of a disputed financing fee related to the May, 2008
Debt financing.  The Company had accrued $18,000 in general and
administrative expense in fiscal 2008 for the issuance of these
warrants.





In
December, 2008 the Company re-priced 200,000 $1.75 warrants, 200,000 $1.50
warrants, and 200,000 $1.25 warrants to a strike price of $0.75 per warrant for
all three series of warrants.  The Company recorded $22,062 to general
and administrative expense for the re-pricing of these
warrants.


6


COMPOSITE
TECHNOLOGY CORPORATION


AND
SUBSIDIARIES


NOTES
TO FINANCIAL STATEMENTS





NOTE
1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES





Company





Composite
Technology Corporation, a corporation originally incorporated in Florida and
reincorporated in Nevada, is an Irvine, CA based company operating in two
segments: CTC Cable (“Cable”) and DeWind (“Wind”). The Cable Segment sells high
energy efficiency patented composite core conductors known as “ACCCTM
conductors” for use in electric transmission and distribution lines. The Wind
segment sells electricity generating wind turbines under the brand name DeWind.
ACCC conductor is commercially available in the United States and Canada, China,
Europe, the Middle East, and South America through direct sales to utilities and
through distribution and purchase agreements.





Accounting





The
accompanying unaudited consolidated financial statements of Composite Technology
Corporation (the “Company” or “Composite Technology”) have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, they do not contain all of the
information and footnotes required for complete financial statements. Interim
information is unaudited; however, in the opinion of the Company's management,
the accompanying unaudited, consolidated financial statements reflect all
adjustments (consisting of normal, recurring adjustments) considered necessary
for a fair presentation of the Company's interim financial information. These
financial statements and notes should be read in conjunction with the audited
financial statements of the Company included in the Company's Annual Report on
Form 10-K/A for the fiscal year ended September 30, 2008 to be filed with the
Securities and Exchange Commission later this month.





Discontinued
Operations





On
October 1, 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.





On April
3, 2008 the Company sold its ownership stake in E Services for 500,000
Euros ($790,250 at April 3, 2008 exchange rates). The consolidated financial
statements of Composite Technology Corporation have been restated to present the
E Services operations, assets and liabilities as discontinued
operations.





On
September 1, 2008 the board of directors of DeWind GmbH filed to place that
subsidiary into insolvency in Lubeck, Germany. This subsidiary primarily served
the acquired turbines under warranty and had operated at a substantial loss
since the July 3, 2006 acquisition of EU Energy. The directors faced a near term
requirement to recapitalize this subsidiary for approximately EUR 5 million. The
filing of insolvency for this subsidiary is not expected to have a material
impact on the future operations of the Company’s DeWind segment.





The
assets and liabilities of DeWind GmbH have been classified on the balance sheet
as Net Liabilities for Deconsolidated Subsidiary in Liquidation.  See
Note 4.





REVENUE
RECOGNITION





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


7


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





(1)
Product revenue which includes revenue from:


a) The
sale of composite core, stranded composite core, core and stranded core
hardware, and other electric utility related products.


b) The
sale of electrical generation turbines, related turbine parts, and license
royalties on turbines sold by third parties.


(2)
Service revenue which includes revenue from the service and maintenance of
turbine generators under service contracts or revenue from billings on a cost
and materials basis.





In
addition to the above general revenue recognition principles prescribed by SAB
104, our specific revenue recognition policies for each revenue
source:





PRODUCT
REVENUES. Product revenues are recognized when product shipment has been made
and title has passed to the end user customer. Product revenues consist
primarily of revenue from the sale of: (i) stranded composite core and related
hardware to utilities either sold directly by the Company or through a
distribution agreement, ii) composite core and related hardware sold to a cable
stranding entity, or iii) turbines, turbine parts, or license rights sold
to wind farm operators, utilities, and technology licensees. Revenues are
deferred for product contracts where the Company is required to perform
installation services until after the installation is complete. Our distribution
agreements are structured so that our revenue cycle is complete upon shipment
and title transfer of products to the distributor with no right of
return.





CTC Cable
sales for the three months ended December 31, 2008 and 2007 consisted of
stranded ACCC conductor and ACCC hardware sold to end user utilities, sales of
ACCC conductor sold to our Chinese distributor, and sales of ACCC conductor core
and ACCC hardware to two of our stranding manufacturers. All ACCC related
product sales were recognized upon delivery of product and transfer of title.
There is no right of return for sales of ACCC conductor or ACCC core to our
Chinese distributor.  For ACCC conductor product sales made directly
by us and not through a manufacturer or distributor, we offer a product
replacement warranty of two years with an optional purchase of up to seven
years. We allocate a portion of sales proceeds to the estimated fair value of
the cost to provide such a warranty. To date, most of our ACCC related product
sales have been without warranty coverage.





DeWind
Turbine related sales for the three months ended December 31, 2008 and 2007
consisted of completed and installed wind turbine units, turbine parts, and
license fees. For DeWind turbine revenues, for turbine sales, we recognized
revenues for completed and installed wind turbine units upon the commissioning,
or operational viability of each wind turbine unit. We recognized revenues on
turbine parts sales upon delivery to the customer and title transfer. We
recognized revenues on the license fees upon collection of the license fees and
reporting by the licensee of units sold under each license
agreement.





For
turbine sales, our contracted sales typically include the turbine and warranty
services for up to two years after turbine installation and we offer extended
warranties for an additional fee. All other turbines sold carried a two year
warranty. Our turbine sales are documented by turbine supply agreements that
specify the contracted value of the turbine, the warranty service period, and
the timing of cash payments by our customers. Our operational history and the
value of extended warranties sold allow us to provide sufficient vendor specific
objective evidence (VSOE) to value the warranty included with a wind turbine,
generally $25,000 per rated megawatt of power per year representing expected
warranty and availability related liabilities during the warranty period. We
recognize as revenue the contracted turbine value reduced by the value of the
warranty portion when the revenue cycle is completed as described above.
Progress payments and customer deposits are recorded as deferred revenues until
the revenue cycle is completed. Costs incurred and turbine materials purchased
during the production of turbines in completion of the revenue cycle are
capitalized into inventory. Operating expenses, including indirect costs and
administrative expenses, are charged as incurred to periodic income and not
allocated to contract costs.  The value of the warranty portion determined
by the VSOE is deferred and recognized ratably over the life of the warranty
service period. For multiple element contracts where there is no vendor specific
objective evidence (VSOE) or third-party evidence that would allow the
allocation of an arrangement fee amongst various pieces of a multi-element
contract, fees received in advance of services provided would be recorded as
deferred revenues until additional operational experience or other vendor
specific objective evidence becomes available, or until the contract is
completed.





SERVICE
REVENUES. Service revenues consist of service and maintenance on our wind
turbines under flat rate contracts, typically billed in advance on an annual or
semi-annual basis on a flat rate, as a full service contract, typically
calculated as a rate per kilowatt of generation and billed monthly or quarterly
in arrears, or as a point of sale service call basis billed on a time and
materials basis. Service revenues are deferred and recognized ratably over the
life of a flat rate service contract, recognized as billed for full service
contracts, or for point of delivery services, when the service has been
provided. Direct costs of uncompleted work related to maintenance or repairs
activity is capitalized and expensed upon completion.  Billings for
turbines on a time and materials basis are recorded into revenue as the services
are delivered.





LICENSE
REVENUE. License revenues consist of cash payments for the licensing of our
older D6 and D8 turbines on a per unit delivered basis. We have license
agreements with three companies in China and India that call for progress
payments to DeWind upon the completion of certain technology transfer
milestones. We defer all payments received and recognize revenue when the
licensee has shipped the finished turbine to the wind farm
operator.


8


WARRANTY,
RETROFIT, AND AVAILABILITY PROVISIONS





Warranty
provisions consist of the estimates of the costs and liabilities associated with
the post-sale servicing of our DeWind wind turbines, and the insured costs and
liabilities associated with any post-sales associated with our ACCC conductor
and related hardware parts.





Warranty
periods for our wind turbines range from zero to seven years and may include
parts-only warranties or parts and repair services warranties and may or may not
include revenue guarantees. Warranty conditions are specific to and are governed
by the turbine supply agreement contract. Warranty related liabilities for time
periods in excess of one year are classified as non-current
liabilities.





Warranties
related to our ACCC products relate to conductor and hardware sold directly by
us to the end-user customer. We mitigate our loss exposure through the use of
third party warranty insurance.





We use
the following terms, all of which are accounted for as warranty related
liabilities:





(1)
            Warranty provisions represent the
      estimated costs to perform expected future repairs of wind turbines, which
      are covered under a warranty. We estimate warranty provisions based on the
      historical cost to provide the services under warranty including
      monitoring, repairs, parts, and insurance and based on the age of the
      turbine under warranty. We also include as warranty provisions the
      estimated losses on “full service” contracts where we provide full service
      in exchange for a revenue share of the wind power produced. For the three
      months ended December 31, 2008 our estimated warranty costs averaged
      approximately $2,600 per turbine per month under warranty and as of
      December 31, 2008 we had approximately 217 turbine – months remaining
      under warranty. We amortize the estimated warranties ratably over the
      remaining warranty period against the actual expenses incurred and we
      amortize the projected loss provisions against the expected future periods
      of full service losses.


(2)
            Retrofit provisions represent the
      estimated future cost to perform significant repairs for known defects in
      turbines that are expected to be incurred during the warranty period or
      were obligated to be repaired while a turbine was under warranty. Retrofit
      costs are estimated based on management’s projection of the costs to
      repair the known defects on a parts and labor basis. When completed,
      retrofit provisions are amortized against the actual expenses incurred.
      All retrofit accruals are recorded as current
      liabilities.


(3)
            Availability penalties represent
      a combination of i) the calculated revenue guarantees under the turbine
      supply agreement and ii) the estimate of future payments for revenue
      guarantees. Actual penalties are calculated under the terms of each
      individual contract and represent the guaranteed value of the wind power
      generated under the term of the contract. If the turbine delivers less
      than the rated power determined under the contract, subject to minimum
      wind conditions, DeWind is obligated under some contracts to reimburse the
      wind turbine purchaser for the shortfall subject to contract or turbine
      maximums, as applicable. Actual availability penalties are recorded as
      current liabilities although such penalties are often disputed as to the
      amounts due and then subsequently mediated or negotiated and which often
      results in payments made in excess of one year. Estimated penalties are
      determined by past availability histories and management estimates of the
      required revenue reimbursement on a per turbine basis and calculated using
      the expected availability rate multiplied by the number of months
      remaining under warranty. Estimated availability penalties are amortized
      against actual availability penalties incurred ratably over the remaining
      warranty period. As of December 31, 2008 we have estimated availability
      penalties accrued of approximately $2,000 per turbine per month remaining
      under warranty. For warranty periods in excess of one year, the estimated
      availability penalty is recorded as a long term
      liability.





The
turbine related warranty liabilities were significantly reduced by the filing of
insolvency of DeWind GmbH as described below in Note 4. Prior to the insolvency
filing, approximately 90% of the Company’s warranty liabilities were related to
turbines under warranty and acquired through the EU acquisition, dating to
periods prior to July 2005.




PROVISION
FOR LOSS ON TURBINE CONTRACTS AND TURBINE CONTRACT INVENTORY
 
 Provision
for loss on turbine contracts represents incurred and estimated costs in excess
of contracted and expected billings on turbine supply
contracts.  Management reviews all turbine supply contracts and
evaluates each contract on an individual basis to determine if estimated costs
to complete exceed projected billings.  For contracts projected to be
at a loss, a provision for contract loss is accrued and expensed to turbine cost
of sales.  After the related inventory is purchased, the provision is
reclassified to inventory reserves to reduce the value of the inventory to the
net realizable value based on the sales price under the contract.
 
 Total
unaudited contract provisions as of December 31, 2008 were $9,626,000 all of
which were included in inventory reserves.  Total restated contract
provisions as of September 30, 2008 were $9,371,000 of which $1,774,000 were
included in inventory reserves and $7,597,000 were included in Provision for
Loss on Turbine Contracts.


Estimates





The
preparation of our financial statements conforms with accounting principles
generally accepted in the United States of America, which requires management to
make estimates and judgments in applying our accounting policies that have an
important impact on our reported amounts of assets, liabilities, revenue,
expenses and related disclosures at the date of our financial statements. On an
on-going basis, management evaluates its estimates including those related to
accounts receivable, inventories, stock-based compensation, warranty, retrofit
and availability provisions and goodwill and intangibles. Management bases its
estimates and judgments on historical experience and on various other factors
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from management’s estimates. We believe that the application of our
critical accounting policies requires significant judgments and estimates on the
part of management.   We believe that the estimates, judgments and
assumption upon which we rely are reasonable, and based upon information
available to us at the time that these estimates, judgments and assumptions are
made. These estimates, judgments and assumptions can affect the reported amounts
of assets and liabilities as of the date of the financial statements as well as
the reported amounts of revenues and expenses during the period presented. To
the extent there are material differences between these estimates, judgments or
assumptions and actual results, our financial statements will be affected. In
many cases, the accounting treatment of a particular transaction is specifically
dictated by GAAP and does not require management's judgment in its application.
There are also many areas in which management's judgment in selecting among
available alternatives would produce a materially different
result.


9


Our key
estimates we use that rely upon management judgment include:





-
            The estimates pertaining to the
      likelihood of our accounts receivable collectibility. These estimates
      primarily rely upon past payment history by customer and management
      judgment on the likelihood of future payments based on the current
      business condition of each customer and the general business
      environment.


-
            The estimates pertaining to the
      valuation of our inventories. These estimates primarily rely upon the
      current order book for each product in inventory along with management’s
      expectations and visibility into future sales of each product in
      inventory.


-
            The assumptions used to calculate
      fair value of our stock based compensation, primarily the volatility
      component of the Black-Scholes-Merton option pricing model used to value
      our warrants and our employee and non-employee options. This estimate
      relies upon the past volatility of our share price over
      time.


-
            The warranty, retrofit and
      availability provisions for our wind turbines. These estimates rely
      primarily on the past history of repairs and maintenance, turbine downtime
      and incurred availability charges as calculated under the terms of each
      contract, and management judgment on: i) the likelihood of customer claims
      for availability based on past history, ii) the likelihood of proactively
      solving or preventing similar repair, warranty, or availability expenses
      in the future, and iii) the projected recovery of sub-warranty claims,
      insurance claims, and other mitigating
    reimbursements.


-
            Goodwill and intangible
      valuation. These estimates rely primarily on financial models reviewed by
      senior management which incorporate business assumptions made by
      management on the underlying products and technologies acquired in the
      DeWind acquisition and the likelihood that the values assigned during the
      initial valuations will be recoverable over time through increased
      revenues, profits, and enterprise
value.





Except as
noted in this document, the methodology and assumptions used for the estimates
pertaining to the activity during the three months ended December 31, 2008 are
consistent with those used for the estimates included in our Form 10-K/A for the
year ended September 30, 2008 to be filed with the Securities and Exchange
Commission later this month.





Reclassifications





Certain
balances were reclassified to conform with current period
presentation.





Recent
Pronouncements




Statement
No. 141R, “Business Combinations” (SFAS 141R)


In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141R, Business
Combinations (SFAS 141R). SFAS 141R requires most identifiable assets,
liabilities, noncontrolling interests, and goodwill acquired in a business
combination to be recorded at “full fair value.” SFAS 141R applies to all
business combinations, including combinations among mutual entities and
combinations by contract alone. Under Statement 141R, all business combinations
will be accounted for by applying the acquisition method. Statement 141R is
effective for business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. We are currently evaluating the impact that SFAS 141R
will have on our consolidated financial statements.





Statement
No. 160, “Non-controlling Interests in Consolidated Financial Statements” (SFAS
160)


In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 160, Non-controlling
Interests in Consolidated Financial Statements (SFAS 160). SFAS 160
requires the ownership interests in subsidiaries held by parties other than the
parent to be treated as a separate component of equity and be clearly
identified, labeled, and presented in the consolidated financial statements.
SFAS 160 is effective for periods beginning on or after December 15, 2008.
Earlier adoption is prohibited. We are currently evaluating the impact that SFAS
160 will have on our consolidated financial statements.





Statement
No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (SFAS
161)


In March,
2008, the FASB issued Statement of Financial Accounting Standards No. 161,
Disclosures about Derivative
Instruments and Hedging Activities (SFAS 161). SFAS 161 amends and
expands the disclosure requirements of SFAS 133 by providing additional
disclosure on the use of derivative instruments including qualitative
disclosures about fair value amounts of gains and losses on derivative
instruments, and disclosures about credit-risk-related contingent features in
derivative agreements. SFAS 161 is effective for periods beginning on or after
November 15, 2008. We are currently evaluating the impact that SFAS 161 will
have on our consolidated financial statements.




Statement
No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS
161)


In
May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles (SFAS 162). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (the
GAAP hierarchy). SFAS 162 will become effective 60 days following the
SEC’s approval of the Public Company Accounting Oversight Board amendments to
AU Section 411, “The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles.” We do not currently expect the
adoption of SFAS 162 to have a material effect on our consolidated results of
operations and financial condition.


10





Significant
new accounting policies adopted or implemented during the three months ended
December 31, 2008




In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS
157), which defines the fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements. This statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years.   The Company is subject to the provisions of SFAS 157 as
of October 1, 2007.  See Note 5.





