UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





x  QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES


EXCHANGE
ACT OF 1934





FOR
THE QUARTERLY PERIOD ENDED MARCH 31, 2010





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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). YES  o 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 definitions 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: May 10, 2010





CLASS
                
                NUMBER
      OF SHARES OUTSTANDINGCommon
      Stock, par value $0.001 per share
                
                288,269,660
      shares








COMPOSITE
TECHNOLOGY CORPORATION


Form 10-Q
for the Quarter ended March 31, 2010


Table of
Contents





PagePART
      I – FINANCIAL INFORMATIONItem
      1    Financial Statements
                  
                  
                  3Item
      2    Management's Discussion and Analysis of Financial
      Condition and Results of Operations
                  
                  
                  25Item
      3    Quantitative and Qualitative Disclosures About Market
      Risk
                  
                  
                  37Item
      4    Controls and Procedures
                  
                  
                  37PART
      II – OTHER INFORMATIONItem
      1    Legal Proceedings
                  
                  
                  39Item
      1A Risk Factors
                  
                  
                  39Item
      2    Unregistered Sales of Equity Securities and the Use of
      Proceeds
                  
                  
                  40Item
      3    Defaults Upon Senior Securities
                  
                  
                  40Item
      4    (Removed and Reserved)
                  
                  
                  40Item
      5    Other Information
                  
                  
                  40Item
      6    Exhibits
                  
                  
                  41SIGNATURES
                  
                  
                  42EXHIBITS


2




PART
1 - FINANCIAL INFORMATION





Item
1. Financial Statements





COMPOSITE
TECHNOLOGY CORPORATION AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(IN
THOUSANDS)





March 31, 2010
                                  
                                  
                                  September 30, 2009(unaudited)ASSETSCURRENT
      ASSETSCash
      and Cash Equivalents
                                  
                                  $
                                  2,706
                                  
                                  
                                  $
                                  23,968Restricted
      Cash, Current Portion (Note 2)
                                  
                                  
                                  5,500
                                  
                                  
                                  
                                  5,500Accounts
      Receivable, net of reserve of $87 and $81
                                  
                                  
                                  1,775
                                  
                                  
                                  
                                  1,732Inventory,
      net of reserve of $1,222 and $923
                                  
                                  
                                  2,829
                                  
                                  
                                  
                                  4,378Prepaid
      Expenses and Other Current Assets
                                  
                                  
                                  1,136
                                  
                                  
                                  
                                  959Current
      Assets of Discontinued Operations (Note 2)
                                  
                                  
                                  2,326
                                  
                                  
                                  
                                  2,522Total
      Current Assets
                                  
                                  
                                  16,272
                                  
                                  
                                  
                                  39,059Property
      and Equipment, net of accumulated depreciation of $2,431 and
      $3,766
                                  
                                  
                                  2,930
                                  
                                  
                                  
                                  3,214Restricted
      Cash, Non-Current (Note 2)
                                  
                                  
                                  11,683
                                  
                                  
                                  
                                  11,675Other
      Assets
                                  
                                  
                                  885
                                  
                                  
                                  
                                  891TOTAL
      ASSETS
                                  
                                  $
                                  31,770
                                  
                                  
                                  $
                                  54,839LIABILITIES
      AND SHAREHOLDERS’ EQUITY (DEFICIT)CURRENT
      LIABILITIESAccounts
      Payable and Other Accrued Liabilities
                                  
                                  $
                                  6,530
                                  
                                  
                                  $
                                  7,217Deferred
      Revenues and Customer Advances
                                  
                                  
                                  41
                                  
                                  
                                  
                                  16Warranty
      Provision
                                  
                                  
                                  314
                                  
                                  
                                  
                                  258Notes
      Payable – Current, net of discount of $0 and $315
                                  
                                  
                                  —
                                  
                                  
                                  
                                  8,723Current
      Liabilities of Discontinued Operations (Note 2)
                                  
                                  
                                  39,786
                                  
                                  
                                  
                                  43,469Total
      Current Liabilities
                                  
                                  
                                  46,671
                                  
                                  
                                  
                                  59,683LONG-TERM
      LIABILITIESLong
      Term Portion of Deferred Revenues
                                  
                                  
                                  576
                                  
                                  
                                  
                                  561Long-Term
      Portion of Warranty Provision
                                  
                                  
                                  283
                                  
                                  
                                  
                                  306Derivative
      Liabilities – Long-Term (Note 1)
                                  
                                  
                                  730
                                  
                                  
                                  
                                  —Non-Current
      Liabilities of Discontinued Operations (Note 2)
                                  
                                  
                                  897
                                  
                                  
                                  
                                  1,120Total
      Long-Term Liabilities
                                  
                                  
                                  2,486
                                  
                                  
                                  
                                  1,987Total
      Liabilities
                                  
                                  
                                  49,157
                                  
                                  
                                  
                                  61,670COMMITMENTS
      AND CONTINGENCIESSHAREHOLDERS’
      EQUITY (DEFICIT)Common
      Stock, $.001 par value 600,000,000 shares authorized 288,269,660 and
      288,088,370 issued and outstanding
                                  
                                  
                                  288
                                  
                                  
                                  
                                  288Additional
      Paid-in Capital
                                  
                                  
                                  251,024
                                  
                                  
                                  
                                  259,755Accumulated
      Deficit
                                  
                                  
                                  (268,699
                                  )
                                  
                                  
                                  (266,874
                                  )Total
      Shareholders’ (Deficit)
                                  
                                  
                                  (17,387
                                  )
                                  
                                  
                                  (6,831
                                  )TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
                                  
                                  $
                                  31,770
                                  
                                  
                                  $
                                  54,839





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


3




COMPOSITE
TECHNOLOGY CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


(IN
THOUSANDS, EXCEPT SHARE AMOUNTS)


(UNAUDITED)





Three Months Ended
                                                March
      31,
                                              
                                              
                                              Six Months Ended
                                                March
      31,2010
                                              
                                              
                                              2009
                                              
                                              
                                              2010
                                              
                                              
                                              2009Revenue
                                              
                                              $
                                              4,252
                                              
                                              
                                              $
                                              6,202
                                              
                                              
                                              $
                                              6,953
                                              
                                              
                                              $
                                              10,562Cost
      of Revenue
                                              
                                              
                                              3,241
                                              
                                              
                                              
                                              4,050
                                              
                                              
                                              
                                              5,724
                                              
                                              
                                              
                                              7,132Gross
      Profit
                                              
                                              
                                              1,011
                                              
                                              
                                              
                                              2,152
                                              
                                              
                                              
                                              1,229
                                              
                                              
                                              
                                              3,430OPERATING
      EXPENSESOfficer
      Compensation
                                              
                                              
                                              816
                                              
                                              
                                              
                                              1,013
                                              
                                              
                                              
                                              1,385
                                              
                                              
                                              
                                              1,756General
      and Administrative
                                              
                                              
                                              3,126
                                              
                                              
                                              
                                              2,230
                                              
                                              
                                              
                                              6,991
                                              
                                              
                                              
                                              4,467Research
      and Development
                                              
                                              
                                              490
                                              
                                              
                                              
                                              737
                                              
                                              
                                              
                                              1,146
                                              
                                              
                                              
                                              1,411Sales
      and Marketing
                                              
                                              
                                              1,847
                                              
                                              
                                              
                                              1,458
                                              
                                              
                                              
                                              2,984
                                              
                                              
                                              
                                              2,747Depreciation
      & Amortization
                                              
                                              
                                              163
                                              
                                              
                                              
                                              92
                                              
                                              
                                              
                                              259
                                              
                                              
                                              
                                              182Total
      Operating Expenses
                                              
                                              
                                              6,442
                                              
                                              
                                              
                                              5,530
                                              
                                              
                                              
                                              12,765
                                              
                                              
                                              
                                              10,563LOSS
      FROM OPERATIONS
                                              
                                              
                                              (5,431
                                              )
                                              
                                              
                                              (3,378
                                              )
                                              
                                              
                                              (11,536
                                              )
                                              
                                              
                                              (7,133
                                              )OTHER
      INCOME / (EXPENSE)Interest
      Expense
                                              
                                              
                                              (175
                                              )
                                              
                                              
                                              (453
                                              )
                                              
                                              
                                              (1,068
                                              )
                                              
                                              
                                              (910
                                              )Interest
      Income
                                              
                                              
                                              5
                                              
                                              
                                              
                                              3
                                              
                                              
                                              
                                              21
                                              
                                              
                                              
                                              15Other
      Expense
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              (264
                                              )
                                              
                                              
                                              —Change
      in Fair Value of Derivative Liabilities (Note 1)
                                              
                                              
                                              66
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              840
                                              
                                              
                                              
                                              —Total
      Other Income / (Expense)
                                              
                                              
                                              (104
                                              )
                                              
                                              
                                              (450
                                              )
                                              
                                              
                                              (471
                                              )
                                              
                                              
                                              (895
                                              )Loss
      from Continuing Operations before Income Taxes
                                              
                                              
                                              (5,535
                                              )
                                              
                                              
                                              (3,828
                                              )
                                              
                                              
                                              (12,007
                                              )
                                              
                                              
                                              (8,028
                                              )Income
      Tax Expense
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              14
                                              
                                              
                                              
                                              4NET
      LOSS FROM CONTINUING OPERATIONS
                                              
                                              
                                              (5,535
                                              )
                                              
                                              
                                              (3,828
                                              )
                                              
                                              
                                              (12,021
                                              )
                                              
                                              
                                              (8,032
                                              )Income
      (Loss) from Discontinued Operations, net of tax of $0, $(13), $1 and $(8)
      (Note 2)
                                              
                                              
                                              2,307
                                              
                                              
                                              
                                              (6,825
                                              )
                                              
                                              
                                              1,085
                                              
                                              
                                              
                                              (10,957
                                              )NET
      LOSS
                                              
                                              
                                              (3,228
                                              )
                                              
                                              
                                              (10,653
                                              )
                                              
                                              
                                              (10,936
                                              )
                                              
                                              
                                              (18,989
                                              )OTHER
      COMPREHENSIVE INCOMEForeign
      Currency Translation Adjustment, net of tax of $0
                                              
                                              
                                              —
                                              
                                              
                                              
                                              1,195
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              2,224COMPREHENSIVE
      LOSS
                                              
                                              $
                                              (3,228
                                              )
                                              
                                              $
                                              (9,458
                                              )
                                              
                                              $
                                              (10,936
                                              )
                                              
                                              $
                                              (16,765
                                              )BASIC
      AND DILUTED LOSS PER SHARELoss
      per share from continuing operations
                                              
                                              $
                                              (0.02
                                              )
                                              
                                              $
                                              (0.01
                                              )
                                              
                                              $
                                              (0.04
                                              )
                                              
                                              $
                                              (0.03
                                              )Income
      (loss) per share from discontinued operations
                                              
                                              $
                                              0.01
                                              
                                              
                                              $
                                              (0.03
                                              )
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              (0.04
                                              )TOTAL
      BASIC AND DILUTED LOSS PER SHARE
                                              
                                              $
                                              (0.01
                                              )
                                              
                                              $
                                              (0.04
                                              )
                                              
                                              $
                                              (0.04
                                              )
                                              
                                              $
                                              (0.07
                                              )WEIGHTED-AVERAGE
      COMMON SHARES OUTSTANDING
                                              
                                              
                                              288,233,818
                                              
                                              
                                              
                                              287,988,370
                                              
                                              
                                              
                                              288,167,108
                                              
                                              
                                              
                                              287,988,370





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


4


COMPOSITE
TECHNOLOGY CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(IN
THOUSANDS)


(UNAUDITED)





Six Months Ended March 31,2010
                                        
                                        
                                        2009CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                                        
                                        $
                                        (10,936
                                        )
                                        
                                        $
                                        (18,989
                                        )(Income)
      loss from discontinued operations
                                        
                                        
                                        (1,085
                                        )
                                        
                                        
                                        10,957Adjustments
      to reconcile net loss to net cash used in operating
      activities:Interest
      and deferred finance charge amortization related to detachable warrants
      and fixed conversion features
                                        
                                        
                                        542
                                        
                                        
                                        
                                        543Depreciation
      & amortization
                                        
                                        
                                        318
                                        
                                        
                                        
                                        465Share-based
      compensation
                                        
                                        
                                        1,489
                                        
                                        
                                        
                                        2,800Amortization
      of prepaid expenses paid in stock/warrants
                                        
                                        
                                        180
                                        
                                        
                                        
                                        164Issuance
      of warrants for services
                                        
                                        
                                        57
                                        
                                        
                                        
                                        22Issuance
      of stock for services
                                        
                                        
                                        45
                                        
                                        
                                        
                                        —Change
      in fair value of derivative liabilities
                                        
                                        
                                        (840
                                        )
                                        
                                        
                                        —Bad
      debt expense
                                        
                                        
                                        31
                                        
                                        
                                        
                                        —Inventory
      reserve expense and inventory impairment charges
                                        
                                        
                                        1,139
                                        
                                        
                                        