NOTE
2 - GOING CONCERN





The
Company has received a report from its independent auditors for the year ended
September 30, 2008 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, 2008, the Company incurred a net loss of
$53,513,000 and negative cash flows from operations of $51,360,000. In addition,
the Company had an accumulated deficit of $193,123,000 at September 30, 2008.
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.





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





Commercial
orders: To date, since inception for our Cable products and since the
acquisition of DeWind, we have received orders including revenues recognized and
unfilled orders for approximately $64 million in ACCC conductor products and
$253 million of Wind turbines. We will require a significant increase in
customer orders at sufficient profit margin levels to cover our expenses and
generate sufficient cash from operations.





There is
no guarantee that our products will be accepted or provide a marketable
advantage and therefore no guarantee that our products will ever be profitable.
In addition, management plans to ensure that sufficient capital will be
available to provide for its capital needs with minimal borrowings and may issue
equity securities to ensure that this is the case. However, there is no
guarantee that the Company will be successful in obtaining sufficient capital
through borrowings or selling equity securities. These financial statements do
not include any adjustments to the amounts and classification of assets and
liabilities that may be necessary should the Company be unable to continue
as a going concern.





We
believe our cash position, including usable restricted cash, as of December 31,
2008 of $9.8 million and expected cash flows from revenue orders may not be
sufficient to fund operations for the next three calendar quarters for both of
our business segments. We believe that we will have positive cash flow from our
Cable business to fund its operations. We anticipate that additional cash is
needed to fund operations beyond March, 2009 for our DeWind business, absent a
large cash deposit for a future turbine order and to the extent required the
Company intends to continue the practice of issuing stock, debt or other
financial instruments for cash or for payment of services until our cash flows
from the sales of our primary products is sufficient to provide cash from
operations or if we believe such a financing event would be a sound business
strategy.


NOTE
3 - RESTATEMENT
  The
financial statements included herein have been restated to correct an error in
accounting for a turbine supply contract loss for costs incurred during the
quarter ended December 31, 2008 but which were committed during the quarter
ended September 30, 2008 and for which sufficient information was available for
management to make an estimate of the contract loss for the quarter and year
ended September 30, 2008.
  During
the quarter ended December 31, 2008 the Company’s DeWind segment delivered 10
unit D8 2 megawatt wind turbines under two supply contracts for the same
customer in South America with an original value of $19,100,000 for the supply
of turbine nacelles, hubs, and blades.  The contracts were negotiated
and signed in June 2007 at a time when turbine component costs were
substantially lower than during the quarter ended September 30,
2008.  During the quarter ended September 30, 2008 the Company agreed
to a supply delay penalty of $955,000, which reduced the value of the contract
to $18,145,000.  Also during the quarter ended September 30, 2008, the
Company revised purchase commitments to vendors to supply the wind turbine
nacelle components at a higher price than were previously
estimated.  The revised commitments when added to the other estimated
costs to complete resulted in an estimated cost to fulfill the contract of
$25,742,000.  The difference of $7,597,000 represents the estimated
loss on the turbine supply contract.  An additional $363,000 of
contract losses under a separate contract was also understated for a total
accrual of $7,960,000 ($7,597,000 recorded as Provision for Loss on Turbine
Contracts, and $363,000 recorded as reserve against inventory purchased and
recorded as of September 30, 2008). The Company is recording this estimated loss
into the quarter and year ended September 30, 2008 to restate the financial
statements to correct the error.
  The
effect to the Balance Sheet and Statement of Operations for the three months and
year ended September
30, 2008 was:
  As
      Originally
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      Restatement( In
      Thousands except share and per share amounts)
                                                                                                                                      
                                                                                                                                      Reported
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      Adjustment
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      As
      RestatedBalance
      SheetInventory,
      net
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      42,451
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      (363
                                                                                                                                      )
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      42,088Provision
      for Loss on Turbine Contracts
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      --
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      7,597
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      7,597Accumulated
      Deficit
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      (185,163
                                                                                                                                      )
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      (7,960
                                                                                                                                      )
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      (193,123
                                                                                                                                      )Total
      Liabilities and Shareholders’ Equity
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      165,440
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      (363
                                                                                                                                      )
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      165,077Statement
      of Operations:Cost
      of Product Sold
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      62,184
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      7,960
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      70,144Net
      Loss
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      (45,553
                                                                                                                                      )
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      (7,960
                                                                                                                                      )
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      (53,513
                                                                                                                                      )Basic
      and Diluted Loss per Share
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      (0.19
                                                                                                                                      )
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      (0.03
                                                                                                                                      )
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      (0.22
                                                                                                                                      )Weighted-Average
      Common Shares Oustanding
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      243,369,110
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      243,369,110
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      243,369,110
 NOTE 4
– DISCONTINUED OPERATIONS OF DEWIND SUBSIDIARIES





During
fiscal 2008 two subsidiaries of DeWind with operations in Europe were either
disposed of or put into insolvency.  On January 9, 2009 one additional
subsidiary was put into insolvency.





DeWind
GmbH:


On
September 1, 2008 the board of directors of DeWind GmbH filed to place that
subsidiary into insolvency in Lubeck, Germany.   The assets and
liabilities of DeWind GmbH have been classified on the balance sheet as Net
Liabilities for Deconsolidated Subsidiary in Liquidation.  The asset
and liabilities comprising this balance consisted of:


11





(In Thousands)
                        
                        December 31, 2008
                        
                        
                        September 30, 2008(unaudited)
                        
                        
                        (restated)ASSETSCash
      and Cash Equivalents
                        
                        $
                        485
                        
                        
                        $
                        491Accounts
      Receivable, net
                        
                        
                        6,881
                        
                        
                        
                        6,961Prepaid
      Expenses and Other Current Assets
                        
                        
                        542
                        
                        
                        
                        548Property
      and Equipment, net
                        
                        
                        10
                        
                        
                        
                        10TOTAL
      ASSETS
                        
                        $
                        7,918
                        
                        
                        $
                        8,010LIABILITIESAccounts
      Payable and Other Accrued Liabilities
                        
                        $
                        13,863
                        
                        
                        $
                        14,026Deferred
      Revenues and Customer Advances
                        
                        
                        1,861
                        
                        
                        
                        1,883Warranty
      Provision
                        
                        
                        11,117
                        
                        
                        
                        11,246Total
      Liabilities
                        
                        $
                        26,841
                        
                        
                        $
                        27,155Net
      Liabilities for Deconsolidated Subsidiary in Liquidation
                        
                        $
                        18,923
                        
                        
                        $
                        19,145




There has
been no significant change to the Net Liabilities for Deconsolidated
Subsidiaries in Liquidation during the quarter ended December 31,
2008.  The remaining assets and liabilities of DeWind GmbH are under
the control of the court-appointed receiver in Germany.  In December,
2008 a receiver status update was provided that did not result in any changes or
impacts to either the assets or liabilities of DeWind GmbH.  The next
status update is expected in June, 2009.


The net
income from operations of DeWind GmbH through the date of insolvency has been
classified on the statement of operations and comprehensive loss as loss from
discontinued operations. Summarized results of discontinued operations are as
follows:




Quarter ending
            
            
            Quarter ending(In Thousands)
            
            December 31,
              2008
            
            
            December 31,
              2007(unaudited)Service
      Revenues
            
            $
            —
            
            
            $
            599Cost
      of Service Revenues
            
            
            —
            
            
            
            2,411Operating
      Expenses
            
            
            —
            
            
            
            324Other
      Income
            
            
            —
            
            
            
            (23
            )Loss
      from discontinued operations
            
            $
            —
            
            
            $
            2,113




DeWind
Service/E Service





On April
3, 2008 the Company and Enertrag closed the sale of the remaining 24.9%
ownership in E Services. During fiscal 2008 this entity was accounted for under
the equity method.  The consolidated financial statements of Composite
Technology Corporation have been restated to present the E Services operations,
assets and liabilities as discontinued operations.




The net
income from operations of E Services has been classified on the statement
of operations and comprehensive loss as loss from discontinued
operations. Summarized results of discontinued operations are as
follows:




Quarter ending
                  
                  
                  Quarter ending(In Thousands)
                  
                  December 31,
                    2008
                  
                  
                  December 31,
                    2007(unaudited)Loss
      from unconsolidated subsidiary accounted for under the equity
      method
                  
                  $
                  —
                  
                  
                  $
                  57Loss
      from discontinued operations
                  
                  $
                  —
                  
                  
                  $
                  57




On
January 9, 2009 the Company placed DeWind Holdings Ltd. into
insolvency.  As of December 31, 2008, DeWind Holdings owned the share
capital of the now insolvent DeWind GmbH and had other assets and liabilities
consisting of $85,000 of other current assets and  $3,663,000 of
accounts payable and other accrued liabilities consolidated into the Company’s
balance sheet.  There were no revenues or expenses for DeWind Holdings
Ltd. during the quarter ended December 31, 2008.  During the quarter
ended December 31, 2007, Dewind Holdings recorded $341,000 of General and
Administrative expenses related to receivable reserves.





NOTE 5
– FAIR VALUE MEASUREMENTS





On October
1, 2008, the Company adopted SFAS No. 157 which defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
SFAS 157 does not require any new fair value measurements, but provides guidance
on how to measure fair value by providing a fair value hierarchy used to
classify the source of the information. In February 2008, the FASB deferred the
effective date of SFAS 157 by one year for certain non-financial assets and
non-financial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually). The
Company adopted the provisions of SFAS 157, except as it applies to those
nonfinancial assets and nonfinancial liabilities for which the effective date
has been delayed by one year.


12





SFAS
No. 157 establishes a three-level valuation hierarchy of valuation
techniques that is based on observable and unobservable inputs. Classification
within the hierarchy is determined based on the lowest level of input that is
significant to the fair value measurement. The first two inputs are considered
observable and the last unobservable, that may be used to measure fair value and
include the following:


Level 1
- Quoted prices in active markets for identical assets or
liabilities.


Level 2
- Inputs other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs that are observable or
can be corroborated by observable market data for substantially the full term of
the assets or liabilities.


Level 3
- Unobservable inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or
liabilities.





As of
December 31, 2008, the Company held certain assets and liabilities that are
required to be measured at fair value on a recurring basis, including its cash
and cash equivalents. The fair value of these assets and liabilities was
determined using the following inputs in accordance with SFAS 157 at December
31, 2008:





Fair Value Measurement as of December 31, 2008(In
      Thousands)
                          
                          Total
                          
                          Level
      1
                          
                          Level
      2
                          
                          Level
      3Description
                          
                          $
                          
                          $
                          
                          $
                          
                          $Cash
      and cash equivalents (1)
                          
                          $
                          9,751
                          
                          $
                          9,751
                          
                          $
                          —
                          
                          $
                          —





(1)
            Included in cash and cash
      equivalents on the accompanying consolidated balance
      sheet.





NOTE 6 –
BALANCE SHEET DETAILS





Accounts
Receivable




Accounts
Receivable consisted of the following at December 31, 2008 and September 30,
2008:




(In Thousands)
                              
                              December 31,
                                2008
                              
                              
                              September 30,
                                2008(unaudited)
                              
                              
                              (restated)Turbine
      products and service receivables
                              
                              $
                              6,338
                              
                              
                              $
                              6,480Unbilled
      receivables
                              
                              
                              20
                              
                              
                              
                              1,744Cable
      products receivables
                              
                              
                              2,668
                              
                              
                              
                              4,484Gross
      Receivables
                              
                              $
                              9,026
                              
                              
                              $
                              12,708Reserves
                              
                              
                              (679
                              )
                              
                              
                              (687
                              )Net
      receivables
                              
                              $
                              8,347
                              
                              
                              $
                              12,021Portion
      relating to greater than one year, net of reserves of $71 and
      $0
                              
                              
                              245
                              
                              
                              
                              248$
                              8,102
                              
                              
                              $
                              11,773





The asset
unbilled receivables (noted in above table) represents revenue that is
recognizable due to the performance of services for which billings have not been
generated as of the balance sheet date. In general, amounts become billable
pursuant to contractual milestones or in accordance with predetermined billing
schedules.





Inventories
and Advance Payments for Turbine Inventory
  Inventories
and advance payments for turbine inventory consisted of the following at
December 31, 2008 and September 30, 2008:
  (In Thousands)
                                      
                                      December 31,
                                        2008
                                      
                                      
                                      September 30,
                                        2008(unaudited)
                                      
                                      
                                      (restated)Raw Materials and Turbine Parts
                                      
                                      $
                                      27,920
                                      
                                      
                                      $
                                      36,704Work
      in Progress
                                      
                                      
                                      31,319
                                      
                                      
                                      
                                      4,457Finished
      Goods
                                      
                                      
                                      3,288
                                      
                                      
                                      
                                      3,123Gross
      Inventory
                                      
                                      $
                                      62,527
                                      
                                      
                                      $
                                      44,284Reserves
                                      
                                      
                                      (9,543
                                      )
                                      
                                      
                                      (2,196
                                      )Net
      Inventory
                                      
                                      $
                                      52,984
                                      
                                      
                                      $
                                      42,088Advance
      Payments for Turbine Inventory
                                      
                                      $
                                      23,580
                                      
                                      
                                      $
                                      31,245




Advance
payments for turbine inventory represents payments made to suppliers in advance
for inventory not yet received as of the balance sheet date.


13




Property
and Equipment




Property
and equipment consisted of the following:




(In Thousands)
                          
                          Estimated
                            Useful Lives
                          
                          December 31,
                            2008
                          
                          
                          September 30,
                            2008(unaudited)
                          
                          
                          (restated)Office
      furniture and equipment
                          
                          3-10
      yrs
                          
                          $
                          1,811
                          
                          
                          $
                          1,584Production
      equipment
                          
                          3-10
      yrs
                          
                          
                          6,312
                          
                          
                          
                          6,390Wind
      turbine in production
                          
                          3-10
      yrs
                          
                          
                          3,258
                          
                          
                          
                          3,296Wind
      farm construction in progress
                          
                          3-10
      yrs
                          
                          
                          4,279
                          
                          
                          
                          —Automobiles
                          
                          3-5
      yrs
                          
                          
                          36
                          
                          
                          
                          36Leasehold
      improvements
                          
                          7
      yrs
                          
                          
                          1,975
                          
                          
                          
                          2,075Total
      Property
                          
                          
                          
                          $
                          17,671
                          
                          
                          $
                          13,381Accumulated
      depreciation
                          
                          
                          
                          
                          (5,889
                          )
                          
                          
                          (5,426
                          )Property,
      net
                          
                          
                          
                          $
                          11,782
                          
                          
                          $
                          7,955








Goodwill
and Intangible Assets




The
Company adopted SFAS No. 142 “Goodwill and Other Intangible Assets” (SFAS 142)
effective January 1, 2002.  In accordance with SFAS 142, the Company
does not amortize goodwill. The Company’s goodwill of $24,218,000 at December
31, 2008 is related to the acquisition of EU Energy on July 3, 2006 and is
currently attributable entirely to the DeWind segment. In accordance with SFAS
142, the Company evaluates goodwill impairment annually at year-end or if
situations arise that may require re-evaluation. We determined that as of
December 31, 2008 no goodwill impairment was required.





As of
December 31, 2008, the Company had the following amounts related to other
intangible assets, all related to the acquisition of EU Energy on July 3, 2006
and therefore the Turbine segment:




(In Thousands)
                              Gross Carrying
                                Amount
                              
                              Accumulated Amortization
                              
                              Net Carrying
                                AmountSeptember 30,
                              
                              Sept 30,
                              
                              
                              
                              December 31,
                              
                              December 31,2008
                              
                              2008
                              
                              Amortized
                              
                              2008
                              
                              2008(restated)
                              
                              (restated)
                              
                              (unaudited)
                              
                              (unaudited)
                              
                              (unaudited)Supply
      Agreements
                              
                              $
                              12,347
                              
                              
                              $
                              (165
                              )
                              
                              $
                              —
                              
                              
                              $
                              (165
                              )
                              
                              $
                              12,182Tech
      Transfer Agreements
                              
                              
                              3,131
                              
                              
                              
                              (467
                              )
                              
                              
                              —
                              
                              
                              
                              (467
                              )
                              
                              
                              2,664Tradename
                              
                              
                              7,553
                              
                              
                              
                              (850
                              )
                              
                              
                              (95
                              )
                              
                              
                              (945
                              )
                              
                              
                              6,608Service
      Contracts
                              
                              
                              1,442
                              
                              
                              
                              (1,442
                              )
                              
                              
                              —
                              
                              
                              
                              (1,442
                              )
                              
                              
                              —Subtotal,
      Intangible Assets
                              
                              $
                              24,473
                              
                              
                              $
                              (2,924
                              )
                              
                              $
                              (95
                              )
                              
                              $
                              (3,019
                              )
                              
                              $
                              21,454


14





Aggregate
amortization expense associated with continuing operations of the intangible
assets with determinable lives was $94,500 and $411,044 for the three months
ended December 31, 2008 and 2007 respectively.





The
supply agreements are related to supplier agreements related to our DeWind D8.2
model. We will record amortization on this agreement over the life of the
agreement beginning with the first commercial shipments of our D8.2, two units
of which shipped in fiscal year 2008, and based on the expected units purchased
under this agreement. Our technology transfer agreements are related to our
China licensing arrangements. We will record amortization on these agreements as
we recognize revenues under these agreements which are based on the turbines
produced under these arrangements over three to five years. We have determined
that our trade name, DeWind, has a life of twenty years and we will amortize
this balance on a straight-line basis. Our service contracts include service and
maintenance contracts. We fully amortized the service contracts as of September
30, 2007. All intangible assets listed are considered to have no residual
value.