                                        171Loss
      on disposal of fixed assets
                                        
                                        
                                        90
                                        
                                        
                                        
                                        —Changes
      in Assets / Liabilities:Restricted
      cash
                                        
                                        
                                        (8
                                        )
                                        
                                        
                                        —Accounts
      receivable
                                        
                                        
                                        (75
                                        )
                                        
                                        
                                        1,552Inventory
                                        
                                        
                                        410
                                        
                                        
                                        
                                        (273
                                        )Prepaids
      and other current assets
                                        
                                        
                                        (324
                                        )
                                        
                                        
                                        (277
                                        )Other
      assets
                                        
                                        
                                        9
                                        
                                        
                                        
                                        147Accounts
      payable and other accruals
                                        
                                        
                                        (688
                                        )
                                        
                                        
                                        1,132Deferred
      revenue
                                        
                                        
                                        40
                                        
                                        
                                        
                                        (446
                                        )Accrued
      warranty liability
                                        
                                        
                                        33
                                        
                                        
                                        
                                        188Net
      assets/liabilities of discontinued operations
                                        
                                        
                                        (2,535
                                        )
                                        
                                        
                                        (11,160
                                        )Cash
      used in operating activities – continuing operations
                                        
                                        
                                        (12,108
                                        )
                                        
                                        
                                        (13,004
                                        )Cash
      used in operating activities – discontinued operations
                                        
                                        
                                        —
                                        
                                        
                                        
                                        (5,377
                                        )Net
      cash used in operating activities
                                        
                                        $
                                        (12,108
                                        )
                                        
                                        $
                                        (18,381
                                        )CASH
      FLOW FROM INVESTING ACTIVITIESPurchase
      of property and equipment
                                        
                                        $
                                        (124
                                        )
                                        
                                        $
                                        (647
                                        )Restricted
      cash
                                        
                                        
                                        —
                                        
                                        
                                        
                                        693Cash
      provided by (used in) investing activities – continuing
      operations
                                        
                                        
                                        (124
                                        )
                                        
                                        
                                        46Cash
      used in investing activities – discontinued
operations
                                        
                                        
                                        —
                                        
                                        
                                        
                                        (792
                                        )Net
      cash used in investing activities
                                        
                                        $
                                        (124
                                        )
                                        
                                        $
                                        (746
                                        )CASH
      FLOW FROM FINANCING ACTIVITIESProceeds
      from exercise of options
                                        
                                        $
                                        7
                                        
                                        
                                        $
                                        —Repayment
      of notes payable
                                        
                                        
                                        (9,037
                                        )
                                        
                                        
                                        —Net
      cash used in financing activities
                                        
                                        $
                                        (9,030
                                        )
                                        
                                        $
                                        —Total
      net decrease in cash and cash equivalents
                                        
                                        $
                                        (21,262
                                        )
                                        
                                        $
                                        (19,127
                                        )Cash
      and cash equivalents at beginning of period
                                        
                                        
                                        23,968
                                        
                                        
                                        
                                        23,085Cash
      and cash equivalents at end of period
                                        
                                        $
                                        2,706
                                        
                                        
                                        $
                                        3,958SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:INTEREST
      PAID
                                        
                                        $
                                        430
                                        
                                        
                                        $
                                        374INCOME
      TAX PAID
                                        
                                        $
                                        14
                                        
                                        
                                        $
                                        3





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


5




SUPPLEMENTAL
DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:





During
the six months ended March 31, 2010, the Company:





Issued
300,000 warrants at an exercise price of $0.45 per share valued at $57,000 in
settlement of a legal dispute.





Issued
161,290 shares of common stock to John Brewster, CTC Cable President valued at
$45,000 in partial payment of an employment acceptance bonus.





Issued
600,000 warrants at an exercise price of $0.35 per share valued at $95,000 in
connection with an ongoing service agreement. The Company recorded $16,000 to
general and administrative expense related to services rendered during the six
months ended March 31, 2010.





During
the six months ended March 31, 2009, 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.





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 $22,000 to general and administrative expense for the re-pricing of
these warrants.


6




COMPOSITE
TECHNOLOGY CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
1 – ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES





Composite
Technology Corporation (the “Company”), originally incorporated in Florida and
reincorporated in Nevada, is an Irvine, CA based company that has operated in
two segments, CTC Cable “Cable” and DeWind “Wind”.  As discussed
below, in September 2009, the Company sold substantially all of its Wind
segment, which sold wind turbines under the brand name DeWind. The Cable segment
sells high efficiency patented composite core electricity conductors known as
"ACCC®
conductor" for use in electric transmission and distribution
lines.  ACCC®
conductor is sold in North America directly by CTC Cable to
utilities.  ACCC®
conductor is sold elsewhere in the world directly to utilities as well as
through license and distribution agreements with Lamifil in Belgium, Far East
Composite Cable Company in China, and through two Indonesian companies PT Tranka
Cable and PT KMI Cable and now through Alcan Cable in the U.S. and
Canada.  ACCC®
conductor has been sold commercially since 2005 and is currently marketed
worldwide to electrical utilities, transmission companies and transmission
design/engineering firms.





BASIS
OF PRESENTATION AND PRINCIPALS OF CONSOLIDATION





The
accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with accounting principles generally accepted in the
United States of America (US GAAP) 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 consolidated financial statements of the Company included in
the Company's Annual Report on Form 10-K for the fiscal year ended September 30,
2009, filed with the Securities and Exchange Commission (SEC) on December 14,
2009.





The
financial statements include the accounts of the Company and its wholly-owned
subsidiaries, the most significant of which is CTC Cable
Corporation.





The
Company consolidates the financial statements of all entities in which the
Company has a controlling financial interest, as defined in US GAAP. All
significant inter-company accounts and transactions are eliminated during
consolidation.




DISCONTINUED
OPERATIONS AND SALE OF DEWIND





On
September 4, 2009, our DeWind subsidiary sold substantially all of its existing
operating assets including all inventories, receivables, fixed assets, wind farm
project assets and intangible assets including all intellectual property and
transferred substantially all operating liabilities including supply chain and
operating expense accounts payables and accrued liabilities, warranty related
liabilities for US turbine installations, and deferred revenues.  All
of the remaining assets and liabilities of DeWind have been classified as net
assets/liabilities of discontinued operations.  All operations of our
former DeWind segment have been reported as discontinued operations. See
discussion at Note 2.





REVENUE
RECOGNITION





Revenues
are recognized based on guidance provided by the SEC. Accordingly, our general
revenue recognition policy is to recognize revenue when there is persuasive
evidence of an arrangement, the sales price is fixed or determinable, collection
of the related receivable is reasonably assured, and delivery has occurred or
services have been rendered.




The
Company derives, or seeks to derive revenues from product revenue sales of
composite core, stranded composite core, core and stranded core hardware, and
other electric utility related products.





In
addition to the above general revenue recognition principles prescribed by the
SEC, our specific revenue recognition policies for each revenue source are as
follows:





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, and (ii) composite core and related hardware sold to a
cable stranding entity. 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.


7





CTC Cable
sales for the three and six months ended March 31, 2010 and 2009 consisted of
stranded ACCC®
conductor and ACCC® hardware
sold to end user utilities and sales of ACCC®
conductor core and ACCC® hardware
to our stranding manufacturers. All ACCC® product
related sales were recognized upon delivery of product and transfer of title.
For ACCC®
conductor product sales made directly by us and not through a manufacturer or
distributor, through a third-party insurance company, we provide the option to
purchase an extended warranty for periods up to five, seven or ten 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.





CONSULTING
REVENUE. Consulting revenues are generally recognized as the consulting services
are provided. We have entered into service contract agreements with electric
utility and utility services companies that generally require us to provide
engineering or design services, often in conjunction with current or future
product sales. In return, we receive engineering service fees payable in
cash.  For the three and six months ended March 31, 2010 and 2009, we
recognized no consulting revenues.





Currently,
multiple element contracts where there is no vendor specific objective evidence
(VSOE) or third-party evidence (TPE) that would allow the allocation of an
arrangement fee amongst various pieces of a multi-element contract, fees
received in advance of services provided are recorded as deferred revenues until
additional operational experience or other VSOE or TPE becomes available, or
until the contract is completed.





WARRANTY
PROVISIONS





Warranty
provisions consist of the insured costs and liabilities associated with any
post-sales associated with our ACCC®
conductor and related hardware parts.





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.  Warranty related liabilities for time
periods in excess of one year are classified as non-current
liabilities.





USE
OF ESTIMATES





The
preparation of our financial statements conform with US GAAP, 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, share-based compensation,
warranty provisions and goodwill and intangibles, as applicable. 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
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
US 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.





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





-
                the
      estimates pertaining to the likelihood of our accounts receivable
      collectability. 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 share-based compensation
      and derivative liabilities, 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 as well as the estimate of the
      option life.




8




-
                  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 and the likelihood that the values assigned during the initial
      valuations will be recoverable over time through increased revenues,
      profits, and enterprise value. Currently, we have no reportable goodwill
      or intangible assets.-
                  the
      estimates and assumptions used to determine the settlement of certain
      accounts related to the sale of the DeWind assets for which a final
      accounting has not been completed and which may result in the increase or
      decrease of asset reserves or increase or decrease of accrued liabilities,
      principally penalty payments, interest, and other costs associated with
      the turbine parts suppliers for DeWind turbine parts. See related
      discussion at Note
2.




DERIVATIVE
FINANCIAL INSTRUMENTS





The
Company issues financial instruments in the form of stock options and stock
warrants, and debt conversion features as part of its convertible debt
issuances. The Company has not issued any derivative instruments for hedging
purposes since its inception. The Company uses the specific guidance and
disclosure requirements provided in US GAAP. Generally, freestanding derivative
contracts where settlement is required by physical share settlement or in net
share settlement; or where the Company has a choice of share or net cash
settlement are accounted for as equity. Contracts where settlement is in cash or
where the counterparty may choose cash settlement are accounted for as a
liability. Under current US GAAP, certain of our warrants and debt conversion
features are subject to liability accounting treatment (see discussion below
under “Derivative Liabilities”), while our stock options are considered indexed
to the Company’s stock and are accounted for as equity.




The
values of the financial instruments are estimated using the Black-Scholes-Merton
(Black-Scholes) option-pricing model. Key assumptions used to value options and
warrants granted, issued or repriced are as follows:




Six Months EndedMarch 31,2010
                    
                    
                    2009Risk
      Free Rate of Return
                    
                    
                    0.82-2.43
                    %
                    
                    
                    0.50-2.02
                    %Volatility
                    
                    
                    95.6-108
                    %
                    
                    
                    75-96
                    %Dividend
      yield
                    
                    
                    0
                    %
                    
                    
                    0
                    %Expected
      life
                    
                    2-5
      yrs
                    
                    
                    .5-5
      yrs





Derivative
Liabilities and Change in Accounting Principle





Our
derivative liabilities include fair value based warrant liabilities and debt
conversion features pursuant to US GAAP applied to the terms of the underlying
agreements. The Company issues warrants to purchase common shares of the Company
as additional incentive for investors who purchase unregistered, restricted
common stock or convertible debentures. The fair value of certain warrants
issued and debt conversion features in conjunction with financing events are
recorded as a discount for debt issuances. Certain warrant agreements and debt
conversion arrangements include provisions that require us to record them as a
liability, at fair value, pursuant to Financial Accounting Standards Board
(FASB) accounting rules, including certain provisions designed to protect a
holder’s position from being diluted. The derivative liabilities are
marked-to-market each reporting period and changes in fair value are recorded as
a non-operating gain or loss in our consolidated statement of operations, until
they are completely settled or expire. The fair value of the warrants and debt
conversion features are determined each reporting period using the Black-Scholes
valuation model, using inputs and assumptions consistent with those used in our
estimate of fair value of employee stock options, except that the remaining
contractual life of the warrant is used.  Such fair value is affected
by changes in inputs to that model including our stock price, expected stock
price volatility, interest rates and expected term.  Refer to “Fair
Value Measurements” below in Note 1 for additional derivative liabilities
disclosures.





For the
three and six months ended March 31, 2010, we recognized gains of $66,000 and
$840,000, respectively, related to the revaluation of our derivative
liabilities.  The 2010 revaluation gain resulted mainly from the
decrease in our stock price from the prior year.





In
connection with the warrants issued to investors as discussed above, the Company
has issued warrants to compensate for financing fees and other service fees
incurred.  Such compensatory warrants are recorded at fair value in
the same manner as non-compensatory warrants, however, the recognized expense is
offset to additional paid-in-capital.  Such warrants are considered
equity transactions in accordance with US GAAP.  Additionally,
warrants issued without anti-dilution provisions are generally considered equity
transactions in accordance with US GAAP. All of our outstanding warrants
including those subject to liability accounting treatment are further discussed
in Note 8.





Change
in Accounting Principle





Prior to
fiscal 2010, the Company accounted for all warrants issued in conjunction with
financing events as equity in accordance with existing US GAAP.


9





On
October 1, 2009, the Company adopted new FASB rules related to determining
whether an instrument (or embedded feature) is indexed to an entity’s own
stock.  Current accounting for derivatives and hedging activities
specifies that a contract that would otherwise meet the definition of a
derivative, but is both (a) indexed to the Company’s own stock and (b)
classified in shareholders’ equity, would not be considered a derivative
financial instrument.  The new rules provide a two-step model to be
applied in determining whether a financial instrument or an embedded feature is
indexed to an issuer’s own stock and thus able to qualify for the existing scope
exception.  In accordance with the new rules, management evaluated
outstanding instruments as of October 1, 2009 and determined all warrants and
debt conversion arrangements with anti-dilution provisions issued in conjunction
with financing events, that are not considered compensatory, are not indexed to
our stock and therefore are to be recorded as liabilities at fair value and
marked-to-market through earnings.  Accordingly, as of October 1,
2009, we have adjusted the opening balance of accumulated deficit to effect this
change in accounting principle as follows:




(Unaudited,
      In Thousands)
                      
                      October 1, 2009Accumulated
      Deficit
                      
                      $
                      (266,874
                      )Cumulative
      Effect of the Change (A)
                      
                      
                      9,111Accumulated
      Deficit, as adjusted
                      
                      $
                      (257,763
                      )




(A)
            The
      cumulative effect of the change to our Accumulated Deficit was derived
      from recognizing mark-to-market fair value revaluation adjustments to the
      applicable warrants and debt conversion features from the original
      issuance dates through October 1, 2009, in the net gain amount of
      $19,284,000.  Additionally, the cumulative effect includes
      recognition of interest expense from amortization of the debt discount
      recorded from the initial valuation of the debt conversion features
      through October 1, 2009, in the amount of
  $10,173,000.





Additionally,
on October 1, 2009, the opening balance of Additional Paid-in Capital includes a
reclassification adjustment to Derivative Liabilities in the amount of
$10,514,000, which represents the aggregate original warrant fair value
previously recorded to equity.





Refer to
“Fair Value Measurements” below in Note 1 for additional derivative liabilities
disclosures.





Share-Based
Compensation





US GAAP
requires that compensation cost relating to share-based payment arrangements be
recognized in the financial statements. US GAAP requires measurement of
compensation cost for all share-based awards at fair value on date of grant and
recognition of compensation over the service period for awards expected to vest.
The fair value of stock options is determined using the Black-Scholes valuation
model. Such fair value is recognized as expense over the service period, net of
estimated forfeitures.





US GAAP
requires that equity instruments issued to non-employees in exchange for
services be valued at the more accurate of the fair value of the services
provided, or the fair value of the equity instruments issued. For equity
instruments issued that are subject to a required service period, the expense
associated with the equity instruments is recorded as the instruments vest or
the services are provided. The Company has granted options and warrants to
non-employees and recorded the fair value of these equity instruments on the
date of issuance using the Black-Scholes valuation model, for options and
warrants not subject to vesting terms. For non-employee option and warrant
grants subject to vesting terms, vested shares are recorded at fair value using
the Black-Scholes valuation model and the associated expense is recorded
simultaneously or as the services are provided. The Company has granted stock to
non-employees for services and values the stock at the more reliable of the
market value on the date of issuance or the value of the services provided. For
stock grants subject to vesting or service requirements, expenses are deferred
and recognized over the more appropriate of the vesting period, or as services
are provided.





SEC
guidance requires share-based compensation to be classified in the same
expense line items as cash compensation.  Additionally,  the
SEC issued guidance regarding the use of a "simplified" method in
developing an estimate of expected term of "plain vanilla" share options in
accordance with US GAAP rules. The Staff indicated that it will accept a
company's election to use the simplified method, regardless of whether the
company has sufficient information to make more refined estimates of expected
term. The Staff believed that more detailed external information about employee
exercise behavior (e.g., employee exercise patterns by industry and/or other
categories of companies) would, over time, become readily available to
companies; however, the Staff continues to accept, under certain circumstances,
the use of the simplified method. The Company currently uses the simplified
method for the expected term in “plain vanilla” share options and
warrants.





Additional
information about share-based compensation is disclosed in Note 9.




10




Convertible
Debt





Convertible
debt is accounted for under specific guidelines established in US GAAP. The Company records a
beneficial conversion feature (BCF) related to the issuance of convertible
debt that have conversion features at fixed or adjustable rates that are
in-the-money when issued and records the fair value of warrants issued with
those instruments. The BCF for the convertible instruments is recognized and
measured by allocating a portion of the proceeds to warrants and as a reduction
to the carrying amount of the convertible instrument equal to the intrinsic
value of the conversion features, both of which are credited to paid-in-capital
or liabilities as appropriate. The Company calculates the fair value of warrants
issued with the convertible instruments using the Black-Scholes valuation
method, using the same assumptions used for valuing employee options, except
that the contractual life of the warrant is used. Upon each issuance, the
Company evaluates the variable conversion features and determines the
appropriate accounting treatment as either equity or liability, in accordance
with US GAAP. The Company first allocates the value of the proceeds
received to the convertible instrument and any other detachable instruments
(such as detachable warrants) on a relative fair value basis and then determines
the amount of any BCF based on effective conversion price to measure the
intrinsic value, if any, of the embedded conversion option. Using the effective
yield method, the allocated fair value is recorded as a debt discount or premium
and is amortized over the expected term of the convertible debt to interest
expense. For a conversion price change of a convertible debt issue, the
additional intrinsic value of the debt conversion feature, calculated as the
number of additional shares issuable due to a conversion price change multiplied
by the previous conversion price, is recorded as additional debt discount and
amortized over the remaining life of the debt.  The accounting for
debt conversion features subject to liability treatment are further discussed
above in “Derivative Liabilities”.





US GAAP
rules specify that a contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether issued
as a separate agreement or included as a provision of a financial instrument or
other agreement, should be separately recognized and measured in accordance with
US GAAP contingency rules. The contingent obligation to make future payments or
otherwise transfer consideration under a registration payment arrangement should
be separately recognized and measured in accordance with said rules, pursuant to
which a contingent obligation must be accrued only if it is more likely than not
to occur. Historically, the Company has not been required to accrue any
contingent liabilities in this regard.





CASH
AND CASH EQUIVALENTS





For the
purpose of the statements of cash flows, the Company considers all highly liquid
investments purchased with original maturities of three months or less to be
cash equivalents.




RESTRICTED
CASH





Restricted
cash represents cash on deposit under control of the Company that secures
standby letters of credit and other payment guarantees for certain
vendors.  Restricted cash balances, comprised of cash held in escrow
in connection with the sale of DeWind as discussed in Note 2, were $17,183,000
and $17,175,000 at March 31, 2010 and September 30, 2009, respectively. 
During the six months ended March 31, 2010, we reported an additional $8,000
from interest income, in accordance with the escrow agreement.




ACCOUNTS
RECEIVABLE





The
Company has trade accounts receivable from cable customers. Cable customer
receivables are typically on net 30 day terms. Balances due greater than one
year from the balance sheet date are reclassified to long term assets, as
applicable. Collateral is generally not required for credit extended to
customers. Credit losses are provided for in the financial statements based on
management's evaluation of historical and current industry trends as well as
history with individual customers. Additions to the provision for bad debts are
included in General and Administrative expense on our Consolidated Statements of
Operations and Comprehensive Loss; charge-offs of uncollectible accounts are
made against existing provisions or direct to expense as
appropriate. Although the Company expects to collect amounts due, actual
collections may differ from estimated amounts.





CONCENTRATIONS
OF CREDIT RISK





Financial
instruments which potentially subject the Company to concentrations of credit
risk consist of cash and cash equivalents. The Company places its cash and cash
equivalents with high credit, quality financial institutions. At times, such
cash and cash equivalents may be in excess of the Federal Deposit Insurance
Corporation insurance limit (currently at $250,000 per depositor, per insured
bank for interest bearing accounts). The Company has not experienced any losses
in such accounts and believes it is not exposed to any significant credit risk
on cash and cash equivalents.




11




INVENTORIES


Inventories
consist of our wrapped and unwrapped manufactured composite core and related
hardware products and raw materials used in the production of those products.
Inventories are valued at the lower of cost or market under the FIFO method.
Cable products manufactured internally are valued at standard cost which
approximates replacement cost.  Payments made to third party vendors
in advance of material deliveries are reported as a separate balance sheet line
item, as applicable.  Costs for product sold is recorded to cost of
goods sold as the expenses are incurred.




PROPERTY
AND EQUIPMENT





Property
is stated at the lower of cost or realizable value, net of accumulated
depreciation. Additions and improvements to property and equipment are
capitalized at cost. Designated project costs are capitalized to
construction-in-progress as incurred. Depreciation of production equipment is
computed using the units-of-production method based on estimated useful lives of
specific production machinery and equipment and the related units estimated to
be produced over periods ranging from ten to twenty
years.  Depreciation for all other assets is computed using the
straight-line method based on estimated useful lives of the assets which range
from three to ten years. Leasehold improvements and leased assets are amortized
or depreciated over the lesser of estimated useful lives or lease terms, as
appropriate. Property is periodically reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Expenditures for maintenance and repairs are charged to
operations as incurred while renewals and betterments are capitalized. Gains or
losses on the sale of property and equipment are reflected in the statements of
operations.





Change
in Accounting Estimate





Effective
on October 1, 2009, the Company changed its method of depreciation for
production machinery and equipment from the straight-line method to the
units-of-production method as described above.  In accordance with US
GAAP, the Company accounted for this change in accounting estimate prospectively
beginning on October 1, 2009.  See Note 5 for additional
information.





IMPAIRMENT
OF LONG-LIVED ASSETS





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





We did
not recognize any impairment charges during the six months ended March 31, 2010
and 2009, respectively.





FAIR
VALUE MEASUREMENTS





Fair
value is defined as the price that would be received to sell an asset, or paid
to transfer a liability, in an orderly transaction between market participants
at the measurement date. Assets and liabilities recorded at fair value in the
consolidated balance sheets are categorized based upon the level of judgment
associated with the inputs used to measure their fair value. The fair value
hierarchy distinguishes between (1) market participant assumptions
developed based on market data obtained from independent sources (observable
inputs) and (2) an entity’s own assumptions about market participant
assumptions developed based on the best information available in the
circumstances (unobservable inputs). The fair value hierarchy consists of three
broad levels, which gives the highest priority to unadjusted quoted prices in
active markets for identical assets or liabilities (Level 1) and the lowest
priority to unobservable inputs (Level 3). The three levels of the fair value
hierarchy are described as follows:





Level 1
- Quoted prices in active markets for identical assets or liabilities, and
identical liabilities when traded as an asset in an active market when no
adjustments to the quoted price of the asset are required.


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.  Inputs are based on management’s best estimate of what
market participants would use in pricing the asset or liability at the
measurement date.





As of
March 31, 2010, the Company held certain assets and liabilities that are
required to be measured at fair value on a recurring basis. The fair value
of these assets and liabilities was determined using the following
inputs:




12




(Unaudited,
      In Thousands)Description
                          
                          Total
                          
                          
                          Level 1
                          
                          
                          Level 2
                          
                          
                          Level 3Certificates
      of deposit (1)
                          
                          $
                          61
                          
                          
                          $
                          61
                          
                          
                          $
                          —
                          
                          
                          $
                          —Restricted
      cash (Note 2)
                          
                          
                          17,183
                          
                          
                          
                          17,183
                          
                          
                          
                          —
                          
                          
                          
                          —Total
      assets
                          
                          $
                          17,244
                          
                          
                          $
                          17,244
                          
                          
                          $
                          —
                          
                          
                          $
                          —Derivative
      liabilities
                          
                          $
                          730
                          
                          
                          $
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          730





(1)
            Short-term
      certificates of deposit are included in cash and cash equivalents in our
      consolidated balance sheet.





During
the six months ended March 31, 2010, there were no transfers into or out of
Levels 1 and 2.  Financial instruments classified as Level 3 in the
fair value hierarchy as of March 31, 2010 include derivative liabilities
resulting from recent financing transactions. In accordance with current
accounting rules, the derivative liabilities are being marked-to-market each
quarter-end until they are completely settled or expire. The derivative
liabilities are valued using the Black-Scholes valuation model, using both
observable and unobservable inputs and assumptions consistent with those used in
our estimate of fair value of employee stock options. See “Derivative
Liabilities” above in Note 1.





The
following table summarizes our fair value measurements using significant Level 3
inputs, and changes therein, for the six months ended March 31,
2010:





(Unaudited,
      In Thousands)
                      
                      Level 3
                        Derivative LiabilitiesBalance
      as of October 1, 2009
                      
                      $
                      1,570Transfers
      into/out of Level 3
                      
                      
                      —Initial
      valuation of derivative liabilities
                      
                      
                      —Change
      in fair value of derivative liabilities - expired
                      
                      
                      (131
                      )Change
      in fair value of derivative liabilities - held
                      
                      
                      (709
                      )Balance
      as of March 31, 2010
                      
                      $
                      730





At March
31, 2010 and September 30, 2009, the Company held no assets or liabilities that
are measured at fair value on a non-recurring basis.