The
unamortized balance of intangible assets is estimated to be amortized as
follows:





(In Thousands)
                        
                        Estimated
                          Amortization
                          Expense(unaudited)Remainder
      of 2009
                        
                        $
                        7512010
                        
                        
                        3,5062011
                        
                        
                        4,2922012
                        
                        
                        4,2772013
                        
                        
                        3,815Thereafter
                        
                        
                        4,813Total
                        
                        $
                        21,454





Accounts
Payable and Accrued Liabilities




Accounts
Payable and Accrued Liabilities consisted of the following:




(In Thousands)
                          
                          December 31,
                            2008
                          
                          
                          September 30,
                            2008(unaudited)
                          
                          
                          (restated)Trade
      Payables
                          
                          $
                          30,786
                          
                          
                          $
                          33,099Accrued
      Acquisition Costs
                          
                          
                          250
                          
                          
                          
                          250Accrued
      Payroll
                          
                          
                          1,274
                          
                          
                          
                          1,059Deferred
      Rents
                          
                          
                          189
                          
                          
                          
                          199Total
      Accounts Payable and Accrued Liabilities
                          
                          $
                          32,499
                          
                          
                          $
                          34,607




Accrued
acquisition costs represent primarily legal and statutory payments required as a
result of the EU acquisition.





Deferred
Revenues and Customer Advances




The
Company records all cash proceeds received from customers for advance payments
on turbines, turbine parts, or cable orders and extended warranties on cable, as
opted by the customer, to deferred revenues and customer advances until such
time as the revenue cycle is completed and the amounts are recognized into
revenues. Due to the long term nature of turbine sales which typically are
supported by contracts with substantial payments in advance of delivery,
deferred revenues and customer advances comprise a large component of our
balance sheet. Deferred revenues and customer advances consist of the
following:




(In Thousands)
                          
                          December 31,
                            2008
                          
                          
                          September 30,
                            2008(unaudited)
                          
                          
                          (restated)Customer
      advances on turbines and turbine parts sales
                          
                          $
                          32,324
                          
                          
                          $
                          26,846Deferred
      revenues – Other turbine related
                          
                          
                          5,695
                          
                          
                          
                          5,589Deferred
      revenues – Cable Sales
                          
                          
                          2,156
                          
                          
                          
                          1,817Total,
      Deferred revenues & customer advances
                          
                          $
                          40,175
                          
                          
                          $
                          34,252Balance
      included in current liabilities
                          
                          
                          39,564
                          
                          
                          
                          33,525Long
      Term Deferred Revenues
                          
                          $
                          611
                          
                          
                          $
                          727


15


Costs
incurred related to deferred revenues and customer advances are capitalized into
inventory as of the balance sheet date.




Warranty Reserve




Through
its ownership of EU Energy, operating as the Wind segment as DeWind, the Company
has financial obligations to customers related to warranty and the availability
performance of wind turbines and has made provisions to reflect these
liabilities. Turbines sold by DeWind are sold with product warranties, typically
between two and five years and which cover replacement parts for turbines and
labor.





Warranty
obligations reflect expected minor repairs during the period of warranty of the
turbine, between 2 and 5 years following installation (Warranty).
Provisions are based on historical experience of repair frequency and cost.
In addition, turbines sold that remain under warranty carry guarantees of
availability (Availability) to produce electric power at certain levels. If a
turbine under warranty does not meet these availability thresholds due to
turbine failure covered by the warranty or servicing contract and the customer’s
turbine produces less power and therefore less revenue, the company reimburses
the customer for the lost value of the power shortfall. Availability provisions
are based on data obtained from the company’s turbine monitoring system, actual
performance being compared to contractual obligation, with provisions made for
any potential contractual liability and estimates of future availability
penalties based on
this historical performance. We have classified all warranty and product
guarantee reserves considered to be payable within one year as current
liabilities and all warranty and product guarantee reserves considered to be
payable greater than one year as non-current liabilities.





December 31,
                              2008
                            
                            
                            September 30,
                              2008(In Thousands)
                            
                            (unaudited)
                            
                            
                            (restated)Turbine
      warranty reserves
                            
                            $
                            563
                            
                            
                            $
                            684Cable
      warranty reserves
                            
                            
                            211
                            
                            
                            
                            220Reserve
      for turbine availability
                            
                            
                            434
                            
                            
                            
                            1,054Total
      Warranty and Product Guarantee reserves
                            
                            
                            1,208
                            
                            
                            
                            1,958Less
      Amount classified as current liabilities
                            
                            
                            933
                            
                            
                            
                            1,462Long
      Term Warranty Liability
                            
                            $
                            275
                            
                            
                            $
                            496





December 31, 2008(In Thousands)
                        
                        (unaudited)Beginning
      balance
                        
                        $
                        1,958Additional
      reserves recorded to expense
                        
                        
                        148Reserves
      utilized
                        
                        
                        (898
                        )Ending
      balance
                        
                        $
                        1,208





NOTE 7 – 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 have been allocated to our two operating segments.




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




ACCC Cable
Division


Located
in Irvine, California with sales operations in Irvine, California, Shanghai,
China, Brazil, and Europe, the CTC Cable segment produces and sells ACCCTMconductor, ACCCTM
core, and related ACCCTM
hardware products for the electrical transmission market. ACCCTM
conductor production is a two step process. The Irvine operations produce
ACCCTM
core which is then shipped to one of four cable manufacturers in Canada,
Belgium, China, or Bahrain where the core is stranded with conductive aluminum
wire to become ACCCTM
conductor. ACCCTM
conductor is sold both through a distribution understanding and manufacturing
agreement with General Cable in the US and Canada, into Europe through a
distribution and manufacturing agreement with Lamifil in Belgium, into China
through a manufacturing and distribution agreement with Far East Composite
Cable, into the Middle East through a manufacturing and distribution agreement
with Midal in Bahrain, as well as directly by CTC Cable to utility customers
worldwide. ACCCTM
conductor has been sold commercially since 2005 and is currently marketed
worldwide to electrical utilities and transmission companies.


16





DeWind Turbine
Division


The Wind
division operates under the brand name DeWind. Located in Lubeck Germany with
sales operations in Dallas, Texas and Irvine, California, the DeWind Division
produces, services, and sells DeWind turbines in the 1.25 and 2.0 Megawatt
range.





Segment
information for the three months ended December 31, 2008 and 2007 is as
follows:





(In Thousands)
                                  
                                  Corporate
                                  
                                  
                                  Cable
                                  
                                  
                                  Turbine
                                  
                                  
                                  TotalThree Months Ended:December 31, 2008Revenues
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  4,360
                                  
                                  
                                  $
                                  6,058
                                  
                                  
                                  $
                                  10,418Operating
      loss
                                  
                                  
                                  (2,242
                                  )
                                  
                                  
                                  (1,512
                                  )
                                  
                                  
                                  (4,199
                                  )
                                  
                                  
                                  (7,953
                                  )Total
      assets
                                  
                                  
                                  5,467
                                  
                                  
                                  
                                  14,058
                                  
                                  
                                  
                                  135,290
                                  
                                  
                                  
                                  154,815Goodwill
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  24,218
                                  
                                  
                                  
                                  24,218Capital
      expenditures
                                  
                                  
                                  —
                                  
                                  
                                  
                                  157
                                  
                                  
                                  
                                  768
                                  
                                  
                                  
                                  925Depreciation
      & amortization
                                  
                                  
                                  —
                                  
                                  
                                  
                                  240
                                  
                                  
                                  
                                  364
                                  
                                  
                                  
                                  604December 31, 2007Revenues
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  10,994
                                  
                                  
                                  $
                                  6,592
                                  
                                  
                                  $
                                  17,586Operating
      income (loss)
                                  
                                  
                                  (1,347
                                  )
                                  
                                  
                                  2,173
                                  
                                  
                                  
                                  (5,113
                                  )
                                  
                                  
                                  (4,287
                                  )Total
      assets
                                  
                                  
                                  6,720
                                  
                                  
                                  
                                  11,197
                                  
                                  
                                  
                                  107,801
                                  
                                  
                                  
                                  125,718Goodwill
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  24,218
                                  
                                  
                                  
                                  24,218Capital
      expenditures
                                  
                                  
                                  —
                                  
                                  
                                  
                                  385
                                  
                                  
                                  
                                  748
                                  
                                  
                                  
                                  1,133Depreciation
      & amortization
                                  
                                  
                                  —
                                  
                                  
                                  
                                  206
                                  
                                  
                                  
                                  659
                                  
                                  
                                  
                                  865




The
Company operates and markets its services and products on a worldwide basis with
its principal markets as follows:




Three Months Ended(In Thousands)
                                
                                December 31, 2008
                                
                                
                                December 31, 2007Cable
                                
                                
                                Turbine
                                
                                
                                Consolidated
                                
                                
                                Cable
                                
                                
                                Turbine
                                
                                
                                ConsolidatedRevenue
      allocation by geographic region based on location of
      customer:Europe
                                
                                $
                                732
                                
                                
                                $
                                441
                                
                                
                                $
                                1,173
                                
                                
                                $
                                —
                                
                                
                                $
                                5,645
                                
                                
                                $
                                5,645China
      / Asia
                                
                                
                                2,387
                                
                                
                                
                                5,617
                                
                                
                                
                                8,004
                                
                                
                                
                                10,988
                                
                                
                                
                                947
                                
                                
                                
                                11,935South
      America
                                
                                
                                1
                                
                                
                                
                                —
                                
                                
                                
                                1
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —Central
      America
                                
                                
                                525
                                
                                
                                
                                —
                                
                                
                                
                                525
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —North
      America
                                
                                
                                715
                                
                                
                                
                                —
                                
                                
                                
                                715
                                
                                
                                
                                6
                                
                                
                                
                                —
                                
                                
                                
                                6Total
      Revenue
                                
                                $
                                4,360
                                
                                
                                $
                                6,058
                                
                                
                                $
                                10,418
                                
                                
                                $
                                10,994
                                
                                
                                $
                                6,592
                                
                                
                                $
                                17,586




December 31, 2008
                            
                            
                            September 30, 2008Cable
                            
                            
                            Turbine
                            
                            
                            Consolidated
                            
                            
                            Cable
                            
                            
                            Turbine
                            
                            
                            ConsolidatedLong-lived
      assets (including goodwill and intangible assets) by geographic region
      based on location of operations:Europe
                            
                            $
                            —
                            
                            
                            $
                            49,628
                            
                            
                            $
                            49,628
                            
                            
                            $
                            —
                            
                            
                            $
                            50,292
                            
                            
                            $
                            50,292United
      States
                            
                            
                            3,346
                            
                            
                            
                            4,481
                            
                            
                            
                            7,827
                            
                            
                            
                            3,430
                            
                            
                            
                            —
                            
                            
                            
                            3,430Total
      long-lived assets (including goodwill and intangible
    assets)
                            
                            $
                            3,346
                            
                            
                            $
                            54,109
                            
                            
                            $
                            57,455
                            
                            
                            $
                            3,430
                            
                            
                            $
                            50,292
                            
                            
                            $
                            53,722


17





During
the quarter, three customers in China represented 76.7% of revenues (two
customers from our DeWind segment and one customer from our Cable segment at
53.9% and 22.8%, respectively), one Cable customer in Europe with 6.9% of
revenues, one Cable customer in Central America with 5.0% of revenues and one
Cable customer in North America with 5.0%. No other customer represented greater
than 5% of consolidated revenues.





NOTE 8 –
EQUITY BASED COMPENSATION





The
Company historically has issued equity based compensation in the form of stock
options to its employees and consultants via option 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.





The
values of the financial instruments are estimated using the Black-Scholes-Merton
(Black-Scholes) option pricing model. Key assumptions used during the three
months ended December 31, 2008 and 2007 to value options and warrants granted
are as follows:




Three Months EndedDecember 31,2008
                    
                    
                    2007Risk
      Free Rate of Return
                    
                    
                    n/a
                    
                    
                    
                    3.28-4.29
                    %Volatility
                    
                    
                    n/a
                    
                    
                    
                    88
                    %Dividend
      yield
                    
                    
                    n/a
                    
                    
                    
                    0
                    %Expected
      life
                    
                    
                    n/a
                    
                    
                    4
      yrs




Our
computation of expected volatility for the three months ended December 31, 2007
is based on historical and 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, 2006, 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. On December 21, 2007, the Securities
and Exchange Commission published Stafff Accounting Bulletin No. 110 (SAB 110),
which provides the Staff’s views on matter relating to share-based
payments.  In particular, SAB 110 allows for an extension past
December 31, 2007 for the use of a simplified method in developing an estimate
of the expected term of “plain vanilla” share options in accordance with SFAS
123R.  SAB 107 and SAB 110 require 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
three months ending December 31, 2008 and 2007 is as follows:





(In Thousands)
                        
                        Three Months
                          Ended
                        
                        
                        Three Months
                          EndedDecember 31,
                        
                        
                        December 312008
                        
                        
                        2007Cost
      of Product Sold
                        
                        $
                        16
                        
                        
                        $
                        15Officer
      Compensation
                        
                        
                        492
                        
                        
                        
                        —Selling
      and marketing
                        
                        
                        366
                        
                        
                        
                        42Research
      and development
                        
                        
                        420
                        
                        
                        
                        77General
      and administrative
                        
                        
                        258
                        
                        
                        
                        83Totals
                        
                        $
                        1,552
                        
                        
                        $
                        217





As of
December 31, 2008, there was $10.5 million of total unrecognized compensation
cost related to non-vested share-based compensation arrangements related to
stock options. The costs are expected to be recognized over a weighted-average
period of 2.3 years.  For options that vest on a quarterly basis, the
actual vesting is used to calculate the compensation expense.  For
options vesting on other than a quarterly basis, an estimate of the forfeiture
rate, between 0% and 15%, is used to calculate the expense, which is then trued
up on each vesting occurrence.  On January 20, 2009 the Company’s
Board of Directors voted to approve a re-pricing of all individuals continuing
to provide ongoing services to the Company including substantially all employee,
director, and consultant stock options.  The Company has treated the
re-pricing as a modification of terms of the options outstanding.  The
Company will expense the incremental fair value for all vested and re-priced
options during the quarter ended March 31, 2009.  The Company will
expense the incremental fair value for all unvested and re-priced options as
these options are earned.  The fair value of the modification was
determined as the difference in the fair value of each option immediately before
and after the re-pricing using the Black-Scholes-Merton option pricing model
with a dividend rate of 0%, a risk free rate of 1.48%, a volatility of 95.6%, a
life of 4 years, and a market price of $0.30 per share.   As a
result of this re-pricing, the Company expects to incur expenses for
the vested options of $560,000 in the March 31, 2009 quarter and recognize an
additional $980,000 of unrecognized compensation cost related to non-vested
share-based compensation over the next 2.5 years.


18


Significantly
all of our existing options are subject to time of service vesting. Our stock
options vest either on an annual or a quarterly basis for options subject to
time of service vesting or for specific performance for option vesting tied to
performance criteria. For the remainder of fiscal 2009, we expect stock based
compensation expense related to employee stock options, including the expense
related to the option re-pricing of approximately $3,800,000 before income
taxes. Such amounts may change as a result of additional grants, forfeitures,
modifications in assumptions and other factors.
 
 Certain
options granted under the 2008 Plan may be exercised at any time for restricted
stock of the Company if not otherwise prohibited by the Company’s Board of
Directors.  Any 2008 Plan option exercises for unvested options have
restricted stock issued that is earned according to the terms of the option
agreement that gave rise to the restricted stock issuance.  The
Company has the right, but not the obligation, to repurchase restricted stock
that is unearned as of the date of any optionee’s termination.  As of
December 31, 2008 none of the 2008 Plan option grants were
exercisable.   Subsequent to the January 20, 2009 re-pricing, all
2008 Plan grants were exercisable.  To date, no restricted stock has
been issued under the 2008 Plan.
 
 The
following table summarizes the Stock Plan stock option activity as of December
31, 2008:
 
 2002 Plan
                          Number of
                          Options
                        
                        
                        2008 Plan
                          Number of
                          Options
                        
                        
                        Total Number of
                          Options
                        
                        
                        Average
                          Exercise
                          PriceOutstanding, September 30, 2008
                        
                        
                        17,899,521
                        
                        
                        
                        7,231,000
                        
                        
                        
                        25,130,521
                        
                        
                        $
                        1.14Granted
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Exercised
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Cancelled
                        
                        
                        (31,251
                        )
                        
                        
                        —
                        
                        
                        
                        (31,251
                        )
                        
                        
                        1.58Outstanding,
      December 31, 2008
                        
                        
                        17,868,270
                        
                        
                        
                        7,231,000
                        
                        
                        
                        25,099,270
                        
                        
                        $
                        1.14Exercisable
      , December 31, 2008
                        
                        
                        11,376,712
                        
                        
                        
                        —
                        
                        
                        
                        11,376,712
                        
                        
                        $
                        0.94
 
 On
October 15, 2008 the Company’s Board of Directors extended the termination date
of the 2002 Option Plan from December 31, 2011 to December 31,
2016.  The weighted-average remaining contractual life of the options
outstanding at December 31, 2008 was 8.4 years. The exercise prices of the
options outstanding at December 31, 2008 ranged from $0.25 to $2.09, 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
                                          
                                          
                                          1,363,216
                                          
                                          1,363,216
                                          
                                          8.0
                                          
                                          $
                                          0.30
                                          
                                          $
                                          0.30$0.50-$0.99
                                          
                                          
                                          2,845,000
                                          
                                          2,545,000
                                          
                                          8.2
                                          
                                          $
                                          0.63
                                          
                                          $
                                          0.60$1.00-$1.49
                                          
                                          
                                          17,136,054
                                          
                                          6,205,726
                                          
                                          8.5
                                          
                                          $
                                          1.14
                                          
                                          $
                                          1.15$1.50-$2.09
                                          
                                          
                                          3,755,000
                                          
                                          1,262,770
                                          
                                          8.0
                                          
                                          $
                                          1.80
                                          
                                          $
                                          1.81Total
                                          
                                          
                                          25,099,270
                                          
                                          11,376,712
  On
January 20, 2009 the Company’s Board of Directors approved the re-pricing of the
options granted under the 2002 Plan and 2008 Plan for all current employees and
selected contractors who continue to provide services to the company on an
ongoing basis.  After the re-pricing, the exercise prices of the
options outstanding at January 20, 2009 ranged from $0.25 to
$1.00.   Information relating to the re-priced options is as
follows:
 Range of
                                        Exercise
                                        Prices
                                      
                                      Stock Options
                                        Outstanding
                                      
                                      Stock
                                        Options
                                        Exercisable
                                      
                                      Weighted
                                        Average
                                        Remaining
                                        Contractual
                                        Life in years
                                      
                                      Weighted
                                        Average
                                        Exercise Price
                                        of Options
                                        Outstanding
                                      
                                      Weighted Average
                                        Exercise Price of
                                        Options
                                        Exercisable$0.25-$0.34
                                      
                                      
                                      103,000
                                      
                                      103,000
                                      
                                      8.4
                                      
                                      $
                                      0.25
                                      
                                      $
                                      0.25$0.35-$0.49
                                      
                                      
                                      24,966,870
                                      
                                      11,244,312
                                      
                                      8.4
                                      
                                      $
                                      0.35
                                      
                                      $
                                      0.35$0.50-$1.00
                                      
                                      
                                      29,400
                                      
                                      29,400
                                      
                                      2.2
                                      
                                      $
                                      1.00
                                      
                                      $
                                      1.00Total
                                      
                                      
                                      25,099,270
                                      
                                      11,376,712
 19
  NOTE 9 –
EQUITY
  COMMON
STOCK
 
 The
Company issued no Common Stock during the quarter ended December 31,
2008.
 
 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-Merton option-pricing model.
 
 The
following table summarizes the Warrant activity for the three months ending
December 31, 2008:
  Number
                                  of Warrants
                                
                                Weighted-Average Exercise
    PriceOutstanding,
      September 30, 2008
                                26,150,815
                                
                                $
                                1.20Granted
                                150,000
                                
                                $
                                0.96Exercised
                                —
                                
                                $
                                —Cancelled
                                2,185,409
                                
                                $
                                1.27OUTSTANDING,
      December 31, 2008
                                24,115,406
                                
                                $
                                1.18EXERCISABLE,
      December 31, 2008
                                24,115,406
                                
                                $
                                1.18
 
 The
following table summarizes the warrants issued, outstanding, and exercisable as
of December 31, 2008:
  Warrant Series
                                    Grant Date
                                    
                                    Strike
                                      Price
                                    
                                    Expiration Date
                                    
                                    Warrants
                                      remaining
                                    
                                    
                                    Proceeds if
                                      Exercised (in
                                      $000s)
                                    
                                    Call
                                      feature2006
      Series A1
                                    Mar,
      2006
                                    
                                    $
                                    1.55
                                    
                                    March,
      2009
                                    
                                    
                                    150,000
                                    
                                    
                                    
                                    233
                                    
                                    None2006
      Series A2
                                    Mar,
      2006
                                    
                                    $
                                    0.75
                                    (A)
                                    March,
      2009
                                    
                                    
                                    1,039,291
                                    
                                    
                                    
                                    779
                                    
                                    None2006
      Series B
                                    Various
      2006
                                    
                                    $
                                    2.00
                                    
                                    Various
      2009
                                    
                                    
                                    2,191,466
                                    
                                    
                                    
                                    4,383
                                    
                                    
                                    (F)2006
      Series C
                                    May,
      2006
                                    
                                    $
                                    0.75
                                    (B)
                                    December,
      2010
                                    
                                    
                                    200,000
                                    
                                    
                                    
                                    150
                                    
                                    None2006
      Series D
                                    May,
      2006
                                    
                                    $
                                    0.75
                                    (C)
                                    December,
      2010
                                    
                                    
                                    200,000
                                    
                                    
                                    
                                    150
                                    
                                    None2006
      Series E
                                    May,
      2006
                                    
                                    $
                                    0.75
                                    (D)
                                    December,
      2010
                                    
                                    
                                    200,000
                                    
                                    
                                    
                                    150
                                    
                                    None2007
      Series F
                                    Nov,
      2006
                                    
                                    $
                                    1.10
                                    
                                    November,
      2009
                                    
                                    
                                    220,000
                                    
                                    
                                    
                                    242
                                    
                                    None2007
      Convertible Debt
                                    Feb,
      2007
                                    
                                    $
                                    1.06
                                    (E)
                                    February,
      2010
                                    
                                    
                                    7,367,815
                                    
                                    
                                    
                                    7,810
                                    
                                    None2007
      Convertible Debt Fees
                                    Mar,
      2007
                                    
                                    $
                                    1.00
                                    (E)
                                    February,
      2010
                                    
                                    
                                    1,291,833
                                    
                                    
                                    
                                    1,292
                                    
                                    None2007
      Factoring
                                    Mar,
      2007
                                    
                                    $
                                    1.06
                                    
                                    February,
      2009
                                    
                                    
                                    1,800,000
                                    
                                    
                                    
                                    1,908
                                    
                                    NoneJune
      PIPE Series 1
                                    Jun,
      2007
                                    
                                    $
                                    1.27
                                    (E)
                                    June,
      2010
                                    
                                    
                                    5,490,100
                                    
                                    
                                    
                                    6,972
                                    
                                    NoneJune
      PIPE Series 2
                                    Jun,
      2007
                                    
                                    $
                                    1.28
                                    (E)
                                    June,
      2010
                                    
                                    
                                    1,564,901
                                    
                                    
                                    
                                    2,003
                                    
                                    None2008
      Debt Series 1
                                    May,
      2008
                                    
                                    $
                                    0.96
                                    (E)
                                    May,
      2011
                                    
                                    
                                    1,125,000
                                    
                                    
                                    
                                    1,080
                                    
                                    None2008
      Debt Amendment
                                    May,
      2008
                                    
                                    $
                                    0.99
                                    (E)
                                    May,
      2011
                                    
                                    
                                    1,125,000
                                    
                                    
                                    
                                    1,114
                                    
                                    None2008
      Debt Services
                                    October,
      2008
                                    
                                    $
                                    0.99
                                    (E)
                                    May,
      2011
                                    
                                    
                                    150,000
                                    
                                    
                                    
                                    144
                                    
                                    NoneTotal
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    24,115,406
                                    
                                    
                                    $
                                    28,410
 
 (A)
Subject anti-dilution provisions. Certain future equity or equity equivalent
issuances below $0.75 per share may result in a price reset to 100% of the new
issue price and additional issuances of warrants.
 
 20
  (B)  Warrants
were re-priced on December 23, 2008 from $1.25 to $0.75 per
warrant.
 
 (C)  Warrants
were re-priced on December 23, 2008 from $1.50 to $0.75 per
warrant.
 
 (D)  Warrants
were re-priced on December 23, 2008 from $1.75 to $0.75 per
warrant.
 
 (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.
    21
  On
October 15, 2008 we issued 150,000 warrants with a strike price of $0.96 per
warrant in settlement of a disputed fee related to placement services for the
May, 2008 Archer debt issuance.  The expense for these warrants was
accrued for as of September 30, 2008.  On December 23, 2008 we agreed
to modify the exercise price of three series of warrants originally issued in
May, 2006.  A total of 600,000 warrants were re-priced to $0.75 per
warrant including 200,000 warrants previously priced at $1.75 per warrant;
200,000 warrants previously priced at $1.50 per warrant; and 200,000 warrant
previously priced at $1.25 per warrant. We valued the price changes and
additional warrants issued using the Black-Scholes-Merton option-pricing
model.  We recorded expense related to modification of warrants as the
difference between the fair value of the warrants prior to the exercise price
reset and after the exercise price reset.  The total expense related
to warrant modifications and issuances during the quarter was $22,000 recorded
to general and administrative expense. We used the following assumptions to
value the warrants modified and expensed in the quarter ended December 31, 2008,
and for the warrant expense accrued for as of September 30,
2008:


Dividend
rate = 0%
 Risk free
return between 1.61% and 1.89%
 Volatility
of between 75% and 86%
 Market
price for October 15, 2008 issuance:  $0.40
 Market
price for December 23, 2008 modification: $0.30
 
 Time to
maturity was the remaining life of the warrant series in question of between 2
and 2.6 years.
 
 Management
has reviewed and assessed the warrants issued during the three months ended
December 31, 2008 and determined that they do not qualify for treatment as
derivatives under SFAS 133.
 
 LOSS
PER SHARE
 
 The
Company utilizes SFAS No. 128, “Earnings per Share.” Basic loss per share is
computed by dividing loss available to common shareholders by the
weighted-average number of common shares outstanding. Diluted loss per share is
computed similar to basic loss per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the additional
common shares were dilutive. Common equivalent shares are excluded from the
computation if their effect is anti-dilutive.
 
 The
following common stock equivalents were excluded from the calculation of diluted
loss per share for the three months ended December 31, 2008 and 2007 since their
effect would have been anti-dilutive:
 
 December 31(unaudited)2008
                            
                            
                            2007Options
      for common stock
                            
                            
                            25,099,270
                            
                            
                            
                            18,648,270Warrants
                            
                            
                            24,115,406
                            
                            
                            
                            29,287,684Convertible
      Debentures, if converted
                            
                            
                            9,037,280
                            
                            
                            
                            10,140,75458,251,956
                            
                            
                            
                            58,076,708
  NOTE 10 –
DEBT AND NOTES PAYABLE
 
 The
following table summarizes the Company’s debt structure as of December 31, 2008
and September 30, 2008:
  December 31, 2008
                              
                              
                              September 30, 2008(In Thousands)
                              
                              (unaudited)
                              
                              
                              (restated)Senior
      Convertible 8% Notes due January, 2010 net of discount of $974 and
      $1,199
                              
                              $
                              8,063
                              
                              
                              $
                              7,838Total
      Long Term Debt
                              
                              $
                              8,063
                              
                              
                              $
                              7,838
  22
  NOTE
11 – VARIABLE INTEREST ENTITY (VIE)
 
 On
October 6, 2008 the Company’s wholly owned subsidiary, DeWind Inc. entered into
a joint venture development agreement with Higher Perpetual Energy to create
DeWind SWI Wind Farms, LLC to jointly develop up to 620 Megawatts of wind farm
properties using leases obtained by Higher Perpetual and DeWind wind
turbines.  The terms of the development agreement provide for an
initial profit sharing of 50% for each party with management control for the
party that has provided the greater amount of contributed capital into the joint
venture.  All contributed capital has a priority repayment to the
contributing party from cash flows generated by the joint venture prior to any
profit sharing payments.  As of December 31, 2008, DeWind Inc. has
contributed the majority of capital into entity and has management control of
the joint venture.
  The
Company has accounted for the entity as a Variable Interest Entity and has
consolidated the assets of the joint venture into the balance
sheet.  To date, the venture has recorded $400,000 in gross startup
costs recorded to general and administrative expenses for the quarter ended
December 31, 2008 in the DeWind segment, of which $88,000 in costs were
allocated to minority interest in consolidated subsidiary, which represents
Higher Perpetual Energy’s total capital contribution to the joint venture as of
December 31, 2008.  The Company has funded $1,035,000 into the venture
as partial payments and accrued $3,511,000 in development on the balance of
plant for the first 10 megawatt wind farm.  A total of $4,279,000 is
included on the consolidated balance sheet within Fixed Assets and further
disclosed as wind farm construction in progress, and which reflects the initial
capitalized development and work in progress paid and accrued as of December 31,
2008 as reduced by the expensed gross startup costs.  See Note
6.
  NOTE
12 – COMMITMENT AND CONTINGENCIES
 
 Please
refer to the Commitment and Contingencies Note on page 94 of our Form 10-K filed
on December 23, 2008 as amended on Form 10-K/A to be filed with
the Securities and Exchange Commission later this month 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.
  NOTE
13 – LITIGATION
 
 FKI Engineering Ltd., FKI plc, and
Brush Electrical Machines Ltd (collectively “FKI”) v. the Company and certain of
its wind segment subsidiaries (here referred to as “DeWind”); DeWind v.
FKI.
 
 In
September, 2008, DeWind GmbH filed for insolvency proceedings in part due to the
impending costs of litigation against FKI and in part due to the negative
operational cash flows and cash position of the subsidiary.  Effective
in October, 2008 the appointed receiver for DeWind GmbH is now responsible for
pursuing the DeWind GmbH claim against FKI for its capital accounts
litigation.   In November, 2008 a winding up petition was filed
by FKI for DeWind Holdings, Ltd due to non-payment of a statutory demand for
1,540,000 Euros ($2,152,000 at September 30, 2008 exchange rates) filed in
January, 2008 and included in the amounts listed above that were adjudicated in
December, 2007.  On November, 21 2008 FKI filed for and received
approval to dismiss the DeWind GmbH capital accounts claim on December 10, 2008
unless a total of 110,000 Euros ($140,000 at November 30, 2008 exchange rates)
of court and legal costs are paid for by DeWind Holdings or guaranteed by
another entity.  Composite Technology Corporation is no longer
involved in the court proceedings between DeWind GmbH and the FKI
parties.  In December, 2008 the receiver filed a preliminary report
and set a date for a more comprehensive receiver report in June,
2009.  Upon filing for insolvency, the DeWind GmbH receiver, at their
sole direction, is responsible for the legal activity surrounding the capital
accounts claim.
 
 FKI has
attempted to enforce collection of the funds due to FKI from two of the
Company’s subsidiaries for their adjudicated debts due from DeWind GmbH (now
insolvent) and its holding company, DeWind Holdings. DeWind Holdings’ only asset
is the share capital of DeWind GmbH.  DeWind Holdings is in turn a
wholly owned subsidiary of DeWind Turbines, Ltd. which is in turn a wholly owned
subsidiary of Composite Technology Corporation.  There are no parent
company guarantees provided by DeWind Turbines, Ltd. or Composite Technology
Corporation for either DeWind Holdings or DeWind GmbH.   Prior to
insolvency proceedings, DeWind GmbH operated substantially for the purpose of
servicing and managing the warranty liabilities related to wind turbines sold up
to June, 2005 while DeWind was under FKI control. We believe that the DeWind
GmbH insolvency will have a minimal impact on the expected future operations of
our wind segment.
 
 On
January 9, 2009 the Directors of DeWind Holdings, Ltd. filed for insolvency
proceedings in the Queen’s Bench Court.  On January 12, 2009, the
court dismissed the winding up petition filed by FKI as a result of DeWind
Holdings, Ltd. filing for insolvency proceedings.
 
 23




Composite
Technology Corporation and CTC Cable Corporation v. Mercury Cable & Energy,
LLC, Ronald Morris, Edward Skonezny, Wang Chen, and “Doe” Defendants 1-100
(“Mercury”)
 
 On August
15, 2008 the Company filed suit in the Superior Court of the State of
California, County of Orange, Central Justice Center (Case No. 30-2008 00110633)
against the Mercury parties including multiple unknown “Doe” defendants,
expected to be named in discovery proceedings, claiming Breach of Contract,
Unfair Competition, Fraud, Intentional Interference with Contract, and
Injunctive Relief.  Several of the Mercury parties had filed a claim
under the Company’s Chapter 11 bankruptcy proceedings which was settled during
the bankruptcy and which provided for certain payments for sales made to
China.  The settlement agreement included non-compete agreements and
stipulated the need to maintain confidentiality for the Company’s technology,
processes, and business practices.  The Company claims that the
Mercury parties have taken actions, which violate the Settlement Agreement and
the Bankruptcy Court Order, including the development of and attempting to
market similar conductor products and misusing confidential information and the
Company further claims that the Settlement Agreement was entered into with
fraudulent intent.  The Company claims that the Mercury parties
engaged in unlawful, unfair, and deceptive conduct and that these actions were
performed with malice and with intent to cause injury to the
Company.  The Company is asking for actual damages, punitive damages,
and attorney fees.  No estimate of such damages can be made at this
time and no accrual for such fees is included in the Company’s financial
statements at December 31, 2008.
 
 On December 5, 2008, Defendants filed a
cross-complaint against CTC and some of the company's officers.  Defendants
served the cross-complaint only on the company (i.e., none of the individual
cross-defendant have been served). On
February 10, 2009 the Company’s motion to dismiss the cross-complaint was
granted but the Court allowed for an amended cross-complaint to be
filed.  On February 10, 2009 the Defendents filed an amended
cross-complaint with the Court which appeared to be in substance similar to the
original cross-complaint.  The Company has 30 days to respond to the
amended cross-complaint.  No further hearing dates have been
established.
 