FAIR
VALUE INFORMATION ABOUT FINANCIAL INSTRUMENTS





US GAAP
regarding fair value disclosures of financial instruments requires disclosure of
fair value information about certain financial instruments for which it is
practical to estimate that value. The carrying amounts reported in our balance
sheet for cash, cash equivalents, restricted cash, accounts receivable, accounts
payable, notes and convertible notes approximate fair value due to the short
maturity of these financial instruments. Derivative liabilities are reported at
fair value as discussed above. Considerable judgment is required to develop such
estimates of fair value. Accordingly, such estimates would not necessarily be
indicative of the amounts that could be realized in a current market exchange.
The use of different market assumptions and/or estimation methodologies may have
a material effect on the estimated fair amounts.





FOREIGN
CURRENCY TRANSLATION





The
Company’s primary functional currency is the U.S. dollar. Assets and liabilities
of the Company denominated in foreign currencies are translated at the rate of
exchange on the balance sheet date. Revenues and expenses are translated using
the average exchange rate for the period.





COMPREHENSIVE
LOSS





Comprehensive
loss includes all changes in shareholders’ equity (deficit) except those
resulting from investments by, and distributions to, shareholders. Accordingly,
the Company’s Consolidated Statements of Operations and Comprehensive Loss
include net loss, and foreign currency translation adjustments that arise from
the translation of foreign currency financial statements into U.S.
dollars.





In
connection with the sale of DeWind and resulting discontinued operations (see
Note 2), our Consolidated Statement of Operations and Comprehensive Loss for the
year ended September 30, 2009 included a reclassification adjustment of the
accumulated foreign currency translation adjustments for DeWind through
September 4, 2009 (date of sale), to recognize the accumulated adjustments as a
component of the loss from discontinued operations within net loss. Since
inception, other comprehensive income (loss) had been derived from DeWind
foreign currency translation adjustments. For the three and six months ended
March 31, 2010, other comprehensive income in the amounts of $2,156,000 and
$2,690,000, respectively, derived from DeWind foreign currency translations
adjustments, has been recognized and included as a component of the Income
(Loss) from Discontinued Operations within Net Loss.


13




RESEARCH
AND DEVELOPMENT EXPENSES





Research
and development expenses are charged to operations as incurred.





START-UP
COSTS





US GAAP
defines start-up activities as one-time activities an entity undertakes when it
opens a new facility, introduces a new product or service, conducts business in
a new territory, or with a new class of customer or beneficiary, initiates a new
process in an existing facility or commences some new operation. Start-up
activities include activities related to organizing a new entity (i.e.
organization costs), which include initial incorporation and professional fees
in connection with establishing the new entity. In accordance with US GAAP, we
expense all start-up activities as incurred.





During
the three and six months ended March 31, 2010, we recorded start-up expenses in
the amounts of $16,000 and $158,000, respectively, which are included in general
and administrative expenses.  Our start-up activities related to
professional fees for organization costs incurred.  No start-up
expenses were incurred during fiscal 2009.





DEFINED
CONTRIBUTION PLAN





The
Company maintains a 401(k) plan covering substantially all of its employees who
are at least 21 years old with 1,000 hours of service.  Such
employees are eligible to contribute a percentage of their annual eligible
compensation and receive discretionary Company matching
contributions.  Discretionary Company matching contributions are
determined by the Board of Directors and may be in the form of cash or Company
stock.  To date, the Company has not made any matching contributions
in either cash or Company stock. There were no changes to the 401 (k) plan
during the six months ended March 31, 2010.





INCOME
TAXES





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




No
provisions for income taxes were made for the three months ended March 31, 2010
and 2009, respectively.  We made provisions for income taxes of
$14,000 and $4,000 for the six months ended March 31, 2010 and 2009,
respectively. 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 March 31, 2010, our deferred
tax assets continued to be fully reserved. We will continue to evaluate, on a
quarterly basis, the positive and negative evidence affecting our ability to
realize our deferred tax assets.





The
Company will recognize the impact of tax positions in the consolidated financial
statements if that position is more likely than not of being sustained on audit,
based on the technical merits of the position.  To date, we have not
recorded any uncertain tax positions.




The
Company files consolidated tax returns in the United States Federal jurisdiction
and in California as well as foreign jurisdictions including Germany and the
United Kingdom. The Company is no longer subject to US Federal income tax
examinations for fiscal years before 2006, is no longer subject to state and
local income tax examinations by tax authorities for fiscal years before 2001,
and is no longer subject to foreign examinations before 2006.





During
fiscal 2008, the Company’s federal returns were selected for examination by the
Internal Revenue Service (IRS) for prior fiscals years ended September 30, 2001
through 2005, all years in which net losses were reported and filed.  The
examination has been completed and the Company received a preliminary
determination of adjustment from the IRS. During the quarter ended December 31,
2009, the IRS proposed certain preliminary adjustments related to payroll tax
returns filed during the period under audit. No adjustments were proposed in
connection with our previously filed federal income tax
returns.  Based on the IRS findings, the Company recorded a payroll
tax liability in the amount of $1,008,000, included as a component of Accounts
Payable and Accrued Liabilities (see Note 6), which was allocated to General and
Administrative Expense ($560,000), Interest Expense ($277,000) and Other Expense
from penalties ($171,000), during the three months ended December 31,
2009.  Payments relating to the assessment arising from the 2001
through 2005 audits will not be made until a final agreement is reached between
the Company and the IRS on such assessments or upon a final resolution resulting
from the administrative appeals process or judicial action.  The
Company has made no payments to date.  During the quarter ended March
31, 2010, the IRS began to provide certain adjustments.  Final
determination of adjustment is expected to be received from the IRS during the
third quarter ending June 30, 2010.


14




The
Company recognizes potential accrued interest and penalties related to uncertain
tax positions in income tax expense, as appropriate. During the three and six
months ended March 31, 2010 and 2009, the Company did not recognize any amount
of income tax expense from potential interest and penalties associated with
uncertain tax positions.




LOSS
PER SHARE





Basic
loss per share is computed by dividing loss available to common shareholders by
the weighted-average number of common shares outstanding. Diluted loss per share
is computed similar to basic loss per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the additional
common shares were dilutive. Common equivalent shares are excluded from the
computation if their effect is anti-dilutive.





The
following common stock equivalents were excluded from the calculation of diluted
loss per share for the three and six months ended March 31, 2010 and 2009 since
their effect would have been anti-dilutive (assumes all outstanding options and
warrants are in-the-money):


(Unaudited)
                        
                        March
      31,2010
                        
                        
                        2009Options
      for common stock
                        
                        
                        28,391,172
                        
                        
                        
                        27,311,020Warrants
      for common stock
                        
                        
                        14,955,001
                        
                        
                        
                        19,126,115Convertible
      Debentures, if converted
                        
                        
                        —
                        
                        
                        
                        9,037,28043,346,173
                        
                        
                        
                        55,474,415




RECLASSIFICATIONS





Certain
prior year balances have been reclassified to conform to the current period
presentation. Additionally, as discussed in Note 2, we have classified all
operations of our former DeWind segment as discontinued operations.





RECENT
ACCOUNTING PRONOUNCEMENTS





In June
2009, the FASB issued new rules related to accounting for transfers of financial
assets. These new rules were incorporated into the Accounting Standards
Codification in December 2009 as discussed in FASB Accounting Standards Update
(ASU) No. 2009-16, Transfers
and Servicing (Topic 860): Accounting for Transfers of Financial Assets.
The new rules amend various provisions related to accounting for transfers and
servicing of financial assets and extinguishments of liabilities, by removing
the concept of a qualifying special-purpose entity and removes the exception
from applying FASB rules related to variable interest entities that are
qualifying special-purpose entities; limits the circumstances in which a
transferor derecognizes a portion or component of a financial asset; defines a
participating interest; requires a transferor to recognize and initially measure
at fair value all assets obtained and liabilities incurred as a result of a
transfer accounted for as a sale; and requires enhanced disclosure; among
others. The new rules become effective for the Company on October 1, 2010,
earlier application is prohibited. The adoption of this standard is not expected
to have a material impact on our consolidated financial statements.





In June
2009, the FASB issued new rules to amend certain accounting for variable
interest entities (VIE). These new rules were incorporated into the
Accounting Standards Codification in December 2009 as discussed in FASB ASU No.
2009-17, Consolidation (Topic
810): Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities. The new rules require an enterprise to perform an
analysis to determine whether the enterprise’s variable interest or interests
give it a controlling financial interest in a VIE; to require ongoing
reassessments of whether an enterprise is the primary beneficiary of a VIE; to
eliminate the quantitative approach previously required for determining the
primary beneficiary of a VIE; to add an additional reconsideration event for
determining whether an entity is a VIE when any changes in facts and
circumstances occur such that holders of the equity investment at risk, as a
group, lose the power from voting rights or similar rights of those investments
to direct the activities of the entity that most significantly impact the
entity’s economic performance; and to require enhanced disclosures that will
provide users of financial statements with more transparent information about an
enterprise’s involvement in a VIE. The new rules become effective for the
Company on October 1, 2010, earlier application is
prohibited.  The adoption of this standard is not expected to have a
material impact on our consolidated financial statements.


15


In
October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging
Issues Task Force (ASU 2009-13).  ASU 2009-13 amends accounting
for revenue arrangements with multiple deliverables, to eliminate the
requirement that all undelivered elements have Vendor-Specific Objective
Evidence (VSOE) or Third-Party Evidence (TPE) before an entity can recognize the
portion of an overall arrangement fee that is attributable to items that already
have been delivered. In the absence of VSOE or TPE of the standalone selling
price for one or more delivered or undelivered elements in a multiple-element
arrangement, entities will be required to estimate the selling prices of those
elements. The overall arrangement fee will be allocated to each element (both
delivered and undelivered items) based on their relative selling prices,
regardless of whether those selling prices are evidenced by VSOE or TPE or are
based on the entity's estimated selling price. Application of the "residual
method" of allocating an overall arrangement fee between delivered and
undelivered elements will no longer be permitted upon adoption of ASU 2009-13.
Additionally, the new guidance will require entities to disclose more
information about their multiple-element revenue arrangements. ASU 2009-13 is
effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15,
2010.  Early adoption is permitted.  If a vendor elects
early adoption and the period of adoption is not the beginning of the entity’s
fiscal year, the entity will be required to apply the amendments in this Update
retrospectively from the beginning of the entity’s fiscal
year.  Additionally, vendors electing early adoption will be required
to disclose the following information at a minimum for all previously reported
interim periods in the fiscal year of adoption:  revenue, income
before income taxes, net income, earnings per share and the effect of the change
for the appropriate captions presented.  We expect to adopt this
standard on October 1, 2010 and are currently evaluating the impact this
standard will have on our consolidated financial statements.





In
January 2010, FASB issued ASU No. 2010-06, Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures About Fair
Value Measurements. The ASU requires new disclosures about transfers into
and out of Levels 1 and 2 and separate disclosures about purchases, sales,
issuances, and settlements relating to Level 3 measurements. It also clarifies
existing fair value disclosures about the level of disaggregation of disclosed
assets and liabilities, and about inputs and valuation techniques used to
measure fair value for both recurring and nonrecurring fair value measurements
that fall in either Level 2 or Level 3.  The new disclosures and
clarifications of existing disclosures were effective, and adopted, during the
Company’s second quarter ended March 31, 2010, however the disclosures about
purchases, sales, issuances, and settlements in the roll forward of activity in
Level 3 measurements, will be effective for the Company’s first quarter ending
December 31, 2011.  Other than requiring additional disclosures, the full
adoption of this new guidance will not have an impact on our consolidated
financial statements.





Significant
recent accounting policies adopted or implemented during the six months ended
March 31, 2010





On
October 1, 2009, we adopted a new FASB rule that revises existing business
combination rules.  The new rule requires most identifiable assets,
liabilities, non-controlling interests, and goodwill acquired in a business
combination to be recorded at “full fair value.” The new rule applies to all
business combinations, including combinations among mutual entities and
combinations by contract alone. Additionally, all business combinations will be
accounted for by applying the acquisition method. The new rule was 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. The adoption of this standard did not have an impact on
our consolidated financial statements.





On
October 1, 2009, we adopted new FASB rules related to accounting for assets
acquired and liabilities assumed in a business combination that arise from
contingencies. The new rules apply to all assets acquired and liabilities
assumed in a business combination that arise from certain contingencies as
defined by the FASB and requires (i) an acquirer to recognize at fair
value, at the acquisition date, an asset acquired or liability assumed in a
business combination that arises from a contingency if the acquisition-date fair
value of that asset or liability can be determined during the measurement
period, otherwise the asset or liability should be recognized at the acquisition
date if certain defined criteria are met; (ii) contingent consideration
arrangements of an acquiree assumed by the acquirer in a business combination be
recognized initially at fair value; (iii) subsequent measurements of assets
and liabilities arising from contingencies be based on a systematic and rational
method depending on their nature and contingent consideration arrangements be
measured subsequently; and (iv) disclosures of the amounts and measurement
basis of such assets and liabilities and the nature of the contingencies. The
new rules were 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. The adoption of this standard did not have
an impact on our consolidated financial statements.