 Insolvency
of DeWind GmbH
 
 On August
29, 2008 in Lubeck Local Court – Bankruptcy Court, Lubeck Germany, the Company’s
DeWind GmbH subsidiary filed for voluntary insolvency in lieu of a required
recapitalization under German statute  of approximately 5,000,000
Euros ($7,040,000 at September 30, 2008 exchange rates).  The DeWind
GmbH subsidiary had limited operational function for the DeWind segment,
functioning solely to provide services on wind turbines that remained under
warranty and which warranties were entered into prior to June, 2005 and in
pursuit of the FKI capital claim described above.  All wind turbines
sold and installed since July, 2005 are serviced under a separate and continuing
DeWind subsidiaries.  At the time of the insolvency, DeWind GmbH was
saddled with contracts which were negotiated while DeWind GmbH was owned by FKI
and that required DeWind GmbH to provide warranty services including “no limit”
wind power generation revenue guarantees (availability penalties) often without
requiring the wind farm customer to properly maintain or service the
turbines.  This subsidiary had incurred losses of $11.9 million and
$8.7 million for fiscal 2007 and 2008 respectively despite a significant
reduction in the number of turbines under warranty.   Concurrent
with the filing of the insolvency, DeWind effectively relinquished its right to
pursue the capital claim to the control of the insolvency
administrator.
 
 On
September 18, 2008 an insolvency administrator was appointed and set an initial
reporting date of December 11, 2008.  On December 1, 2008 the initial
report of the liquidator was published which referred primarily to procedural
issues and did not address the assets or liabilities of DeWind GmbH in
detail.  The December 1, 2008 report set the date of the follow on
report to be in June 2009.
 
 NOTE
14 – RELATED PARTIES
 
 The
Company has contracts with two companies owned by its director, Michael
McIntosh: a legal services agreement with The McIntosh Group (TMG) for legal and
intellectual property services and a consulting agreement with Technology
Management Advisors, LLC (TMA) for strategic business advisory services related
to technology and international patent and intellectual property filings. The
initial agreements were executed on March 1, 2002 for a term of three years and
were renewed in 2005.
 
 On July
3, 2006 these agreements were cancelled and replaced with three agreements as
follows:
 
 ·
                  An
      agreement between TMG and CTC Cable, a wholly owned subsidiary operating
      as the “cable” division of the Company to provide patent 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 patent 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 months ended December 31, 2008 we recorded fees of $125,000 and patent
filing expenses of $8,003 for TMG, and fees of $62,500 and incidental expenses
of $12,034 for TMA. All of these expenses were recorded to Research and
Development expense.
 
 24
  As of
December 31, 2008 the Company had outstanding balances due to TMA and TMG of
24,851 and $42,129 respectively, included in accounts payable.
 
 NOTE
15 - SUBSEQUENT EVENTS
 
 On
January 9, 2009, the Company placed DeWind Holdings Ltd into
insolvency.  See Note 4.
 
 On
January 20, 2009, the Company’s Board of Directors approved the re-pricing of
substantially all Director, Management, Employee and Consultant stock options
with exercise prices ranging between $0.53 and $2.09 per option.  All
options subject to re-pricing were reset to an exercise price of $0.35 per
option.  The market price of a share of common stock on the date of
the option re-pricing was $0.30 per share. See Note 8.
  25
  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, 2008 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/A
to be filed with the Securities and Exchange Commission later this
month.
 
 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/A for the fiscal year ended
September 30, 2008. All forward-looking statements are based on information
currently available to Composite Technology Corporation and we assume no
obligation to update such forward-looking statements, except as required by law.
Service marks, trademarks and trade names referred to in this Form 10-Q are the
property of their respective owners.
 
 OVERVIEW
 
 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.
 
 The
quarter ended December 31, 2008 represented a period of significant shocks to
the world economies and worldwide financial markets including a collapse of risk
capital financing and the failure of multiple commercial and investment banking
institutions.  The combination of these factors according to the press
has resulted in  significantly lowered economic forecasts and
expectations.  The turmoil of these external forces has resulted in a
negative impact on both businesses of Composite Technology
Corporation.
 
 The CTC
Cable business saw delays in several anticipated sales in new markets and was
negatively impacted from the delay in sales orders caused by a slowdown in China
due to the Beijing Olympics.   These delays affected revenues for
the September, 2008 and December, 2008 quarters resulting in deliveries of only
561 km of ACCCTM products in the December 2008 quarter.  We have
subsequently seen a resurgence of orders from China and new orders in the U.S.
that are for near term deliveries. Since the middle of December, 2008 we have
received orders for 1,070 km of ACCCTM conductor and ACCCTM core and our backlog
has increased to $11.8 million.
 
 A more
significant impact is occurring in the DeWind business segment through product
order delays and most importantly through a significant restriction in financing
available for our potential customers to order and purchase wind turbines for
wind farm projects.  In addition, the delay until October of the
extension of a key renewable tax credit for wind turbines, suspended the
ordering and financing of turbines at almost the time when awareness of the
severity of the credit crisis was becoming known.  Further, the
decrease in the price of fossil fuels from their historical peaks in July, 2009
to prices approximately 30% of the peak, has created a perception that there is
less willingness to pay the higher price for renewable energy.  These
factors combine to make the business environment for wind turbines very
difficult.  While none of our existing customers have cancelled their
orders, one customer with two orders totaling 50 DeWind turbines worth $140
million has defaulted on key progress payments as a result of losing their
wind farm financings and other customers that were expected to purchase turbines
have delayed their purchase decisions.  Furthermore, our expected
contingency plan to finance our own wind farms for internal development projects
has not yet come to fruition due to the difficult investment
marketplace.
 
 The
Company realized during the December, 2008 quarter that the financing
environment for wind turbines had changed significantly as compared to the
environment only one quarter earlier and  management began to develop
plans to ensure the maximum preservation of value for both businesses. Central
among these plans was to invest and operate to continue the viability and growth
of the CTC Cable business, while realizing that the DeWind business would likely
need to seek a strategic investor or partner, so that it could weather the storm
until the economic environment for the wind business improved. To this
extent, in December, 2008 the Company engaged the services of RBS Securities, an
affiliate of The Royal Bank of Scotland Plc, to identify qualified companies
interested in a partnership to better leverage and monetize the leading edge
technology of DeWind which will allow DeWind to take advantage of the expected
demand in the wind renewables market over the next few years.  We
chose RBS Securities because of their extensive and global M&A experience as
well as project financing within the wind industry. RBS Securities is expected
to play a vital role to the DeWind business including assistance to the Company
in finding a strategic investor for the DeWind business, as well as to secure
financing for DeWind’s venture with Higher Perpetual Energy on 620 megawatts of
wind farms.  RBS has identified and contacted a significant list of
interested parties and negotiations with some of these parties are
underway.  We currently have no plans or intentions to sell a stake in
CTC Cable or take strategic partners into the CTC Cable business.
  Restatement:  Provision
for Loss on Turbine Contracts:
 
 The
Company is restating its fiscal year ending September 30, 2008 financials to
reflect understated estimated losses on a turbine sales
contracts.  The restatement includes a contract loss provision of
$7,597,000 representing the amount of incurred and projected costs in excess of
the expected billings on sales contracts for 10 D8 2 megawatt wind turbine
nacelles, hubs, and blade sets.  The turbines were shipped during the
quarter ended December 31, 2008.  Revenues were deferred as of
December 31, 2008 and will be recognized after the turbines are commissioned,
expected later in fiscal 2009.  The restatement also includes an
additional contract loss of $363,000 for a single turbine unit order for
estimated additional tower costs and shipping costs for a total loss estimate of
$7,960,000.
 
 For the
$7,597,000 loss, two contracts with a total original value of $19,100,000 were
originally signed in June 2007 for delivery in June,
2008.   During the quarter ended September, 2008 the Company
agreed to a delivery delay penalty of $955,000 with the customer, which reduced
the expected, billed contract value to $18,145,000.  Also during the
quarter ended September 30, 2008, additional commitments were incurred for
procurement and delivery of the turbines and turbine blades.  These
commitments, in addition to approximately $8.4 million of parts delivered or
available through September 30, 2008, as well as estimates of the additional
costs required to complete the project, brought the total projected contract
cost to $25,742,000 resulting in a projected contract loss of
$7,597,000.  For the September 30, 2008 balance sheet, the balance is
included as accrued loss on turbine contracts.  For the December 31,
2008 balance sheet, the balance is included as a portion of inventory
reserves.
 
 The large
contract loss is due to a combination of four primary factors.
 
 First,
nearly $1.0 million of the loss is due to delivery delays caused by late gearbox
availability.
 
 Second,
it is due to the impact of higher nacelle component prices totaling
approximately $2.7 million.  The component price increases were the
result of a combination of factors but largely due to the nearly 30% increase in
the value of the Euro against the dollar, industry wide turbine parts shortages
driving up component prices, and low economies of scale for parts purchases at
lower than expected levels.  The higher component prices were not
accompanied by increased billings.  Unlike our current contracts that
require additional payments for Euro and steel price appreciation, the contract
was not written to inherently hedge DeWind against price spikes for the Euro and
certain materials such as steel and DeWind did not hedge against these price
increases. Approximately 60% of the component value was from parts suppliers
paid in Euros.
 
 Third,
our blade costs were approximately $3.3 million higher than originally
projected.  When we signed the contract in 2007 we had expected a much
lower cost for our D8 blade sets due to increased production rate and therefore
a lower cost per turbine set.  The final blade price included
penalties for reducing production at our European blade supplier.
 
 Finally,
approximately $600,000 was due to the additional costs of expedited materials,
which were required to avoid additional delivery penalties.  We were
required to pay a much higher price for the turbine nacelles by TECO due to air
freight required for certain key parts, including
gearboxes.
 26
  Consolidated Revenues, Gross
Margins, and EBITDAS
 
 On a
consolidated basis, revenues from continuing operations for the three months
ended December 31, 2008 decreased by $7.2 million or 41% from $17.6 million
in 2007 to $10.4 million in 2008. The decrease was due to a $6.6 million
decrease in CTC Cable sales and a decrease of $0.2 million of turbine product
sales and a $0.5 million decrease in turbine service related sales.
 
 The
fiscal 2009 quarter decrease for CTC Cable was due to the combination of a
revenue spike in December, 2007 on nearly 1,100 km of cable deliveries including
523 km of higher revenue ACCCTM conductor as compared to 561 km of primarily
small sized and therefore low price point ACCCTM core deliveries in the December,
2008 quarter which was in turn the result of lower orders out of China due to
the Beijing Olympics during the September, 2008 quarter.  The turbine
product increase is the net effect of a reduction to $0 of turbine deliveries
recorded into revenue for the December, 2008 quarter.  All December,
2008 revenues were for parts sales.   The decrease in turbine
service related sales is due to reductions of amortized prepaid turbine
maintenance and a reduction of turbine service revenues from the European
installation base.
 
 Consolidated
gross margins decreased by $2.5 million from $4.0 million or 22% of revenues for
the three months ended December 31, 2007 to $1.5 million for the three months
ended December 31, 2008 or 14.6% of revenues. The margin decrease is due to
reduced CTC Cable margins of $2.9 million primarily due to lower revenue levels,
and a $0.5 million increase in DeWind margins due to higher margin parts sales
in the December, 2008 quarter as opposed to lower margin turbine sales in the
comparable 2007 quarter.
 
 The
following table is a reconciliation of consolidated “non-GAAP” EBITDAS
discussed above for the three months ended December 31, 2008 and
2007.  Management believes that “non-GAAP” EBITDAS provides an
important decision metric due to the large amount of non-cash expenses incurred
by the Company and its subsidiaries.  We believe that EBITDAS is a
meaningful proxy for the operating cash flow activities since it excludes
non-cash charges for depreciation and for stock based compensation charges that
historically have been dependent on the vesting schedules of the underlying
options granted rather than the operations of the business.
  (Unaudited)
                    (In Thousands)
                  
                  Three months ended December 31,Consolidated
                  
                  2008
                  
                  
                  2007Net
      loss from continuing operations
                  
                  $
                  (8,421
                  )
                  
                  $
                  (5,191
                  )Interest,
      taxes, depreciation, amortization and stock-based compensation
      (ITDAS):Interest,
      net
                  
                  
                  460
                  
                  
                  
                  896Taxes
                  
                  
                  8
                  
                  
                  
                  8Depreciation
      and amortization
                  
                  
                  604
                  
                  
                  
                  865Stock-based
      compensation
                  
                  
                  1,552
                  
                  
                  
                  216Total
      ITDAS
                  
                  $
                  2,624
                  
                  
                  $
                  1,985“Non-GAAP”
      EBITDAS
                  
                  $
                  (5,797
                  )
                  
                  $
                  (3,206
                  )
  EBITDAS
loss increased by $2.7 million from the prior year primarily due to reduced
margins of $2.7 million primarily related to lower cable revenues.
 
 DeWind
Division
 The
DeWind segment operates under the brand name DeWind, which has designed and sold
wind turbines since 1995 from Lubeck, Germany. Currently, DeWind is operated
from the Company’s Irvine, California offices with sales operations in, Irvine,
California and Lubeck, Germany along with Engineering and R&D operations in
both Irvine, California and Lubeck, Germany. The DeWind segment designs,
produces, sells and services DeWind turbines in the 1.25 and 2.0 megawatt range
worldwide. We acquired DeWind during the EU Energy acquisition on July 3, 2006.
Accordingly, we have incorporated DeWind’s operations into our financial results
since that date.
  RECENT
DEVELOPMENTS
 
 The
revenues of the DeWind segment for the quarter ended December 31, 2008 consisted
solely of turbine parts sales made to DeWind’s Chinese license
partners.  There were two turbine deliveries during the quarter for
which revenue was deferred as the revenue recognition criteria had not been met
as of the end of December, 2008.  In particular, 10 D8 units valued at
approximately $19 million and the first commercial D8.2 turbine sold in the U.S.
valued at $2.5 million were deferred.  During the quarter, an
additional order for three new D6 turbines, scheduled for delivery later in
fiscal 2009 was received.  As of December 31, 2008, the total backlog
of DeWind was $310 million, of which $265 million represents orders where
financing is uncertain or pending.
 
 27
  The
DeWind segment entered the December, 2008 quarter with caution and
optimism.  The credit market downturn, which began in September was
not fully known early in the quarter. Between August, 2008 and early October,
2008 DeWind had received orders for 50 D9 turbines for a wind farm in Canada
worth approximately $150 million, had received an initial down payment for the
first 10 turbines of this order and had signed a development agreement to
jointly develop 620 Megawatts of wind farms in Texas with a total potential cost
of approximately $1.5 billion.  Based on these developments, DeWind
continued to commit resources towards the completion of the D9 turbine as well
as begin construction of the first 10 megawatts of the wind farms in
Texas.  By November, 2008 after the Canadian order financing was
withheld from the developer, who then defaulted on scheduled payments, and it
became apparent that financing for wind farms had been significantly reduced,
DeWind quickly decided that additional strategies needed to be
pursued.
 
 In
December, 2008 management realized that additional funding would be necessary to
complete the development initiatives and to maintain a viable supply chain for
the D8.2 and D9 turbine products.  DeWind has since engaged an
international investment banking firm to entertain alternative options including
financing of the 620 Megawatt wind farms and obtaining strategic investors into
DeWind.  At present, the investment banking firm has successfully
directed their efforts on likely investors or partners with sufficient financial
backing and is in discussions and negotiation with multiple parties for both
options.  Since December, DeWind has significantly restricted its cash
payments by reducing operating expenses, reducing or temporarily halting
development initiatives, and limiting payments to suppliers, in particular for
advance payments on future deliveries of parts in an effort to conserve cash
until either the financing market allows for turbine financing or an investor is
found for the wind farms or as an investment into DeWind.
 
 The
following table is a reconciliation of DeWind only “non-GAAP” EBITDAS discussed
above for the three months ended December 31, 2008 and
2007.  Management believes that “non-GAAP” EBITDAS provides an
important decision metric due to the large amount of non-cash expenses incurred
by the Company and its subsidiaries.  We believe that EBITDAS is a
meaningful proxy for the operating cash flow activities since it excludes
non-cash charges for depreciation and for stock based compensation charges that
historically have been dependent on the vesting schedules of the underlying
options granted rather than the operations of the business.
  (Unaudited)
                              (In Thousands)
                            
                            Three months ended December 31,DeWind Segment Only
                            
                            2008
                            
                            
                            2007Net
      loss from continuing operations
                            
                            $
                            (4,217
                            )
                            
                            $
                            (5,204
                            )Interest,
      taxes, depreciation, amortization and stock-based compensation
      (ITDAS):Interest
                            
                            
                            13
                            
                            
                            
                            84Taxes
                            
                            
                            5
                            
                            
                            
                            7Depreciation
      and amortization
                            
                            
                            364
                            
                            
                            
                            659Stock-based
      compensation
                            
                            
                            423
                            
                            
                            
                            —Total
      ITDAS
                            
                            $
                            805
                            
                            
                            $
                            750“Non-GAAP”
      EBITDAS
                            
                            $
                            (3,412
                            )
                            
                            $
                            (4,454
                            )
  ACCCTM Cable
Division
 Located
in Irvine, California with sales operations in Irvine, California, Shanghai,
China, Europe, the Middle East, and Brazil, the CTC Cable Division produces and
sells ACCCTM conductor products and related ACCCTM hardware products. ACCCTM
conductor production is a two step process. The Irvine operations produce the
high strength, light weight, reduced sag composite ACCCTM core, which is then
shipped to one of four conductor stranding licensees in Canada, Belgium, China,
or Bahrain where the core is stranded with conductive aluminum to become ACCCTM
conductor. ACCCTM conductor and core are sold in Canada and the U.S. directly to
utilities or through a distribution agreement with General Cable. ACCCTM
conductor and core are sold elsewhere in the world directly to utilities as well
as through license and distribution agreements with Lamifil in Belgium, Jiangsu
New Far East in China, and Midal in Bahrain. ACCCTM conductor has been sold
commercially since 2005 and is currently marketed worldwide to electrical
utilities, transmission companies and transmission design and engineering
firms.
 
 RECENT
DEVELOPMENTS
 
 The CTC
Cable business saw continued expansion into new markets and greater traction on
our new efficiency message in our U.S. market but CTC Cable also saw delays in
several anticipated sales wins in new markets and was negatively impacted from
the delay in sales orders caused by a slowdown in China due to the Beijing
Olympics.   These delays affected revenues for the September,
2008 and December, 2008 quarters resulting in deliveries of only 561 km of ACCCTM
products in the December 2008 quarter and coupled with legal expenses related to
the Mercury litigation, the CTC Cable business had a $0.8 million EBITDAS loss
for the quarter.
 
 We have
subsequently seen a resurgence of orders out of China and new orders in the U.S.
that call for near term deliveries. Since the middle of December, 2008 we have
received orders for 1,070 km of ACCCTM conductor and ACCCTM core and our backlog
has increased to $11.8 million. The recently announced U.S. order to Sierra
Pacific is important since the decision to purchase ACCCTM conductor by this
customer was primarily due to the cost savings associated with using ACCCTM
including the improved efficiency of ACCCTM conductor over existing transmission
conductor products.  We are hopeful that these orders are the first of
many such wins for U.S. utility sales opportunities and we believe the wins are
reflective of a much more effective sales organization.   These
recent orders along with additional expected orders out of China and other new
U.S. and international customers make us optimistic on future sales wins that
will add to our backlog, expand our customer base, and return CTC Cable to
profitability.  We are also optimistic that the proposed
infrastructure and grid efficiency directives that are being pushed by the new
Obama administration will result in an increased focus by utilities in the U.S.
to acknowledge the efficiency benefits of our ACCCTM products.
 
 28
  The Cable
division’s focus during the quarter ending December 31, 2008 was sales,
marketing, and operations with a goal to position CTC Cable for rapid revenue
growth.
 
 The sales
and marketing initiatives begun in the latter half of fiscal 2008 were continued
with multiple areas of the sales and marketing infrastructure completed during
the quarter, or shortly thereafter.  These initiatives focused on
developing a sales organization necessary to penetrate and support order
solicitations, bid tenders, and to evangelize the efficiency message of the
ACCCTM conductor product line.  During the quarter, CTC Cable filled
out complete coverage of the U.S. and Canadian markets through its consortium of
14 sales agent representatives.  The sales organization also completed
new sales collateral and sales tools to help automate bid and information
requests including a new CTC Cable website which is in beta testing currently
and expected to be fully implemented in March, 2009.
 
 CTC Cable
continues to develop new relationships in targeted markets including Europe,
South and Latin America and the Middle East.  During the quarter we
were awarded bids for orders in India and Indonesia and we continue to work to
open other new markets.  One of the more exciting developments was the
successful win of a new customer in the United States for a 90 km order of ACCCTM
conductor. This customer is the first U.S. customer to purchase ACCCTM conductor
primarily on the basis of evaluating the product for its efficiency
benefits.  Prior U.S. sales were either short test lines or for due to
the low sag or high temperature applications of ACCCTM conductor.  We
believe this win is significant because it represents a significant change in
the perception of the use of ACCCTM conductor with U.S. utilities away from a
“niche” product chosen when there was no other alternative available to a
product that could be rolled out to replace substantially all transmission
conductor within a given utility’s grid under management.
 
 The focus
of our cable operations during the three-month period ending December 31, 2008
has been to increase production to manage the large influx of orders from our
new markets as well as produce ACCCTM core for deliveries under our China
agreement. During the quarter we installed and began operating new machines in
our new production floor.  The installation had been delayed due to a
construction delay of the backup power generation for this floor.  We
now have twelve pultrusion machines in operation with each of the new production
machines able to produce up to 3.5 km per day per machine.  By the end
of March, 2009 we expect to have eighteen machines in operation with a projected
annual capacity in excess of 18,000 km per year, sufficient capacity to provide
in excess of $100 million in ACCCTM core revenue per year.  During the
quarter, we also recertified our plant for ISO 9001-2000
certification.
 
 We
believe that we have lined up sufficient raw materials supplies for our ACCCTM
core to produce our expected ACCCTM product sales worldwide for the next twelve
months.  The recent economic downturn has resulted in a decreased
demand for aerospace grade carbon fiber that we use to produce our composite
core resulting in increased availability of materials for ACCCTM
core.   We will continue to work to expand our ACCCTM conductor
production capacity through stranding and manufacturing agreements with targeted
manufacturers worldwide. As we open new markets and we begin to sell ACCCTM
conductor locally, we will look to sign additional agreements with local
stranding sources.  Discussions with new stranding partners are
underway at multiple locations worldwide.
 
 The
following table is a reconciliation of CTC Cable only “non-GAAP” EBITDAS
discussed above for the three months ended December 31, 2008 and
2007.  Management believes that “non-GAAP” EBITDAS provides an
important decision metric due to the large amount of non-cash expenses incurred
by the Company and its subsidiaries.  We believe that EBITDAS is a
meaningful proxy for the operating cash flow activities since it excludes
non-cash charges for depreciation and for stock based compensation charges that
historically have been dependent on the vesting schedules of the underlying
options granted rather than the operations of the business.
  (Unaudited)
                            (In Thousands)
                          
                          Three months ended December 31,Cable Segment Only
                          
                          2008
                          
                          
                          2007Net
      income/(loss) from continuing operations
                          
                          $
                          (1,512
                          )
                          
                          $
                          2,173Interest,
      taxes, depreciation, amortization and stock-based compensation
      (ITDAS):Interest
                          
                          
                          —
                          
                          
                          
                          —Taxes
                          
                          
                          —
                          
                          
                          
                          —Depreciation
      and amortization
                          
                          
                          240
                          
                          
                          
                          206Stock-based
      compensation
                          
                          
                          433
                          
                          
                          
                          146Total
      ITDAS
                          
                          $
                          673
                          
                          
                          $
                          352“Non-GAAP”
      EBITDAS
                          
                          $
                          (839
                          )
                          
                          $
                          2,525
 
 29
    RESULTS
OF OPERATIONS
 
 Revenues,
Cost of Revenues, and Gross Margins:
 
 During
the quarter ended December 31, 2008, the geographical allocation of consolidated
revenues was:
 
 China/Asia
                        
                        
                        76.8
                        %Europe
                        
                        
                        11.3
                        %Central
      America
                        
                        
                        5.0
                        %North
      America
                        
                        
                        6.9
                        %
  During
the quarter, three customers in China represented 76.7% of revenues (two
customers from our DeWind segment and one customer from our Cable segment at
53.9% and 22.8%, respectively), one Cable customer in Europe with 6.9% of
revenues, one Cable customer in Central America with 5.0% of revenues and one
Cable customer in North America with 5.0%. No other customer represented greater
than 5% of consolidated revenues.
 
 Our
revenues and gross margin analysis are listed in the table below.
 
 Three Months Ended December
      31,(In
      Thousands)
                          
                          2008
                          
                          
                          2007(unaudited)
                          
                          Cable Segment
                          
                          
                          Wind Segment
                          
                          
                          Total
                          
                          
                          Cable Segment
                          
                          
                          Wind Segment
                          
                          
                          TotalProduct
      Sales –Cable
                          
                          $
                          4,360
                          
                          
                          $
                          —
                          
                          
                          $
                          4,360
                          
                          
                          $
                          10,994
                          
                          
                          $
                          —
                          
                          
                          $
                          10,994Product
      Sales – Turbines
                          
                          
                          —
                          
                          
                          
                          5,948
                          
                          
                          
                          5,948
                          
                          
                          
                          —
                          
                          
                          
                          6,077
                          
                          
                          
                          6,077Other
      Turbine Related Revenue
                          
                          
                          —
                          
                          
                          
                          110
                          
                          
                          
                          110
                          
                          
                          
                          —
                          
                          
                          
                          515
                          
                          
                          
                          515Total
      Revenues
                          
                          $
                          4,360
                          
                          
                          $
                          6,058
                          
                          
                          $
                          10,418
                          
                          
                          $
                          10,994
                          
                          
                          $
                          6,592
                          
                          
                          $
                          17,586Cost
      of Sales - Cable
                          
                          $
                          3,082
                          
                          
                          $
                          —
                          
                          
                          $
                          3,082
                          
                          
                          $
                          6,821
                          
                          
                          $
                          —
                          
                          
                          $
                          6,821Cost
      of Sales – Turbines
                          
                          
                          —
                          
                          
                          
                          5,000
                          
                          
                          
                          5,000
                          
                          
                          
                          —
                          
                          
                          
                          6,085
                          
                          
                          
                          6,085Cost
      of Sales – Turbine Service
                          
                          
                          —
                          
                          
                          
                          813
                          
                          
                          
                          813
                          
                          
                          
                          —
                          
                          
                          
                          640
                          
                          
                          
                          640Total
      Cost of Sales
                          
                          $
                          3,082
                          
                          
                          $
                          5,813
                          
                          
                          $
                          8,895
                          
                          
                          $
                          6,821
                          
                          
                          $
                          6,725
                          
                          
                          $
                          13,546Gross
      Margin - Cable
                          
                          $
                          1,278
                          
                          
                          $
                          —
                          
                          
                          $
                          1,278
                          
                          
                          $
                          4,173
                          
                          
                          $
                          —
                          
                          
                          $
                          4,173Gross
      Margin % - Cable
                          
                          
                          29.3
                          %
                          
                          
                          —
                          
                          
                          
                          29.3
                          %
                          
                          
                          38.0
                          %
                          
                          
                          —
                          
                          
                          
                          38.0
                          %Gross
      Margin – Turbines
                          
                          
                          —
                          
                          
                          
                          948
                          
                          
                          
                          948
                          
                          
                          
                          —
                          
                          
                          
                          (8
                          )
                          
                          
                          (8
                          )Gross
      Margin % - Turbines
                          
                          
                          —
                          
                          
                          
                          15.9
                          %
                          
                          
                          15.9
                          %
                          
                          
                          —
                          
                          
                          
                          -0.1
                          %
                          
                          
                          -0.1
                          %Gross
      Margin – Turbine Service
                          
                          
                          —
                          
                          
                          
                          (703
                          )
                          
                          
                          (703
                          )
                          
                          
                          —
                          
                          
                          
                          (125
                          )
                          
                          
                          (125
                          )Gross
      Margin % - Turbine Service
                          
                          
                          —
                          
                          
                          
                          -639.1
                          %
                          
                          
                          -639.1
                          %
                          
                          
                          —
                          
                          
                          
                          -24.3
                          %
                          
                          
                          -24.3
                          %Total
      Gross Margin
                          
                          $
                          1,278
                          
                          
                          $
                          245
                          
                          
                          $
                          1,523
                          
                          
                          $
                          4,173
                          
                          
                          $
                          (133
                          )
                          
                          $
                          4,040Total
      Gross Margin %
                          
                          
                          29.3
                          %
                          
                          
                          4.0
                          %
                          
                          
                          14.6
                          %
                          
                          
                          38.0
                          %
                          
                          
                          -2.0
                          %
                          
                          
                          23.0
                          %
  CABLE
REVENUES. Product revenues for the quarter ended December 31, 2008 of $4.4
million consisted of only 561 kilometers of ACCCTM core, and related ACCCTM
hardware products sold primarily to Jiangsu New Far East Cable Company in
China.  Cable revenues decreased $6.6 million or 60% for the three
months ended December 31, 2008, compared to the same periods in prior year. The
decrease in revenue for the current quarter was due to a decrease of over 600 km
of ACCCTM products from the December, 2007 quarter and due to a change in product
mix since product deliveries in 2007 were primarily higher sales price ACCCTM
conductor while 2008 sales were lower priced ACCCTM core.
 
 Cost of
Sales and resultant Gross Margin on cable revenues for the three ended December
31, 2008 represent materials, labor, freight, and allocated overhead costs to
produce ACCCTM conductor, ACCCTM  core, and related
hardware.  Cable gross margin decreased by $2.9 million or 69% from
the same period in the prior year. Margin percentages for current quarter
decreased to 29.3%, compared to the same period in prior year of 38%. The
current quarter gross margin decrease is due to combination of lower sales of
ACCCTM products and a much lower utilization of ACCCTM core production related
labor overhead as in prior quarters per revenue dollar.
 
 30
  TURBINE
REVENUES. Turbine revenues for the quarter ended December 31, 2008 of $5.9
million consisted entirely of sales of parts and unlike prior quarters had no
revenues related to turbine deliveries or license fees.  The December,
2007 quarter included revenues for two D8 turbines and two D4
turbines.
 
 Cost of
sales for the quarter ended December 31, 2008 decreased $1.1 million to $5.0
million and are reflective of the cost for the parts sold and $0.3 million in
loss provisions on turbine contracts for delivery later in fiscal
2009.  The December, 2007 quarter included the costs for the two D8
and two D4 turbines.
 
 TURBINE
SERVICE REVENUES. Turbine service revenues for the quarter ended December 31,
2008 of $0.1 million consisted of amortized deferred service and maintenance
revenues and service billings related to turbines that were not transferred to
the now discontinued E Services entity, typically for turbines recently ending
their warranty periods. Turbine service revenues for the quarter ended December
31, 2007 of $0.5 million represents primarily amortization of deferred
maintenance revenues for those turbines remaining under warranty which were not
transferred to E Service. The decrease in revenues is due to decreased service
billings for customers rolling off their warranty period who purchased
maintenance services subsequent to their warranty termination.
  Cost of
revenues for turbine service represents the labor, parts, supplies, and overhead
related to the servicing of turbines and the net effect of changes in our
turbine availability and warranty provisions. Cost of revenues for the three
months ending December 31, 2008 increased by $0.2 million due to higher charges
related to warranty and availability provisions than were recorded in the
December, 2007 quarter.
 
 OPERATING
EXPENSES
 
 Operating
expenses that are specifically identifiable for a given segment are included in
that segment and are described 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 $1.2 million or 13.8% from $8.3 million in the
quarter ended December 31, 2007 to $9.5 million in the current quarter due to
stock compensation increases of $1.3 million, non-recurring legal related
expenses of $1.1 million, increases in CTC Cable sales related expenses of $0.4
million and DeWind expense reductions of $1.7 million.  Excluding
stock compensation charges, operating expenses were consistent at $8.1 million
despite $1.1 million in non-recurring expenses in the December, 2008
quarter.
 
 The $1.1
million in non-recurring expense changes included $0.4 million in startup costs
related to one-time DeWind wind farm development that are potentially
recoverable from the joint venture from future joint venture cash flows, a $0.2
million Corporate credit related to the DeWind acquisition taken in the
December, 2007 quarter but not recurring in 2008, and $0.5 million in CTC Cable
and Corporate expenses related to the Mercury litigation and for our income tax
audit which was completed by the IRS in January, 2009 with no additional tax
assessed.
 
 On a
standalone basis, Corporate expenses increased $0.9 million from $1.3 million to
$2.2 million including an increase of $0.6 million in stock compensation charges
, $0.2 million related to the credit reversal described above, $0.2 million of
litigation and tax defense costs and a $0.1 million expense
reduction.
 
 CTC Cable
expenses increased $0.8 million or 39.5% due to $0.3 million in higher stock
compensation charges, $0.4 million in cash basis sales and marketing expenses
resulting from an increase in our sales and marketing
departments,  $0.3 million related to the Mercury litigation
and  IRS tax audits, offset by $0.2 million in other research and
general and administration cost reductions.
 
 DeWind
expenses decreased $0.5 million or 11.7% to $4.4 million.  The
reduction is the net effect of an increase of $0.4 million in stock compensation
charges, $0.4 million in non-recurring wind farm startup costs offset by a $0.3
million decrease in depreciation and amortization and  a decrease of
$1.0 million in other cash basis expenses including $0.2 million in general and
administrative expenses and $0.8 million in research and development expenses
which was the net effect of a reduction of D8.2 60 hertz US prototype costs
incurred in the 2007 quarter offset by the increase of D9 blade and D8.2 cold
weather development costs incurred in 2008.
  The
following table provides a comparative analysis of operating
expenses.
 