On
October 1, 2009, we adopted new FASB rules related to determining the useful
life of intangible assets.  The new rules amend the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under existing FASB
rules for goodwill and other intangible assets. This change is intended to
improve the consistency between the useful life of a recognized intangible asset
outside a business combination and the period of expected cash flows used to
measure the fair value of an intangible asset in a business
combination.  The new rules were effective for the financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years.  The requirement for
determining useful lives must be applied prospectively to intangible assets
acquired after the effective date and the disclosure requirements must be
applied prospectively to all intangible recognized as of, and subsequent to, the
effective date.  The adoption of this standard did not have an impact
on our consolidated financial statements.





On
October 1, 2009, we adopted a new FASB rule related to non-controlling interests
in consolidated financial statements. The new rule 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. The new rule was effective for fiscal
years beginning on or after December 15, 2008 and interim periods within
those fiscal years. Earlier adoption was prohibited. The adoption of this
standard did not have an impact on our consolidated financial
statements.  On October 1, 2009, we also adopted related guidance,
FASB ASU No. 2010-2, Consolidation (Topic 810):
Accounting and Reporting for Decreases in Ownership of a Subsidiary – a Scope
Clarification , which amended certain provisions of the preceding new
guidance for non-controlling interests and changes in ownership interests of a
subsidiary, specifically related to an entity that experiences a decrease in
ownership in a subsidiary.  The new guidance clarifies the scope of
the decrease in ownership provisions.  The adoption of this standard
did not have an impact on our consolidated financial
statements.


16





On
October 1, 2009, we adopted new FASB rules related to determining whether an
instrument (or embedded feature) is indexed to an entity’s own
stock.  Existing accounting for derivatives and hedging activities,
specifies that a contract that would otherwise meet the definition of a
derivative but is both (a) indexed to the Company’s own stock and (b) classified
in shareholders’ equity in the statement of financial position would not be
considered a derivative financial instrument.  The new rules provide a
new two-step model to be applied in determining whether a financial instrument
or an embedded feature is indexed to an issuer’s own stock and thus able to
qualify for the existing scope exception.  The new rules were
effective for the first annual reporting period beginning after December 15,
2008, and early adoption is prohibited.  The adoption of this new
standard caused a change in our accounting principles, as discussed above in
Note 1 “Derivative Liabilities and Change in Accounting Principle”.





On
October 1, 2009, we adopted the FASB ASU No. 2009-5, Fair Value Measurements and
Disclosures (Topic 820)—Measuring Liabilities at Fair Value, which
changed the fair value accounting for liabilities. These changes clarify
existing guidance that in circumstances in which a quoted price in an active
market for the identical liability is not available, an entity is required to
measure fair value using either a valuation technique that uses a quoted price
of either a similar liability or a quoted price of an identical or similar
liability when traded as an asset, or another valuation technique that is
consistent with the principles of fair value measurements, such as an income
approach (e.g., present value technique) or a market approach. This guidance
also states that both a quoted price in an active market for the identical
liability and a quoted price for the identical liability when traded as an asset
in an active market when no adjustments to the quoted price of the asset are
required, are Level 1 fair value measurements. The adoption of this ASU did not
have an impact on our consolidated financial statements.





On
January 1, 2010, we adopted the FASB ASU No. 2010-06, Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures About Fair
Value Measurements, which currently requires new disclosures about
transfers into and out of Levels 1 and 2. It also clarifies existing fair value
disclosures about the level of disaggregation of disclosed assets and
liabilities, and about inputs and valuation techniques used to measure fair
value for both recurring and nonrecurring fair value measurements that fall in
either Level 2 or Level 3.  Other than requiring additional disclosures,
the adoption of this new guidance did not have an impact on our consolidated
financial statements.





NOTE
2 – DISCONTINUED OPERATIONS AND SALE OF DEWIND





As of
March 31, 2010, all operations of our former DeWind segment have been classified
as discontinued operations.





On
September 4, 2009, our DeWind subsidiary sold substantially all of its existing
operating assets including all inventories, receivables, fixed assets, wind farm
project assets and intangible assets including all intellectual property and
transferred substantially all operating liabilities including supply chain and
operating expense accounts payables and accrued liabilities, warranty related
liabilities for US turbine installations, and deferred revenues.  All
of the remaining assets and liabilities of DeWind have been classified as net
assets or liabilities of discontinued operations.  All operations of
our former DeWind segment have been reported as discontinued
operations.





The sale
of DeWind was valued at $49.5 million in cash.  The Company received
approximately $32.3 million in cash with $17.2 million in cash escrowed to cover
certain contingent liabilities.  Of the escrowed cash, $5.5 million is
expected to be released within one year after the achievement of certain
milestones and $11.7 million is expected to be released over time periods that
may be as late as 2012 under certain conditions. The purchase price is further
subject to adjustment based on delivery of the value of the assets transferred
net of liabilities assumed.   The Company has placed the $17.2 million
in cash in escrow to indemnify the buyer if claims are made against them by
third parties and those claims are determined to be valid and
enforceable.  Our intention is to vigorously defend against any such
claims should they occur.  Defense of such claims may result in
additional costs to maintain the Company’s interest in the restricted cash or to
limit potential liability.  In the event that claims are successful,
the balance payable to the buyer may include all, part, or cash amounts in
excess of the $17.2 million escrowed, including potentially an additional $17.7
million up to a total of $34.9 million under certain conditions, which are not
expected by the Company.  If such claims are successfully made, this
would result in additional losses on the DeWind sale transaction and could
require a substantial refund of the proceeds received.  The Company
believes the $17.2 million in escrow will be released per the terms of the
agreement.  Accordingly, at March 31, 2010, we have classified the $17.2
million held in escrow as restricted cash, with $5.5 million as current and
$11.7 million as long-term (see Note 1 “Restricted Cash”).




The
consolidated assets and liabilities of our former DeWind segment have been
classified on the balance sheet as Net Liabilities of Discontinued
Operations.  The asset and liabilities comprising the balances, as
classified in our balance sheets, consist of:




17




(In Thousands)
                              
                              March
      31, 2010
                              
                              
                              September 30, 2009(unaudited)ASSETSAccounts
      Receivable, net
                              
                              $
                              1,800
                              
                              
                              $
                              2,461Prepaid
      Expenses and Other Current Assets
                              
                              
                              526
                              
                              
                              
                              61TOTAL
      ASSETS
                              
                              $
                              2,326
                              
                              
                              $
                              2,522LIABILITIESAccounts
      Payable and Other Accrued Liabilities
                              
                              $
                              36,326
                              
                              
                              $
                              39,356Deferred
      Revenues and Customer Advances
                              
                              
                              2,445
                              
                              
                              
                              2,869Warranty
      Provision
                              
                              
                              1,015
                              
                              
                              
                              1,244Total
      Current Liabilities
                              
                              
                              39,786
                              
                              
                              
                              43,469Long-Term
      Portion of Warranty Provision
                              
                              
                              897
                              
                              
                              
                              1,120Total
      Liabilities
                              
                              
                              40,683
                              
                              
                              
                              44,589Net
      Liabilities of Discontinued Operations
                              
                              $
                              (
      38,357
                              )
                              
                              $
                              (
      42,067
                              )




Except
for former intercompany loans, significantly all of the assets and liabilities
of the discontinued operations pertain to activities outside of the United
States, primarily for turbines sold and installed in Europe and South America
and technology licenses to Chinese customers. At March 31, 2010 and
September 30, 2009, included above in Accounts Payable and Other Accrued
Liabilities are net payables related to formerly consolidated, now
insolvent European subsidiaries of approximately $20 million and $22 million,
respectively, substantially all of which has been assigned by the insolvency
receiver to a third party. As of March 31, 2010, the net payables from insolvent
subsidiaries are comprised of assets in the amount of $8 million and liabilities
in the amount of $28 million. We did not receive an update from the insolvency
receiver related to the assets and liabilities for the insolvent
subsidiaries during the quarter ended March 31, 2010.




The
consolidated net loss from operations of our former DeWind segment has been
classified on the statements of operations and comprehensive loss, as Loss from
Discontinued Operations. Summarized results of discontinued operations are as
follows:





Three Months Ended March 31,
                        
                        
                        Six Months Ended March 31,(Unaudited,
      In Thousands)
                        
                        2010
                        
                        
                        
                        2009
                        
                        
                        
                        2010
                        
                        
                        
                        2009Revenues
                        
                        $
                        1,131
                        
                        
                        $
                        9,873
                        
                        
                        $
                        1,440
                        
                        
                        $
                        15,931Cost
      of Revenues
                        
                        
                        847
                        
                        
                        
                        12,023
                        
                        
                        
                        1,637
                        
                        
                        
                        17,836Operating
      Expenses
                        
                        
                        136
                        
                        
                        
                        4,639
                        
                        
                        
                        1,419
                        
                        
                        
                        9,083Other
      (Income) Expense
                        
                        
                        (2,159
                        )
                        
                        
                        49
                        
                        
                        
                        (2,702
                        )
                        
                        
                        (23
                        )Income
      Tax Expense (Benefit)
                        
                        
                        —
                        
                        
                        
                        (13
                        )
                        
                        
                        1
                        
                        
                        
                        (8
                        )(Income)
      Loss from Discontinued Operations
                        
                        $
                        2,307
                        
                        
                        $
                        (6,825
                        )
                        
                        $
                        1,085
                        
                        
                        $
                        (10,957
                        )





Since
September 4, 2009, the Company has had no continuing involvement with our former
DeWind segment; any subsequent cash flows are directly related to the
liquidation of the remaining assets and liabilities.  No corporate
overhead has been allocated to discontinued operations.





On
December 4, 2009 Daewoo Shipbuilding and Marine Engineering (DSME) provided
the Company with a preliminary net asset value calculation in accordance with
the terms and conditions of the Asset Purchase Agreement dated September 4,
2009.  The Company responded with an adjusted net asset value
calculation on December 16, 2009.  In January, 2010 the Company and
DSME had a series of meetings to discuss the differences.  Final
negotiations and resolution of all differences is expected during the June 2010
quarter.





NOTE
3 - ACCOUNTS RECEIVABLE





Accounts
receivable, net consists of the following:




(In Thousands)
                      
                      March
      31,
                        2010
                      
                      
                      September 30,
                        2009(unaudited)Cable
      Receivables
                      
                      $
                      1,862
                      
                      
                      $
                      1,813Reserves
                      
                      
                      (87
                      )
                      
                      
                      (81
                      )Net
      Accounts Receivable
                      
                      $
                      1,775
                      
                      
                      $
                      1,732




18




NOTE
4 – INVENTORY





Inventories
consist of the following:





(In Thousands)
                        
                        March 31,
                          2010
                        
                        
                        September 30,
                          2009(unaudited)Raw
      Materials
                        
                        $
                        1,914
                        
                        
                        $
                        2,040Work-in-Progress
                        
                        
                        —
                        
                        
                        
                        —Finished
      Goods
                        
                        
                        2,137
                        
                        
                        
                        3,261Gross
      Inventory
                        
                        
                        4,051
                        
                        
                        
                        5,301Reserves
                        
                        
                        (1,222
                        )
                        
                        
                        (923
                        )Net
      Inventory
                        
                        $
                        2,829
                        
                        
                        $
                        4,378




NOTE
5 – PROPERTY AND EQUIPMENT





Property
and equipment consisted of the following:


(In Thousands)
                                
                                Estimated Useful
                                  Lives
                                
                                
                                March 31,
                                  2010
                                
                                
                                September 30,
                                  2009(unaudited)Office
      Furniture and Equipment
                                
                                
                                3-10
      yrs
                                
                                
                                $
                                741
                                
                                
                                $
                                936Production
      Equipment
                                
                                
                                10-20
      yrs
                                
                                
                                
                                3,863
                                
                                
                                
                                4,994Construction-in-Progress
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                302Leasehold
      Improvements
                                
                                Lesser of lease term or 7 yrs
                                
                                
                                
                                757
                                
                                
                                
                                748Total
      Property
                                
                                
                                
                                
                                
                                
                                5,361
                                
                                
                                
                                6,980Accumulated
      Depreciation
                                
                                
                                
                                
                                
                                
                                (2,431
                                )
                                
                                
                                (3,766
                                )Property
      and Equipment, net
                                
                                
                                
                                
                                
                                $
                                2,930
                                
                                
                                $
                                3,214





Depreciation
expense was $192,000 and $318,000, for the three and six months ended March 31,
2010, respectively.  Depreciation expense was $224,000 and $465,000,
for the three and six months ended March 31, 2009, respectively.  As of
October 1, 2009, the Company changed its method of depreciating production
equipment, which included applying an estimated useful life of 10-20 years as
compared to a range of 3-10 years applied in prior periods.  Refer to
discussion in Note 1 “Property and Equipment – Change in Accounting
Estimate”.





NOTE
6 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES





Accounts
payable and accrued liabilities consisted of the following:


(In Thousands)
                      
                      March 31,
                        2010
                      
                      
                      September 30,
                        2009(unaudited)Trade
      Payables
                      
                      $
                      2,612
                      
                      
                      $
                      4,179Accrued
      Commissions
                      
                      
                      800
                      
                      
                      
                      667Accrued
      Insurance
                      
                      
                      102
                      
                      
                      
                      441Accrued
      Payroll and Payroll Related
                      
                      
                      930
                      
                      
                      
                      541Accrued
      Payroll Tax Liability (A)
                      
                      
                      1,008
                      
                      
                      
                      —Accrued
      Interest
                      
                      
                      —
                      
                      
                      
                      183Deferred
      Rents
                      
                      
                      85
                      
                      
                      
                      133Accrued
      Sales Tax
                      
                      
                      128
                      
                      
                      
                      128Accrued
      Other
                      
                      
                      865
                      
                      
                      
                      945Total
      Accounts Payable and Accrued Liabilities
                      
                      $
                      6,530
                      
                      
                      $
                      7,217





(A)
            During
      the six months ended March 31 2010, the Company accrued a payroll tax
      liability as a result of an IRS audit (see “Income Taxes” in Note 1 for
      additional information).




19




NOTE
7 – DEFERRED REVENUES AND CUSTOMER ADVANCES





The
Company records all cash proceeds received from customers on orders and extended
warranties, 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.  Deferred revenues and customer advances consist of the
following:




(In Thousands)
                        
                        March 31,
                          2010
                        
                        
                        September 30,
                          2009(unaudited)Deferred
      Revenues
                        
                        $
                        576
                        
                        
                        $
                        563Customer
      Advances
                        
                        
                        41
                        
                        
                        
                        14Total
      Deferred Revenues and Customer Advances
                        
                        
                        617
                        
                        
                        
                        577Less
      amount classified in current liabilities
                        
                        
                        41
                        
                        
                        
                        16Long-term
      Deferred Revenues
                        
                        $
                        576
                        
                        
                        $
                        561





Long-term
deferred revenue is comprised of long-term extended warranties.




NOTE 8 –
SHAREHOLDERS’ EQUITY (DEFICIT)




COMMON
STOCK





The
following issuances of common stock were made during the six months ended March
31, 2010:





CASH





During
the six months ended March 31, 2010 the Company received $7,000 in cash from the
exercise of 20,000 consultant options.





SERVICES





During
the six months ended March 31, 2010 the Company issued 161,290 shares of common
stock to John Brewster, CTC Cable President valued at $45,000 at the date of
issuance in partial payment of an employment acceptance bonus.





WARRANTS





The
Company issues warrants to purchase common shares of the Company either as
compensation for consulting services, or as additional incentive for investors
who purchase unregistered, restricted common stock or Convertible Debentures.
The value of warrants issued for compensation is accounted for as a non-cash
expense to the Company at the fair value of the warrants issued. The value of
warrants issued in conjunction with financing events is either a reduction in
paid in capital for common stock issuances or as a discount for debt issuances.
The Company values the warrants at fair value as calculated by using the
Black-Scholes option-pricing model.  See Note 1 “Derivative
Liabilities” for additional warrants accounting and disclosure.





The
following table summarizes the Warrant activity for the six months ended March
31, 2010:




(Unaudited)
                          
                          Number
                            of Warrants
                          
                          
                          Weighted-Average Exercise
                            PriceOutstanding,
      September 30, 2009
                          
                          
                          22,934,649
                          
                          
                          $
                          0.95Granted
                          
                          
                          900,000
                          
                          
                          
                          0.38Exercised
                          
                          
                          —
                          
                          
                          
                          —Cancelled
                          
                          
                          (8,879,648
                          )
                          
                          
                          1.03OUTSTANDING,
      March 31, 2010
                          
                          
                          14,955,001
                          
                          
                          $
                          0.87EXERCISABLE,
      March 31, 2010
                          
                          
                          14,455,001
                          
                          
                          $
                          0.89





On
November 13, 2009 we issued 300,000 warrants with a strike price of $0.45 per
warrant and a two-year life in settlement of a legal dispute.  We
valued the warrants at $57,000 using the Black-Scholes-Merton option pricing
model and the following assumptions:


Dividend
rate = 0%


Risk free
return of 0.82%


Volatility
of 108%


20





Market
price of $0.37 per share


Maturity
of 2 years





On
February 12, 2010 we issued 600,000 warrants with a strike price of $0.35 per
warrant and a three-year life in connection with an ongoing service
agreement.  The warrants vest in six equal 100,000 share amounts on a
quarterly basis, beginning on February 12, 2010.  We valued the
warrants at $95,000 using the Black-Scholes-Merton option pricing model and the
following assumptions:


Dividend
rate = 0%


Risk free
return of 1.40%


Volatility
of 98%


Market
price of $0.28 per share


Maturity
of 3 years





Management
has reviewed and assessed the warrants issued during the six months ended March
31, 2010 and determined that they do not qualify for treatment as derivatives
under applicable US GAAP rules.





NOTE 9 –
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 the FASB which require fair value calculations 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
option-pricing model. Key assumptions used during the six months ended March 31,
2010 and 2009 to value options granted are as follows:





Six Months EndedMarch 31,2010
                              
                              2009Risk
      Free Rate of Return
                              
                              
                              2.18-2.43
                              %
                              
                              
                              0.50-2.02
                              %Volatility
                              
                              
                              95.6
                              %
                              
                              
                              96
                              %Dividend
      yield
                              
                              
                              0
                              %
                              
                              
                              0
                              %Expected
      life
                              
                              5
      years
                              
                              .5-5
      years




Our
computation of expected volatility for the six months ended March 31, 2010 is
based on historical volatility over the expected life of the options granted.
Our computation of expected life is based on historical exercise patterns
pursuant to SEC guidelines. 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.





Share-based
compensation included in the results of operations for the three and six months
ended March 31, 2010 and 2009 is as follows:





Three Months Ended March 31,
                        
                        
                        Six Months Ended March 31,(Unaudited,
      In Thousands)
                        
                        2010
                        
                        
                        
                        2009
                        
                        
                        
                        2010
                        
                        
                        
                        2009Cost
      of Product Sold
                        
                        $
                        37
                        
                        
                        $
                        29
                        
                        
                        $
                        55
                        
                        
                        $
                        45Officer
      Compensation
                        
                        
                        360
                        
                        
                        
                        769
                        
                        
                        
                        687
                        
                        
                        
                        1,260Selling
      and marketing
                        
                        
                        103
                        
                        
                        
                        210
                        
                        
                        
                        188
                        
                        
                        
                        446Research
      and development
                        
                        
                        14
                        
                        
                        
                        334
                        
                        
                        
                        66
                        
                        
                        
                        502General
      and administrative
                        
                        
                        311
                        
                        
                        
                        329
                        
                        
                        
                        493
                        
                        
                        
                        547Totals
                        
                        $
                        825
                        
                        
                        $
                        1,671
                        
                        
                        $
                        1,489
                        
                        
                        $
                        2,800





The
Company recorded $20,000 and $89,000 of equity-based compensation into
discontinued operations for the three and six months ended March 31, 2010,
respectively.  The Company recorded $248,000 and $672,000 of
equity-based compensation into discontinued operations for the three and six
months ended March 31, 2009, respectively.





As of
March 31, 2010, there was $3.3 million of total unrecognized compensation cost
related to unamortized accrued share-based compensation arrangements related to
outstanding employee stock options. The costs are expected to be recognized over
a weighted-average period of 2.0 years.  For the remainder of fiscal
2010, we expect share-based compensation expense related to employee stock
options of $1,182,000 before income taxes. Such amounts may change as a result
of additional grants, forfeitures, modifications in assumptions and other
factors.


21





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 on specific performance
measurements for option vesting tied to performance
criteria.  Compensation cost is generally calculated on a daily basis
over the requisite service period incorporating actual vesting period dates, and
includes expected forfeiture rates between 0% and 15%.





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
March 31, 2010 all of the 2008 Plan option grants were exercisable. To date, no
restricted stock has been issued under the 2008 Plan.  Of the 2008
plan options exercisable, 3,959,751 options were vested and exercisable into
unrestricted stock.





The
following table summarizes the Stock Plan stock option activity for the six
months ended March 31, 2010:





(Unaudited)
                                
                                2002 Plan
                                  Number of
                                  Options
                                
                                
                                2008 Plan
                                  Number of
                                  Options
                                
                                
                                Total Number of
                                  Options
                                
                                
                                Average
                                  Exercise
                                  PriceOutstanding, September 30, 2009
                                
                                
                                16,212,156
                                
                                
                                
                                9,688,808
                                
                                
                                
                                25,900,964
                                
                                
                                $
                                0.35Granted
                                
                                
                                —
                                
                                
                                
                                2,660,000
                                
                                
                                
                                2,660,000
                                
                                
                                
                                0.35Exercised
                                
                                
                                (20,000
                                )
                                
                                
                                —
                                
                                
                                
                                (20,000
                                )
                                
                                
                                0.35Cancelled
                                
                                
                                (27,916
                                )
                                
                                
                                (121,876
                                )
                                
                                
                                (149,792
                                )
                                
                                
                                0.35Outstanding,
      March 31, 2010
                                
                                
                                16,164,240
                                
                                
                                
                                12,226,932
                                
                                
                                
                                28,391,172
                                
                                
                                $
                                0.35Exercisable
      , March 31, 2010
                                
                                
                                14,830,391
                                
                                
                                
                                12,226,932
                                
                                
                                
                                27,057,323
                                
                                
                                $
                                0.35




The
weighted-average remaining contractual life of the options outstanding at March
31, 2010 was 6.9 years. The exercise prices of the options outstanding at March
31, 2010 ranged from $0.25 to $1.00, and information relating to these options
is as follows (unaudited):




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
                                    
                                    
                                    728,000
                                    
                                    
                                    
                                    728,000
                                    
                                    
                                    
                                    6.75
                                    
                                    
                                    $
                                    0.25
                                    
                                    
                                    $
                                    0.25$0.35-$0.49
                                    
                                    
                                    27,633,772
                                    
                                    
                                    
                                    26,299,923
                                    
                                    
                                    
                                    6.91
                                    
                                    
                                    $
                                    0.35
                                    
                                    
                                    $
                                    0.35$1.00-$1.49
                                    
                                    
                                    29,400
                                    
                                    
                                    
                                    29,400
                                    
                                    
                                    
                                    0.91
                                    
                                    
                                    $
                                    1.00
                                    
                                    
                                    $
                                    1.00Total
                                    
                                    
                                    28,391,172
                                    
                                    
                                    
                                    27,057,323




NOTE
10 – LITIGATION





Stribog
Ltd (formerly DeWind Ltd) .v. FKI Plc. and FKI Engineering Ltd.





On
October 30, 2009 the Company’s wholly owned subsidiary, Stribog Ltd. (formerly
DeWind Ltd.), filed an action for negative declaration in the Court of Lubeck,
Germany against FKI (Case No. 23568 Lubeck) to set the value of the intellectual
property of DeWind GmbH that had been transferred to DeWind Ltd. in August, 2008
and to verify the propriety of the transfer.  The intellectual property had
been transferred under the terms of a DeWind intercompany agreement for 500,000
Euros ($635,000 at May 6, 2010 exchange rates) prior to the DeWind GmbH
insolvency filing.  FKI claims the value of the intellectual property is
significantly higher and as a result, that the transfer was improperly
conducted.  The Company believes that fair market value was paid for this
intellectual property.  FKI was formally served in November, 2009 on
this negative declaratory relief action.  Stribog Ltd. has not
recorded a liability associated with the difference in the price paid by Stribog
Ltd. and any value claimed by FKI, as it is uncertain whether the court will
uphold or deny the compensation paid by Stribog Ltd. for the intellectual
property.




22




FKI
Engineering Limited and FKI plc v. Stribog Ltd and De Wind
GmbH


On or
about January 21, 2010, FKI Engineering Ltd. and FKI Engineering, formerly FKI
Plc., filed an action against Stribog Ltd., formerly DeWind Ltd., in the
Commercial Court, Queen’s Bench Division, United Kingdom (Case No. 2010 Folio
61).  FKI’s claim is brought pursuant to an assignment agreement
executed by the insolvency administrator assigning FKI the right to pursue
claims on behalf of DeWind GmbH for amounts allegedly owed to DeWind GmbH from
various companies.  FKI claims that Stribog Ltd. is in breach of an
August 1, 2005 business transfer agreement where DeWind GmbH agreed to sell and
Stribog Ltd. agreed to purchase the assets of DeWind GmbH.  FKI claims
that DeWind GmbH is owed approximately 46,681,543 Euros ($59,300,000 at January
29, 2010 exchange rates). Stribog Ltd. disputes that it owes any funds to
DeWind GmbH and is vigorously contesting the validity of this
allegation.