 Three Months Ended December
      31,(In
      Thousands)
                      
                      2008
                      
                      
                      2007(unaudited)
                      
                      Corporate
                      
                      
                      Cable
                      
                      
                      DeWind
                      
                      
                      Total
                      
                      
                      Corporate
                      
                      
                      Cable
                      
                      
                      DeWind
                      
                      
                      TotalOfficer
      Compensation
                      
                      $
                      743
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      743
                      
                      
                      $
                      254
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      254General
      and Administrative
                      
                      
                      1,499
                      
                      
                      
                      738
                      
                      
                      
                      1,786
                      
                      
                      
                      4,023
                      
                      
                      
                      1,093
                      
                      
                      
                      404
                      
                      
                      
                      1,810
                      
                      
                      
                      3,307Research
      and Development
                      
                      
                      —
                      
                      
                      
                      673
                      
                      
                      
                      1,940
                      
                      
                      
                      2,613
                      
                      
                      
                      —
                      
                      
                      
                      812
                      
                      
                      
                      2,347
                      
                      
                      
                      3,159Sales
      and Marketing
                      
                      
                      —
                      
                      
                      
                      1,289
                      
                      
                      
                      539
                      
                      
                      
                      1,828
                      
                      
                      
                      —
                      
                      
                      
                      711
                      
                      
                      
                      344
                      
                      
                      
                      1,055Depreciation
      and Amortization
                      
                      
                      —
                      
                      
                      
                      90
                      
                      
                      
                      179
                      
                      
                      
                      269
                      
                      
                      
                      —
                      
                      
                      
                      73
                      
                      
                      
                      479
                      
                      
                      
                      552Total
      Operating Expenses
                      
                      $
                      2,242
                      
                      
                      $
                      2,790
                      
                      
                      $
                      4,444
                      
                      
                      $
                      9,476
                      
                      
                      $
                      1,347
                      
                      
                      $
                      2,000
                      
                      
                      $
                      4,980
                      
                      
                      $
                      8,327
 
 OFFICER
COMPENSATION. Officer compensation represents CTC corporate expenses and
consists primarily of salaries, consulting fees paid in cash, and the fair value
of stock grants issued to officers of the Company. Officer compensation
increased $0.6 million or 233% in the current quarter from $0.2 million for the
quarter ended December 31, 2007.  The increase for the three months is
due to increased stock-compensation recorded in the current quarter as compared
to prior year.
  31
  GENERAL
AND ADMINISTRATIVE EXPENSES. General and administrative expenses consisted
primarily of salaries and employee benefits for administrative personnel,
facilities costs, stock listing fees, insurance expenses, legal, professional
and consulting expenses, and expenses related to reserves for uncollectible
receivables. G&A expense increased $0.7 million or 21.7% in the current
quarter from $3.3 million for the quarter ended December 31, 2007. The increase
in G&A expenses for the quarter is due primarily to a $0.2 million increase
in stock compensation, $0.2 million in additional corporate costs, and $0.3
million in Cable costs offset by a decrease $0.1 million for the DeWind business
segment.  The increase in corporate expenses is due to additional
audit and tax related legal and professional fees and a one-time reversal of an
accrual related to the DeWind acquisition that reduced expenses in the December,
2007 quarter; the Cable increase is due to the Mercury litigation costs, and the
decrease in DeWind is due to reduced costs in our European operations, offset by
a non-recurring $0.4 million related to startup costs for the wind farm joint
venture.
 
 RESEARCH
AND DEVELOPMENT EXPENSES. Research and development expenses 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, to complete our DeWind
D8.2 development and prototypes, and our composite materials product technology
and production processes.
 
 Research
and development expenses decreased $0.6 million or 17.3% in the current quarter
from $3.2 million for the quarter ended December 31, 2007. The current quarter
decrease is due to the net effect of a $0.3 million increase stock compensation
charges, and cash basis expense reductions of $0.2 million in the Cable business
and $0.7 million in the DeWind business, due to lower US prototype costs offset
by increased spending on our D9 initiatives including extended blade development
and a cold weather package.
 
 SALES AND
MARKETING EXPENSE. Sales and marketing expense consisted primarily of salaries
and commissions for sales and marketing personnel, expenses for consultants,
equipment, travel, and printed marketing literature and sales materials. Sales
and Marketing expenses increased  $0.7 million or 69% in the current
quarter from $1.1 million in the quarter ended December 31, 2007. The current
quarter increase of $0.7 million included $0.3 million increase in stock
compensation charges and $0.4 million due to increases in Cable sales and
marketing expenses due to additional US and International headcount related
expenses and expenses related to increased marketing efforts for our website
enhancement and sales collateral changes.
 
 DEPRECIATION
& AMORTIZATION EXPENSE. Depreciation expense consisted of depreciation on
capitalized equipment, leasehold improvements, and other capital assets and
amortization of acquired intangibles. The depreciation and amortization expense
decreased by $0.3 million or 51% for the current quarter from $0.6 million for
the quarter ended December 31, 2007.  The decrease in the quarter was
primarily due to lower amortization of intangibles from our DeWind segment
compared to prior year due to lower turbine deliveries and a decrease in
depreciation in the Cable business.
 
 INTEREST
EXPENSE. Interest expense consists of interest paid and payable on the Company's
capital lease obligations, the cash interest payable on Company’s Debentures and
Notes and the amortization of the Convertible Note discount recorded for the
value of the warrants and conversion features issued in conjunction with the
Convertible Notes. Interest expense decreased $0.5 million or 52% in the current
quarter from $1.0 million in the quarter ended December 31, 2007. The decrease
in the current quarter is primarily due to lower interest on lower debt balances
of the remaining $9.0 million in principal on our February, 2007 Convertible
Notes and a reduction to zero of interest on capital lease obligations that were
repaid in May, 2008.
  INCOME
TAXES. We made no provision for income taxes in the three months ending December
31, 2008 due to net losses incurred except for minimum tax
liabilities.  We have determined that due to our continuing operating
losses as well as the uncertainty of the timing of profitability in future
periods, we should fully reserve our deferred tax assets. As of December 31,
2008, 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 December 31,(In Thousands)
                            
                            2008
                            
                            
                            2007(unaudited)
                            
                            
                            
                            (unaudited)Corporate
                            
                            $
                            (2,692
                            )
                            
                            $
                            (2,160
                            )Cable
                            
                            
                            (1,512
                            )
                            
                            
                            2,173Dewind
                            
                            
                            (4,130
                            )
                            
                            
                            (7,374
                            )Total
                            
                            $
                            (8,334
                            )
                            
                            $
                            (7,361
                            )
  32
  Our net
loss increased $0.9 million or 13.2% in the current quarter from $7.4 million
for the quarter ended December 31, 2007. The increase for the quarter was due
primarily to $2.7 million gross margin decreases, primarily in the Cable
operations due to lower revenue levels, operating expense increases of $1.1
million, primarily caused by $1.3 million in increased stock compensation
charges offset by a $0.6 million decrease in depreciation and amortization
expense; a $0.5 million decrease in interest expense, and a reduction of $2.2
million in losses related to discontinued operations of DeWind related
businesses.
  33


LIQUIDITY
AND CAPITAL RESOURCES





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





For the
three months ended December 31, 2008, we had a net loss from continuing
operations of $8.4 million. At December 31, 2008 we had $9.8 million of cash and
cash equivalents, which represented a decrease of $12.8 million from September
30, 2008. The decrease was due to cash used in operations of $12.2 million,
cash used in investing activities for the investment in wind farm joint ventures
of $0.8 million purchase of property, plant and equipment of $0.2 million,
offset by a favorable Euro exchange rate providing $0.5 million.





Cash
used in operations during the three months ended December 31, 2008 of $12.2
million was the result of operating losses, offset by depreciation,
amortization, and non-cash compensation expenses and working capital
requirements, most significantly related to the purchase of turbine inventory
parts and payments on accounts payable related to those parts offset by
additional cash receipts for deferred revenues.





We
anticipate that our current cash assets combined with expected sales of our ACCC
conductor will not be sufficient to sustain our 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.





As
described above, we have also engaged the services of RBS Securities to obtain
additional cash funding into our DeWind business as well as financing for
DeWind’s joint venture wind farm projects.




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 and steel.


Whenever
possible, we manage price risks through cost containment
measures.  For our CTC Cable business, 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, and we do not believe that inflation risk or
other price risks will be material to our CTC Cable business or Corporate
overhead results of operations, financial position, or cash flows.
 
 For our
DeWind business, during the year ended September 30, 2008 and the quarter ended
December 31, 2008 there were substantial fluctuations in the turbine component
costs driven in part by increased demand and in part due to raw materials
increases that we were unable to pass through to our customers and which
resulted in losses on several turbine supply contracts.  These losses
primarily related to fixed price contracts that were signed in
2007.  Our current turbine supply contracts incorporate price
escalators that allow a full or partial pass-through of additional materials
price increases to our customers.




OFF
BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS





There are
no off balance sheet arrangements. The following table summarizes our
contractual obligations (including interest expense) and commitments as of
December 31, 2008:




Contractual Obligations (in thousands)
                            
                            Total
                            
                            
                            Less than 1
                              year
                            
                            
                            1-3 years
                            
                            
                            More than 3
                              YearsDebt
      Obligations
                            
                            $
                            9,820
                            
                            
                            $
                            724
                            
                            
                            $
                            9,096
                            
                            
                            $
                            —Operating
      Lease Obligations
                            
                            $
                            2,482
                            
                            
                            $
                            1,457
                            
                            
                            $
                            1,025
                            
                            
                            
                            —Purchase
      Commitments
                            
                            $
                            15,500
                            
                            
                            $
                            15,500
                            
                            
                            $
                            —
                            
                            
                            $
                            —




Included
in purchase commitments are approximately $3.5 million of additional commitments
to a vendor to complete a sizable portion of the balance of the plant for the
first 10 megawatt wind farm for the wind farm joint venture.





Not
included in the table above are amounts included on our balance sheet under
warranty liabilities. Our turbine warranty generally provides for payment of
services for turbine related repairs as well as provides for compensation for
availability penalties. Availability penalties are wind generating revenue
guarantees payable in cash to wind farm operators if their turbine under
warranty fails to meet minimum wind generation levels. As of December 31, 2008,
we had accrued availability penalties relating to incurred and measured wind
generating guarantees totaling $434,019 which are payable upon the resolution of
the underlying claims. We currently classify all such payments as less than one
year.





34





ITEM
3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





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





As of
December 31, 2008 we did not hold any derivative financial instruments for
speculative or trading purposes. The primary objective of our investment
activities is the preservation of principal while maximizing investment income
and minimizing risk. As of December 31, 2008, we had $9.8 million in cash, cash
equivalents and short-term investments that mature in three months or less. Due
to the short duration of these financial instruments, we do not expect that a
change in interest rates would result in any material loss to our investment
portfolio.





We are
subject to price risks arising from exchange rate fluctuations in the functional
currency of our European subsidiaries, primarily the Euro and the UK Sterling.
We currently do not hedge the exchange rate risk related to our assets and
liabilities and do not hedge the exchange rate risk related to expected future
operating expenses. For our future sales, we do inherently hedge against the
exchange rate risk for that portion of our turbine supply chain purchased in
Euros through a banding process in our turbine supply agreements (TSAs). In our
TSAs with prices denominated in US Dollars, we typically set an exchange rate
for the Euro. For exchange rate changes greater than approximately a 5% trading
range, price adjustments are made for the final turbine purchase price when the
closing exchange rate falls outside of the trading band.





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 December 31, 2008 to ensure that information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and
forms.
 
 During
management's review of our internal control structure under Sarbanes-Oxley
section 404, for the fiscal year ending September 30, 2008, we determined the
following to be material weaknesses:
 
 Entity
level Processes and weaknesses. As of September 30, 2008, the following material
weaknesses existed related to general processes and weaknesses for the entity
taken as a whole:
 
 o Proper
segregation of duties and inadequate training did not exist as well as an
inadequate number of accounting and finance personnel staff at fiscal year
end.
 
 o The
Company had a two member Audit Committee, a two member Compensation Committee,
and has 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.  In October, 2007 we added one additional independent
director who also serves on the Audit and Compensation committees.
 
 o The
Company did not have an independent internal audit function due to the small
size of the organization.
 
 These
material weaknesses related to the entity as a whole affect all of our
significant accounts and could result in a material misstatement to our annual
or interim consolidated financial statements that would not be prevented or
detected.
 
 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.
  Information
Technology General Controls (ITGC'S). ITGC'S include four basic information
technology (IT) areas relevant to internal control over financial reporting:
program development, program changes, computer operations, and access to
programs and data. As of September 30, 2008, a material weakness existed
relating to our information technology general controls, including ineffective
controls relating to access
to programs and data including (1) user administration, (2) application and
system configurations, and (3) periodic user access validation
 
 Inventory
Processes. The following material weaknesses existed related to ineffective
controls over our inventory processes:
 
 o
Perpetual Inventory records: Ineffective controls to (a) accurately record the
raw materials inventory moved out of inventory stores and into manufacturing
production and later into finished goods, (b) accurately record manufacturing
variances, (c) properly reconcile in sufficient detail all inventories for
turbine parts  owned by the Company but held at third
parties.




35





Procure
to Pay process. During our fiscal 2008 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) 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.
 
 ii) There
were inadequate vendor management duties and responsibilities during the
year
 
 iii)
There was a lack of sufficient purchasing reports for management
review.
 
 Equity
Administration Process. During our 2008 assessment, we noted a lack of
segregation of duties over tracking and recording stock related
activity.
  Accounting
personnel.  During our 2008 assessment, we determined that we do not
have a sufficient number of accounting personnel trained in Generally Accepted
Accounting Principles working in our DeWind subsidiary.
 
 Project
review process.  We determined that we had an inadequate review
process over turbine supply contract review and the turbine project accounting
system was inadequate.
  During
the three months ended December 31, 2008 and through the date of this report,
the Company improved the internal control structure and addressed the identified
material weaknesses as follows:
 
 o In
January, 2009 the Company appointed a third independent Director who will serve
on the Audit and Compensation Committees as well as to provide a majority of
independent directors on our five person Board of Directors.
 
 o In
October, 2008, the Company completed an important phase of the upgrade to its
accounting and manufacturing IT systems to more adequately track and maintain
inventory and to automate manufacturing and inventory costing.
 
 o The
Company improved its IT processes surrounding security of information and user
administration and access validation procedures.
 
 o
Additional accounting and finance personnel were added in late fiscal 2008 to
address proper segregation of duties and inadequate training.
 
 The
Company's management has identified the steps necessary to address the material
weaknesses existing in 2008 described above and that remain as a December
31, 2008, as follows:
  (1)
Hiring additional accounting and operations personnel and engaging outside
contractors with technical accounting expertise, as needed, and reorganizing the
accounting and finance department to ensure that accounting personnel with
adequate experience, skills and knowledge relating to complex, non-routine
transactions are directly involved in the review and accounting evaluation of
our complex, non-routine transactions;
 
 (2)
Involving both internal accounting and operations personnel and outside
contractors with technical accounting expertise, as needed, early in the
evaluation of a complex, non-routine transaction to obtain




36





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;
 
 (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)
Evaluating the internal audit function in relation to the Company's financial
resources and requirements. We expect to pursue a strategy of outsourcing our
internal audit function in fiscal 2009;
 
 (6)
Develop and maintain an effective inventory reconciliation process between
DeWind’s accounting records and TECO Westinghouse records.
 
 (7)  Invest
in additional enhancements to our IT systems including enhancements to
processing manufacturing and inventory transactions, equity administration
processes, and security over user access and administration.
 
 (8)  Conduct
a thorough and complete project accounting review on a quarterly basis, which is
reviewed by senior management.  Implement an automated project
accounting software system.
 
 The
Company began to execute the remediation plans identified above in the first
fiscal quarter of 2009.  These remediation efforts are expected to
continue through fiscal 2009.
 
 Except
for the beginning of the transition of control of our DeWind inventory to
TECO/Westinghouse in the fourth fiscal quarter of 2008 and which continued into
the first fiscal quarter of 2009 as as noted above, there were no changes in our
internal control over financial reporting during the year ended September 30,
2008 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.
 
 SingerLewak
LLP, our independent registered public accounting firm, has audited management's
assessment of the effectiveness of the Company's internal control over financial
reporting as of September 30, 2008 as stated in their report which appears
in the Annual Report on Form 10-K/A to be filed with the Securities and Exchange
Commission later this month.
 
 Evaluation
of Effectiveness of Disclosure Controls and Procedures
 
 Under the
supervision and with the participation of our management, including our Chief
Executive Officer/ and our Chief Financial Officer, we evaluated the
effectiveness of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
ineffective as of December 31, 2008 because of the material weaknesses
identified above.




PART
II - OTHER INFORMATION




ITEM
1 - LEGAL PROCEEDINGS





There
have been no material changes to the Legal Proceedings described in Form 10-K/A
to be filed with the Securities and Exchange Commission later this month except
as noted in Footnote 13. See also Footnote 13 to the financial statements
in this document.




ITEM 1A. RISK
FACTORS





The
following risk factors have changed or have been updated for recent information
as compared to the Risk Factors listed in Form 10-K/A to be filed with the
Securities and Exchange Commission later this months. Such risk factors should
be read in conjunction with the risk factors listed in such Form
10-K/A.





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 $56 million in
ACCC product sales since inception and we have $56 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
CONCENTRATED WITH A SMALL NUMBER OF CUSTOMERS.


For both
our cable and turbine business units, revenues recognized over the past two
fiscal quarters and order bookings received to date are concentrated with a very
small number of customers, primarily our Cable customer in China, a Cable
customer in Poland, and for turbine related contracts, orders to our
Chinese licensees, Czech customer, and a customer in Argentina. 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.