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 from the Mercury parties
to the Company 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’s 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 March 31, 2010.





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-defendants have been served). The Company
filed several motions aimed at dismissing certain of the cross-claims, which
resulted in the Defendants filing several amended pleadings. On May 12, 2009 the
Court granted the Company’s motion directed to the sixth cause of action
contained in the second amended cross-complaint, and dismissed that claim with
prejudice.  The Defendants’ cross-complaint asserts claims for fraud
in inducing the settlement agreement, rescission of the settlement agreement,
breach of the settlement agreement, accounting, and declaratory
relief.





On March
2, 2009, the Company’s subsidiary, CTC Cable Corporation ("CTC Cable"), filed a
lawsuit against Mercury Cable & Energy, LLC ("Mercury") in the United States
District Court for the Central District of California, Southern Division (Case
No. SA CV 09-261 DOC (MLGx)), seeking damages for infringement of CTC Cable's
United States Patent No. 7,368,162 (’162) and United States Patent No. 7,211,319
(‘319), and for infringement of a CTC Cable copyright
registration.  The Company is asking for actual damages, treble
damages, attorneys fees, interest, costs and injunctive relief.  No
estimate of such damages can be made at this time and no accrual for the
Company’s future fees and costs is included in the Company's financial
statements at March 31, 2010.




In
response to this lawsuit, Mercury has requested the United States Patent and
Trademark Office reexamine the '162 and '319 patents and requested the Court to
stay the patent and copyright lawsuit pending the Patent Office's final
reexamination of CTC's patents.  The Court granted Mercury's request
to stay the lawsuit pending the Patent Office’s final decisions. CTC's copyright
infringement claim is also stayed pending the Patent Office’s
decisions.




On
November 4, 2009, the Patent Office issued a first Office Action in the
re-examination of the '319 patent.  As is common practice, the Patent
Office initially rejected most of the claims based on the prior art patents
submitted with Mercury's reexamination request pending response by CTC. However,
the Patent Office did confirm the validity of claim 17 of reexamination request.
On November 23, 2009, Mercury issued a press release falsely stating that the
Patent Office “invalidated” 28 of 29 claims contained in the '319
patent.  Contrary to Mercury's latest press release, the Office Action
did not serve to invalidate any claims of the patent and all of the Company’s
patent claims being reexamined remained in force during the pendency of the
reexamination.





On
February 24, 2010, the Patent Office issued an official Notice of Intent to
Issue Ex Parte Re-examination Certificate (“Notice”) for U.S. Patent No.
7,368,162 ("'162 patent").  In the Notice, the Patent Office confirmed
the patentability of eight (8) original claims, and approved the other twenty
eight (28) original claims with only minor amendments. The Patent Office further
allowed forty seven (47) new claims, bringing the total claim count in this
patent to eighty three (83) claims. No claims were finally
rejected.




On March
1, 2010, the Patent Office issued an official Notice of Intent to Issue Ex Parte
Re-examination Certificate (“Notice”) for U.S. Patent No. 7,211,319 ("'319
patent"). In the Notice, the Patent Office approved the twenty-nine (29)
original claims with only minor amendments. The Patent Office further allowed
forty-three (43) new claims, bringing the total claim count in this patent to
seventy-two (72) claims. No claims were finally rejected.




CTC
Cable's suit against Mercury for willful patent infringement had been stayed by
the Court pending the outcome of the reexamination of the '319 patent and of the
‘162 patent.  On March 23, 2010, CTC filed a stipulated request to
lift the stay and allow the suit to proceed.  On March 24, 2010, the
United States District Court issued an Order granting the request and lifted the
stay of proceedings.  Discovery is now ongoing.


23




In
Re Composite Technology Corporation Derivative Litigation (Brad Thomas v. Benton
Wilcoxon, Michael Porter, Domonic J. Carney, Michael McIntosh, Stephen Bircher,
Rayna Limited, Keeley Services Limited, Ellsford Management Limited, Laikadog
Holdings Limited, James Carkulis, and Does 1 through 1000 (including D. Dean
McCormick, III, CPA as Doe 1, John P. Mitola, as Doe 2, and Michael K. Lee, as
Doe 3) and Nominal Defendant Composite Technology Corporation)





On June
26, 2009 Mr. Brad Thomas, alleged to be a shareholder of the Company, filed a
shareholder derivative complaint in the Superior Court of the State of
California, County of Orange (Case No. 30-2009-00125211) for damages and
equitable relief.  The complaint asserts claims for negligence, gross
negligence, breach of fiduciary duty, waste, mismanagement, gross mismanagement,
abuse of control, negligent misrepresentation, intentional misrepresentation,
fraudulent promise, constructive fraud, and violations of the California
Corporations Code, and seeks an accounting, rescission and/or
reformation.  The facts focus on the Company’s acquisition of its
DeWind subsidiary and also related self-interested transactions, accounting
deficiencies and misstatements.  Certain of the defendants are current
directors and/or officers or past officers of the Company.  Under the
Company’s articles of incorporation and bylaws, the Company is obligated to
provide for indemnification for director and officer liability.





On
October 13, 2009, the Company and the individual defendants filed demurrers
(motions to strike) to the Complaint on the grounds that Plaintiff Thomas did
not make a written demand on the Company’s board of directors prior to filing
the Complaint as required under Nevada law and that any decisions made by the
individual director/office defendants in relation to the subject matter of the
Complaint are protected under the business judgment rule.  Prior to
the scheduled hearing on the demurrer, Plaintiff Thomas filed a First Amended
Complaint on or about November 11, 2009 naming three additional current board
members.  In addition, on October 20, 2009, the Company filed a Motion
to Stay Discovery in this matter on the grounds that Plaintiff Thomas should not
be permitted to conduct discovery until such time as the dispute over the
sufficiency of the First Amended Complaint is decided by the Court. On January
22, 2010, the Company filed another demurrer (motion to strike) to the First
Amended Complaint on the same grounds as the original demurrers.  On
March 8, 2010, the Court overruled the Company’s demurrer and lifted the stay on
discovery.  On May 4, 2010, the Court held a Case Management
Conference and set the case for trial beginning on November 8,
2010.  Discovery is now ongoing.  The Company has not
reserved any amounts for this litigation as the amounts are undeterminable and
are further eligible for reimbursement under existing insurance
policies.





NOTE
11 – SEGMENT INFORMATION





As of
March 31, 2010, we manage and report our operations through one business
segment: CTC Cable.  During the year ended September 30, 2009 we
revised our segments to reflect the disposal of DeWind. DeWind comprised our
previously reported Wind segment, which has been presented as discontinued
operations in our Consolidated Financial Statements (see Note
2).  When applicable, segment data is organized on the basis of
products. Historically, the Company evaluates the performance of its operating
segments primarily based on revenues and operating income, any transactions
between reportable segments are eliminated in the consolidation of reportable
segment data.





Located
in Irvine, California with sales operations in the U.S., China, Europe, the
Middle East and Brazil, CTC Cable produces and sells ACCC®
conductor and related ACCC® hardware
products. ACCC®
conductor production is a two step process. The Irvine operations produce the
high strength, light weight, composite ACCC®core,
which is then shipped to one of our conductor standing licensees in the U.S.,
Canada, Belgium, China, Indonesia or Bahrain where the core is stranded with
conductive aluminum to become ACCC®
conductor.  ACCC®
conductor is sold in North America directly by CTC Cable to
utilities.  ACCC®
conductor is sold elsewhere in the world directly to utilities as well as
through license and distribution agreements with Lamifil in Belgium, Far East
Composite Cable Company in China, and through two Indonesian companies PT Tranka
Cable and PT KMI Cable and now through Alcan Cable in the U.S. and
Canada.  ACCC®
conductor has been sold commercially since 2005 and is currently marketed
worldwide to electrical utilities, transmission companies and transmission
design/engineering firms.




The
Company operates and markets its services and products on a worldwide
basis:




Three Months Ended March 31,
                        
                        
                        Six Months Ended March 31,(Unaudited,
      In Thousands)
                        
                        2010
                        
                        
                        
                        2009
                        
                        
                        
                        2010
                        
                        
                        
                        2009Europe
                        
                        $
                        16
                        
                        
                        $
                        (91
                        )
                        
                        $
                        105
                        
                        
                        $
                        641China
                        
                        
                        181
                        
                        
                        
                        5,175
                        
                        
                        
                        181
                        
                        
                        
                        7,553Other
      Asia
                        
                        
                        1,615
                        
                        
                        
                        —
                        
                        
                        
                        1,622
                        
                        
                        
                        9North
      America
                        
                        
                        2,430
                        
                        
                        
                        1,113
                        
                        
                        
                        3,607
                        
                        
                        
                        1,829South
      America
                        
                        
                        10
                        
                        
                        
                        1
                        
                        
                        
                        1,438
                        
                        
                        
                        1Mexico
                        
                        
                        —
                        
                        
                        
                        4
                        
                        
                        
                        —
                        
                        
                        
                        529Total
      Revenue
                        
                        $
                        4,252
                        
                        
                        $
                        6,202
                        
                        
                        $
                        6,953
                        
                        
                        $
                        10,562


24





All
long-lived assets, comprised of property and equipment, are located in the
United States.





For the
three months ended March 31, 2010, three customers represented 94% of revenue
(two in the U.S. at 56% and one in Indonesia at 38%). For the six months
ended March 31, 2010, four customers represented 91% of revenue (two the U.S. at
47%, one in Chile, South America at 21% and one in Indonesia at
23%).





For the
three months ended March 31, 2009, two customers represented approximately 100%
of revenue (one in China at 83% and one in the U.S. at 17%). For the six
months ended March 31, 2009, five customers represented 98% of revenue (one in
China at 72%, one in the U.S. at 10%, one in Europe at 6%, one in Canada at 5%
and one in Mexico at 5%).  No other customer represented greater than
5% of consolidated revenue.





NOTE
12 – SUBSEQUENT EVENTS (Unaudited)





Management
evaluated all subsequent events through the issue date of the consolidated
financial statements and concluded that no subsequent events have occurred that
would require recognition in the consolidated financial statements or disclosure
in the notes to financial statements, except as disclosed below.





In April
2010, Composite Technology Corporation issued a $10.0 million Senior Secured
Loan due in April 2012 and received $9.7 million in cash net of fees and costs
of $0.3 million.  The loan bears interest at 7.5% payable monthly on
balances secured by qualified accounts receivable of the Company and interest at
12.5% payable monthly on balances not secured by qualified accounts
receivable.  Qualified accounts receivable consist of 80% of current
trade accounts receivable.  The loan package included an issuance of a
total of 10 million warrants to purchase a like number of the Company’s common
stock in two tranches.  The first tranche is for 5 million warrants
with a three year life and an exercise price of $0.29 per
warrant.  The second tranche is for 5 million warrants with a five
year life and an exercise price of $1.00 per warrant.  Both warrant
tranches may be exercised at any time prior to expiration on a cashless basis
and are automatically exercised at expiration on a cashless basis for shares of
the Company.





The loan
has two financial covenants, measured monthly consisting of i) a liquidity
covenant and ii) a profitability covenant.  The liquidity covenant
requires the maintenance of a minimum of $7.5 million of combined cash and
accounts receivable balances, measured at month-end.  The
profitability covenant consists of a maximum accumulated adjusted operating loss
of $5.0 million, measured beginning April 1, 2010.  The adjusted
operating loss consists of operating loss, less depreciation, amortization, and
certain other non-cash charges including stock related compensation and
increased or decreased by the corresponding increase or decrease in deferred
revenues as compared to the March 31, 2010 deferred revenue
balance.





The loan
may be prepaid at any time prior to April 12, 2012 with a prepayment penalty of
3% of principal if prepaid in the first year and 1.5% of principal if prepaid in
the second year of the loan.





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, 2009 and the
related Management's Discussion and Analysis of Financial Condition and Results
of Operations, both of which are contained in our Annual Report on Form 10-K
filed with the Securities and Exchange Commission on December 14,
2009.





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 elsewhere in this report and in our Annual Report on Form 10-K for the
fiscal year ended September 30, 2009. 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





The
financial results for the six months ended March 31, 2010 reflected revenue
declines over prior year periods caused by significant order reductions from
customers in China, Mexico, and Europe.  These declines were partially
offset by order increases from North American, South American, and other Asian
market customers. CTC Cable business growth slowed due to the continuing
worldwide economic downturn that resulted in delays of several anticipated line
projects that had specified ACCC®
conductor in both new international markets and the United
States.   This resulted in a decrease to 545 kilometers of
ACCC® products
shipped in the six months ended March 31, 2010 from 1,715 kilometers in the six
months ended March 31, 2009.  The decrease in shipments resulted in
significant decreases in production levels during the quarter for our
manufacturing plant in Irvine, California.  While our individual sales
at historical standard costs were in line with historical margins, the
historically low utilization of our plant resulted in a much less efficient
allocation of our fixed overhead and trained production labor
force.  If order levels and production levels increase, the Company
expects to see gross margins in line with historical levels.