37






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 three months ended December 31, 2008 we had a
net loss from continuing operations of $8.4 million and negative cash flows from
operations of $12.2 million. For the fiscal year ended September 30, 2008, we
had a net loss from continuing operations of $53.5 million and negative cash
flows from operations of $51.4 million.  For the fiscal year ended
September 30, 2007, we had a net loss from continuing operations of $30.6
million and negative cash flows from operations of $22.2 million. For the fiscal
year ended September 30, 2006, we had a net los from continuing operations of
$26.6 million and negative cash flows from operations of $6.5
million.




IF WE
CANNOT RAISE CAPITAL WHEN IT IS NEEDED, WE MAY BE REQUIRED TO REDUCE OR SUSPEND
OPERATIONS OR GO OUT OF BUSINESS ALTOGETHER FOR ONE OR MORE OF OUR OPERATING
SEGMENTS.


We
anticipate that for the foreseeable future, the sales of our ACCC cable or
DeWind turbine businesses may not be sufficient enough to sustain our
current level of operations on a consolidated basis and that we will continue to
incur net losses due to our costs exceeding our revenues for our DeWind
business. For these reasons, we believe that we will need to either raise
additional capital, to take on a strategic investment partner, or a full or
partial sale of DeWind to fund the operations of the business or until such
time, if ever, as we become cash-flow positive. It is highly likely that we will
continue to seek to raise money through public or private sales of our
securities, debt financing or short-term loans, corporate collaborations, asset
sales, or a combination of the foregoing. Our ability to raise additional funds
in the public or private markets will be adversely affected if the results of
our business operations are not favorable, if any products developed are not
well-received or if our stock price or trading volume is low. Additional funding
may not be available on favorable terms to us, or at all. To the extent that
money is raised through the sale of our securities, the issuance of those
securities could result in dilution to our existing stockholders. If we raise
money through debt financing, we may be required to secure the financing with
all of our business assets, which could be sold or retained by the creditor
should we default in our payment obligations. If we cannot sustain our working
capital needs with financings or if available financing is prohibitively
expensive, we may not be able to complete the commercialization of our products.
As a result, we may be required to discontinue our operations without obtaining
any value for our products, which could eliminate stockholder equity, or we
could be forced to relinquish rights to some or all of our products in return
for an amount substantially less than we expended.




WE HAVE
SUBSTANTIAL EXPOSURE TO EXCHANGE RATE RISK AS WE PURCHASE A SUBSTANTIAL QUANTITY
AND VALUE OF TURBINE PARTS FROM EUROPEAN BASED SUPPLIERS AND WE HAVE SIGNIFICANT
LIABILITIES DENOMINATED IN FOREIGN CURRENCIES.





Over the
past 24 months, the US Dollar has fluctuated  against foreign
currencies, notably the Euro. When the Company purchased the DeWind subsidiary
in July, 2006, the Dollar to Euro exchange rate was approximately $1.29 to the
Euro. As of June 30, 2008 the exchange rate was $1.58 to the Euro for a 22.5%
decline in the dollar from July 3, 2006 to June 30, 2008.  The Euro
subsequently devalued to $1.39 as of December 31, 2008 and to $1.30 as of
February 9, 2009. We currently do not hedge our foreign currency
risk.





We
currently purchase significantly all of our turbine components and parts from
overseas suppliers, primarily in Europe and a significant percentage of our
parts are payable in Euros. We have contractual commitments with certain key
suppliers that call for payment denominated in the Euro. We also have
contractual commitments under past warranties that call for payments in Euros
and we conduct a substantial portion of our DeWind development efforts in
Germany. To the extent that the Dollar to Euro exchange rates change
significantly, any such change could have a material impact on the operations
and financial results of the company.




THE
COMPANY HAS HAD A HISTORY OF MATERIAL WEAKNESSES IN THE ACCOUNTING, FINANCIAL,
AND BUSINESS CONTROL STRUCTURE AND THE ACQUISITION OF EU ENERGY/DEWIND HAS
RESULTED IN ADDITIONAL SARBANES-OXLEY ISSUES AND MATERIAL WEAKNESSES IN THE
CONTROL STRUCTURE.
 
 The
Company has determined that the disclosure and internal control structure of the
consolidated entity has material weaknesses that will require the investment of
additional resources to mitigate and resolve.  EU Energy was a UK
company that was not previously subject to the requirements of the
Sarbanes-Oxley Act of 2002. The operations of EU Energy are material to the
results of the post-acquisition combined entity and management’s initial
assessment of the EU Energy control structure has identified several additional
key material control weaknesses that may require the investment of additional
resources.  The Company may be required to hire additional employees,
consult with expert advisors, invest in Informational Technology, and provide
for additional Board oversight including additional independent directors, and
audit committee, and an internal audit function.  These remediation
efforts may consume additional financial resources resulting in additional
expense to the company.
 
 These
weaknesses may also lead to errors with our financial results.  For
instance, in  February 2009, the Company concluded that errors were
made in its wind turbine contract review procedures and that contract losses of
$7,960,000 should have been recorded for expected costs in excess of expected
proceeds for turbines that were shipped during the quarter ended December 31,
2008.   Both the expected costs and the expected proceeds were
determinable and estimable as of the year ended September 30, 2008, and a
contract loss should have been recorded.





Risks
Related To Our Securities





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


The
market price of our common stock may be subject to significant fluctuations in
response to our operating results, announcements of new products or market
expansions by us or our competitors, changes in general conditions in the
economy, the financial markets, the electrical power transmission and
distribution industry, or other developments and activities affecting us, our
customers, or our competitors, some of which may be unrelated to our
performance. The sale or attempted sale of a large amount of common stock into
the market may also have a significant impact on the trading price of our common
stock. During the last 12 months, the closing bid prices for our common stock
have fluctuated from a high of $1.44 to a low of $0.18. Fluctuations in the
trading price or liquidity of our common stock may adversely affect our ability
to raise capital through future equity financings.





38





AS OF
FEBRUARY 5, 2009, 728,000 COMMON SHARES ARE ISSUABLE UPON EXERCISE OF ALL
OUTSTANDING OPTIONS, WARRANTS AND CONVERSION OF CONVERTIBLE NOTES FOR LESS THAN
THE MARKET PRICE OF $0.34 PER SHARE. CASH PROCEEDS RESULTING FROM THE FULL
EXERCISE AND CONVERSION OF THESE SECURITIES WOULD BE APPROXIMATELY $182,000.
WHILE CURRENT MARKET PRICES ARE BELOW SUBSTANTIALLY ALL OF OUR CONVERTIBLE
EQUITY SECURITIES, INCLUDING OPTIONS AND WARRANTS, A SUBSTANTIAL NUMBER OF
OPTIONS WERE RECENTLY RE-PRICED TO $0.35 PER SHARE.  A PRICE INCREASE
ABOVE THAT STRIKE PRICE WOULD RESULT IN APPROXIMATELY 19,203,000 OPTIONS AT
$0.35 PER OPTION OF WHICH.  FULL CONVERSION OF SUCH SHARES WOULD
INCREASE THE OUTSTANDING COMMON SHARES BY 6.7% TO APPROXIMATELY 307,191,000
SHARES.





The
exercise price or conversion price of outstanding options, warrants and
convertible notes may be less than the current market price for our common
shares. In the event of the exercise of these securities, a shareholder could
suffer substantial dilution of his, her or its investment in terms of the
percentage ownership in us as well as the book value of the common shares held.
At the February 9, 2009 market price of $0.32 per share, 728,000 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 $182,000 and would increase the outstanding common shares to
approximately 288,716,000 shares.





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





None





ITEM
3 - DEFAULTS ON SENIOR SECURITIES





None





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




None




ITEM
5 - OTHER INFORMATION




Departure
of Directors or Certain Officers; Election of Directors; Appointment of Certain
Officers; Compensatory Arrangements of Certain Officers





On
January 20, 2009, the Board of Directors of the Registrant elected Michael K.
Lee (“Lee”) as a new member of the Board of Directors. Lee was appointed for a
1-year term subject to reelection by the Shareholders for 2 further terms of
1-year on the same terms and conditions. Lee was also appointed to the Audit
Committee and the Compensation Committee with immediate effect. In remuneration
for his services, Lee will receive $4,000 per month during his term as a
Director. He was also granted 500,000 options to purchase shares of common stock
of the Registrant at a price of $0.35 per option. These options will vest over
36 months with the first portion of 41,667 vesting 3 months after the grant date
and thereafter an additional portion of 41,667 will vest at 3-monthly intervals
until finally the last portion of 41,663 will vest on the 3-year anniversary of
the grant.





There are
no family relationships among the directors or executive officers.





There are
no transactions, since the beginning of the Company’s last fiscal year, or any
currently proposed transaction, in which the Company was or is to be a
participant and the amount involved exceeds the lesser of $120,000 or one
percent of the average of the Company’s total assets at year-end for the last
three completed fiscal years, and in which any related person had or will have a
direct or indirect material interest.





Other
than the director agreement described under Item 1.01 and ancillary arrangements
mentioned there under, there is no material plan, contract or arrangement
(whether or not written) to which Mr. Lee is a party or in which he participates
that is entered into or material amendment in connection with the triggering
event or any grant or award to Mr. Lee or modification thereto, under any such
plan, contract or arrangement in connection with any such event.





On
January 20, 2009 the Board of Directors of the Registrant elected to modify the
strike price for all employee, director, and management stock options to $0.35
per option.  On February 4, 2009 the respective directors and
executive officers of the Company ratified the revised option
agreements.  No changes were made to any vesting schedules for any of
the Directors and Officers.





39





Options
outstanding as of December 31, 2008 subject to price adjustment to $0.35 per
option:





Name
                          
                          Weighted
                            Average strike
                            price prior to re-
                            pricing
                          
                          
                          Total
                            Options
                            re-priced
                          
                          
                          Vested
                            Options
                            re-priced
                          
                          
                          Unvested
                            Options
                            re-pricedDirectors and OfficersBenton
      Wilcoxon
                          
                          $
                          1.13
                          
                          
                          
                          4,200,000
                          
                          
                          
                          1,333,333
                          
                          
                          
                          2,866,667Marvin
      Sepe
                          
                          $
                          1.18
                          
                          
                          
                          2,750,000
                          
                          
                          
                          833,333
                          
                          
                          
                          1,916,667Domonic
      Carney
                          
                          $
                          1.16
                          
                          
                          
                          2,250,000
                          
                          
                          
                          833,333
                          
                          
                          
                          1,416,667Robert
      Rugh
                          
                          $
                          1.45
                          
                          
                          
                          1,250,000
                          
                          
                          
                          166,667
                          
                          
                          
                          1,083,333Michael
      McIntosh
                          
                          $
                          1.10
                          
                          
                          
                          2,125,000
                          
                          
                          
                          1,047,568
                          
                          
                          
                          1,077,432Dean
      McCormick III
                          
                          $
                          1.09
                          
                          
                          
                          681,000
                          
                          
                          
                          428,586
                          
                          
                          
                          252,414John
      Mitola
                          
                          $
                          2.09
                          
                          
                          
                          500,000
                          
                          
                          
                          166,150
                          
                          
                          
                          333,850Total
      Directors & Officers
                          
                          $
                          1.20
                          
                          
                          
                          13,756,000
                          
                          
                          
                          4,808,970
                          
                          
                          
                          8,947,030





40





ITEM
6 - EXHIBITS





EXHIBIT
INDEX




Number
                  
                  Description3.1(1)
                  
                  Articles
      of Incorporation of the Company3.2(2)
                  
                  Certificate
      of Amendment to Articles of Incorporation3.2(3)
                  
                  Bylaws
      of Composite Technology Corporation, as modified January 6,
      200610.1(4)
                  
                  Letter
      and Option agreement by and between Composite Technology Corporation and
      Michael Lee10.2(5)
                  
                  Revisions
      to Option agreements by and between Composite Technology Corporation and
      Messrs. Benton Wilcoxon, Marvin Sepe, Domonic Carney, Robert Rugh, Michael
      McIntosh, John Mitola, and Dean McCormick10.3(6)(7)
                  
                  Limited
      Liability Company Agreement of DeWind SW1 Wind Farms LLC dated as of
      October 6, 2006 by and among by Dewind Energy Development Company, LLC, a
      Nevada limited liability company (“DeWind”) and Higher Perpetual Energy,
      LLC (“Higher Perpetual”), a Texas limited liability
    company.10.4(6)
                  
                  Conveyance
      and Contribution Agreement by and among Higher Power Energy, LLC, a Texas
      limited liability company (“Higher Power”), Perpetual Energy Ltd., a
      United Kingdom private limited company (“Perpetual”), Higher Perpetual
      Energy, LLC, a Texas limited liability company (“Higher Perpetual”),
      DeWind SWI Wind Farms, LLC, a Delaware limited liability company
      (“Company”), LittlePringle1, LLC, a Delaware limited liability company
      (“LP1 Sub”), LittlePringle2, LLC, a Delaware limited liability company
      (“LP2 Sub”), BigPringle, LLC, a Delaware limited liability company (“Big
      Pringle Sub”), PD1, LLC, a Delaware limited liability company (“PD1 Sub”),
      DeWind Energy Development Company, LLC, a Nevada limited liability company
      (“DeWind”), and DeWind, Inc., a Nevada corporation (“DeWind,
      Inc.”).10.5(6)
                  
                  Developer
      Agreement dated as of October 6, 2008 by and among Perpetual Energy
      Limited, a United Kingdom private limited company (“Perpetual”), Higher
      Power Energy, LLC, a Texas limited liability company (“Higher Power”),
      Dewind Energy Development Company, LLC, a Nevada limited liability company
      (“DeWind”), Dewind SWI Wind Farms, LLC, a Delaware limited liability
      company (“Holdco”) and Higher Perpetual Energy, LLC, a Texas limited
      liability company (“Higher Perpetual”)10.6(6)
                  
                  Operating
      Agreement of BigPringle, LLC dated as of October 6, 2008 by DeWind SWI
      Wind Farms, LLC, a Delaware limited liability company10.7(6)
                  
                  Operating
      Agreement of LittlePringle1, LLC dated as of October 6, 2008 by DeWind SWI
      Wind Farms, LLC, a Delaware limited liability company10.8(6)
                  
                  Operating
      Agreement of LittlePringle2, LLC dated as of October 6, 2008 by DeWind SWI
      Wind Farms, LLC, a Delaware limited liability company10.9(6)
                  
                  Operating
      Agreement of PD1, LLC dated as of October 6, 2008 by DeWind SWI Wind
      Farms, LLC, a Delaware limited liability company10.10(6)
                  
                  Assignment
      and Assumption Agreement dated  as of October 6,
      2008  , between Higher Power Energy, LLC (“Assignor”), a Texas
      limited liability company and BigPringle, LLC (“Assignee”), a Delaware
      limited liability company10.11(6)
                  
                  Assignment
      and Assumption Agreement dated  as of October 6,
      2008  , between Higher Power Energy, LLC (“Assignor”), a Texas
      limited liability company and LittlePringle1, LLC (“Assignee”), a Delaware
      limited liability company10.12(6)
                  
                  Assignment
      and Assumption Agreement dated  as of October 6,
      2008  , between Higher Power Energy, LLC (“Assignor”), a Texas
      limited liability company and LittlePringle2, LLC (“Assignee”), a Delaware
      limited liability company10.13(6)
                  
                  Assignment
      and Assumption Agreement dated  as of October 6,
      2008  , between Higher Power Energy, LLC (“Assignor”), a Texas
      limited liability company and PD1, LLC (“Assignee”), a Delaware limited
      liability company10.14(6)
                  
                  Assignment
      Agreement dated as of October 6, 2008, entered into by and between Pringle
      Wind II, LLC, a Texas limited liability company and LittlePringle1, LLC, a
      Delaware limited liability company.10.15(6)
                  
                  Assignment
      and Assumption Agreement dated as of October 6, 2008, is entered into by
      and between Pringle Wind II, LLC, a Texas limited liability company, and
      LittlePringle1, LLC, a Delaware limited liability company, and consented
      to and acknowledged by Hutchinson County, Texas, acting through its duly
      elected Commissioners Court.10.16(6)
                  
                  Assignment
      Agreement dated as of October 6, 2008, entered into by and between Pringle
      Wind II, LLC, a Texas limited liability company and LittlePringle2, LLC, a
      Delaware limited liability company.10.17(6)
                  
                  Assignment
      and Assumption Agreement dated as of October 6, 2008, is entered into by
      and between Pringle Wind II, LLC, a Texas limited liability company, and
      LittlePringle2, LLC, a Delaware limited liability company, and consented
      to and acknowledged by Hutchinson County, Texas, acting through its duly
      elected Commissioners Court.31.1(6)
                  
                  Rule
      13a-14(a) / 15d-14(a)(4) Certification of Chief Executive
      Officer31.2(6)
                  
                  Rule
      13a-14(a) / 15d-14(a)(4) Certification of Chief Financial
      Officer32.1(6)
                  
                  Section
      1350 Certification of Chief Executive Officer32.2(6)
                  
                  Section
      1350 Certification of Chief Financial
Officer




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





(2)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on December 18, 2007.





(3)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on January 12, 2006.





(4)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on January 26, 2009.





(5)
Incorporated herein by reference to Form 8-K filed with t the U.S. Securities
and Exchange Commission on February 10, 2009.





(6) Filed
herewith.




(7)
Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.


41





SIGNATURE





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





COMPOSITE
TECHNOLOGY CORPORATION


(Registrant)





By: /s/ Benton H
      WilcoxonBenton
      H WilcoxonChief
      Executive
Officer





February
17, 2009





42