25





In
January 2010, Composite Technology Corporation repaid $9.0 million to fully
redeem $9.0 million of Senior Convertible Debentures upon their
maturity.  Repayment was made out of cash on hand.





In
February 2010, CTC Cable signed distribution and manufacturing agreements with
Alcan Cable.  The distribution agreement calls for Alcan to distribute
ACCC®
conductor to certain of their customers.  In order to maintain
exclusive distribution rights with certain Alcan customers in the U.S. and
Canada, Alcan has agreed to purchase minimum quantities of ACCC®
conductor during calendar year 2010 and potentially through 2012.  The term
of the contract is one year, which may be extended for an additional two years
if Alcan sells a minimum quantity of ACCC®conductor within the first year and achieves stranding qualifications.CTC Cable expects that the Alcan Cable distribution agreement will
provide revenue orders beginning later in 2010.  The agreements call
for Alcan to receive a license to strand ACCC®
conductor for delivery in North America after certification requirements are
met, which is expected later in 2010.





In March
2010, CTC Cable continued to fill key positions to drive business development
expansion strategies and business optimization.  CTC Cable filled voids in
our business development and operational environment with crucial resource
skill-sets.  For the foreseeable future, CTC Cable will continue its
efforts to obtain highly specialized expertise in research & development and
engineering to maintain its competitive advantage with human capital for new
product development and on-going enhancements to its existing composite core
patented technology.





In April
2010, Composite Technology Corporation issued a $10.0 million Senior Secured
Loan due in April 2012 and received $9.7 million in cash net of fees and costs
of $0.3 million.  The loan bears interest at 7.5% payable monthly on
balances secured by qualified accounts receivable of the Company and interest at
12.5% payable monthly on balances not secured by qualified accounts
receivable.  Qualified accounts receivable consist of 80% of current
trade accounts receivable.  The loan package included an issuance of a
total of 10 million warrants to purchase a like number of the Company’s common
stock in two tranches.  The first tranche is for 5 million warrants
with a three year life and an exercise price of $0.29 per
warrant.  The second tranche is for 5 million warrants with a five
year life and an exercise price of $1.00 per warrant.  Both warrant
tranches may be exercised at any time prior to expiration on a cashless basis
and are automatically exercised at expiration on a cashless basis for shares of
the Company.





The loan
has two financial covenants, measured monthly consisting of i) a liquidity
covenant and ii) a profitability covenant.   The liquidity
covenant requires the maintenance of a minimum of $7.5 million of combined cash
and accounts receivable balances, measured at month end.  The
profitability covenant consists of a maximum accumulated adjusted operating loss
of $5.0 million, measured beginning April 1, 2010.  The adjusted
operating loss consists of operating loss, less depreciation, amortization, and
certain other non-cash charges including stock related compensation and
increased or decreased by the corresponding increase or decrease in deferred
revenues as compared to the March 31, 2010 deferred revenue
balance.





The loan
may be prepaid at any time prior to April 12, 2012 with a prepayment penalty of
3% of principal if prepaid in the first year and 1.5% of principal if prepaid in
the second year of the loan.





Additionally,
CTC Cable continuously performs various on-going research and development
testing activities to qualify its ACCC®
conductor products and related ACCC® hardware
products with upcoming utility project opportunities with potential
customers.  During the March 2010 quarter, CTC Cable completed various
test installations that have or may result in further customer orders. Also, the
Company continued to develop a new ACCC®
conductor - TP®that
will have superior engineering advantages over General Cable Technologies’
T-2®
conductors with testing to begin in the second half of the fiscal
year.





CTC Cable
Division





Located
in Irvine, California with sales operations in Irvine, California, China,
Europe, the Middle East, and Brazil, CTC Cable produces and sells ACCC®
conductor products and related ACCC® hardware
products. ACCC®
conductor production is a two step process. The Irvine operations produce the
high strength, light weight, composite ACCC® core,
which is then shipped to one of six conductor stranding licensees in the U.S.,
Belgium, China, Indonesia or Bahrain where the core is stranded with conductive
aluminum to become ACCC®
conductor.  ACCC®
conductor is sold in North America directly by CTC Cable to
utilities.  ACCC®
conductor is sold elsewhere in the world directly to utilities as well as
through license and distribution agreements with Lamifil in Belgium, Far East
Composite Cable Company in China, and through two Indonesian companies PT Tranka
Cable and PT KMI Cable and now through Alcan Cable in the U.S. and
Canada.  ACCC®
conductor has been sold commercially since 2005 and is currently marketed
worldwide to electrical utilities, transmission companies and transmission
design/engineering firms.


26





RECENT
DEVELOPMENTS





Looking
forward into the remainder of fiscal 2010, CTC Cable will pursue its domestic
and international business development growth strategy by continuing to expand
its sales channel partners with global stranders, strategic consultants, sales
agents, and market distributors as well as increase direct business development
resources at CTC Cable.  Through these channel networks, CTC Cable
will continue to drive revenue by focusing on existing and new utility project
opportunities in its core domestic and international pipeline, penetrating new
developing and emerging markets, leveraging new and existing distribution
channels, and revitalizing the lagging Chinese market.  CTC Cable will
also continue its efforts to obtain federal and state incentives made available
to utilities for the use of efficient transmission conductors, which should be
favorable to ACCC®
conductor.  To balance the additional resources needed to support CTC
Cable’s growth expansion strategy, the Company is establishing various business
optimization initiatives to further augment its efforts to maintain its
competitive advantage in the marketplace.  This entails a realignment
of CTC Cable’s supply chain model to drive certain cost saving opportunities
including moving towards a fixed to variable cost framework that optimizes
operational resources, renegotiating current pricing with key supplier sources
of core production raw materials, outsourcing non-core production activities,
implementing activity-based costing measures for projects to better monitor
performance and maximize profit margins and increasing production efficiency
through enhancement of automation techniques.





Despite
slower than expected sales in the beginning of this year attributable to
customers pushing orders out to the later half of the year, CTC Cable’s business
development efforts continue to show growth through orders from new and existing
customers.  Market penetration continues with sales to new customers
worldwide.  In support of this continued expansion and the projected
growth over the next twelve month period, CTC Cable is pursuing relationships
with additional suppliers and working with our existing suppliers to expand the
support of ACCC®
conductors and hardware into new geographic regions.  These expanded
efforts are focused not only on new stranding partners but are also targeted
towards developing multiple hardware suppliers.  The availability of
ACCC® hardware
from different regions will support our recent efforts to sign agreements with
additional stranding sources. Discussions with new stranding partners are
continuing at multiple locations worldwide in particular with several stranding
manufacturers and distributors in Asia, South America, and Mexico.  
The strategy to localize stranding and hardware manufacturing will provide a
solid platform from which to grow cable sales and to provide support for our
worldwide customer base.





CTC Cable
Revenues were as follows for the three and six months ended March 31, 2010 and
2009:




(Unaudited,
      In Thousands -
                        
                        Three Months Ended March 31,
                        
                        
                        Six Months Ended March 31,except
      kilometer related amounts)
                        
                        2010
                        
                        
                        
                        2009
                        
                        
                        
                        2010
                        
                        
                        
                        2009Europe
                        
                        $
                        16
                        
                        
                        $
                        (91
                        )
                        
                        $
                        105
                        
                        
                        $
                        641China
                        
                        
                        181
                        
                        
                        
                        5,175
                        
                        
                        
                        181
                        
                        
                        
                        7,553Other
      Asia
                        
                        
                        1,615
                        
                        
                        
                        —
                        
                        
                        
                        1,622
                        
                        
                        
                        9North
      America
                        
                        
                        2,430
                        
                        
                        
                        1,113
                        
                        
                        
                        3,607
                        
                        
                        
                        1,829South
      America
                        
                        
                        10
                        
                        
                        
                        1
                        
                        
                        
                        1,438
                        
                        
                        
                        1Mexico
                        
                        
                        —
                        
                        
                        
                        4
                        
                        
                        
                        —
                        
                        
                        
                        529Total
      Revenue
                        
                        $
                        4,252
                        
                        
                        $
                        6,202
                        
                        
                        $
                        6,953
                        
                        
                        $
                        10,562Kilometers
      shipped
                        
                        
                        390
                        
                        
                        
                        1,153
                        
                        
                        
                        545
                        
                        
                        
                        1,715Revenue
      per kilometer
                        
                        $
                        9,732
                        
                        
                        $
                        4,589
                        
                        
                        $
                        11,010
                        
                        
                        $
                        5,170





The
worldwide economic downturn continues to effect sales of ACCC®
conductor worldwide and has impacted the timeline for receipt of new cable
orders.  This trend looks to continue through 2010 with many projects
delayed until the later half of 2010 or through 2011.





Total
Revenues for the quarter decreased to $4.3 million as compared to $6.2 million
for the same period in the prior year.  CTC Cable’s gross margins were
negatively impacted by several factors.  Gross margins for the quarter
decreased to 23.8% as compared to 34.7% in the prior
year.   During the March 2010 quarter, we sold primarily
ACCC®
conductor, which carries lower margins per revenue dollar.  In
addition, our plant utilization was inefficient during the quarter due to the
low production levels.  Our plant carries fixed costs for rent and
labor which is based on plant utilization in excess of 20% to build our
ACCC® core
including our production teams, quality assurance, and infrastructure
groups.  During the March 2010 quarter, we produced at less than 10%
plant capacity.  This resulted in a negative production cost variance
that will be reduced as additional expected orders are received in the later
half of the fiscal year.





CTC
Cable’s operating expenses increased from the December 2009 quarter primarily
related to reallocation of personnel and overhead costs to general and
administrative expenses from production related expenses which are normally
recorded to inventory and costs of sales and which were caused by the low plant
utilization, additional headcounts in the business development and operations
environment, higher expenditures associated with pursuing CTC Cable’s efforts to
expand the Company’s domestic and international business development growth
strategy.




27




DeWind Asset
Sale





On
September 4, 2009, our DeWind subsidiary sold substantially all of its existing
operating assets including all inventories, receivables, fixed assets, wind farm
project assets and intangible assets including all intellectual property. The
sale of the DeWind net assets was for $49.5 million in cash.  The
Company received approximately $32.3 million in cash in fiscal 2009 with $17.2
million in cash placed in escrow to cover certain contingent liabilities
and adjustments based on delivery of the value of the net value of the assets
transferred, after liabilities.  Of the cash in escrow, $5.5 million
is expected to be released in fiscal 2010 after the achievement of certain
milestones and $11.7 million is expected to be released over time periods that
may be as late as 2012 under certain conditions. The asset sale agreement calls
for a true-up mechanism on the fair value of the assets sold.





On
December 4, 2009 DSME provided the Company with a preliminary net asset
value calculation in accordance with the terms and conditions of the Asset
Purchase Agreement dated September 4, 2009.  The Company responded
with an adjusted net asset value calculation on December 16, 2009.  In
January, 2010 the Company and DSME had a series of meetings to discuss the
differences.  Final negotiations and resolution of all differences is
expected during the June 2010 quarter.





As of
March 31, 2010, the remaining assets and liabilities of the discontinued
operations consist of the following:





(Unaudited,
      In Thousands)
                          
                          March
      31, 2010ASSETSAccounts
      Receivable, net
                          
                          $
                          1,800Prepaid
      Expenses and Other Current Assets
                          
                          
                          526TOTAL
      ASSETS
                          
                          $
                          2,326LIABILITIESAccounts
      Payable and Other Accrued Liabilities
                          
                          $
                          36,326Deferred
      Revenues and Customer Advances
                          
                          
                          2,445Warranty
      Provision
                          
                          
                          1,912Total
      Liabilities
                          
                          
                          40,683Net
      Liabilities of Discontinued Operations
                          
                          $
                          (38,357
                          )




Significantly
all of the assets and liabilities of the discontinued operations pertain to
activities outside of the United States, primarily for turbines sold and
installed in Europe and South America and technology licenses to Chinese
customers.  At March 31, 2010, included above in Accounts Payable and
Other Accrued Liabilities are net payables related to formerly consolidated, now
insolvent European subsidiaries of approximately $20 million, substantially all
of which has been assigned by the insolvency receiver to FKI, a former owner of
DeWind engaged in discovery and threats of litigation with Stribog Ltd.,
formerly DeWind Ltd.  As of March 31, 2010, the net payables to
insolvent subsidiaries are comprised of assets in the amount of $8 million and
liabilities in the amount of $28 million. We did not receive an update from the
insolvency receiver related to the assets and liabilities for the insolvent
subsidiaries during the quarter ended March 31, 2010.





RESULTS
OF OPERATIONS





The
following table presents a comparative analysis of Revenue, Cost of Revenues,
and Gross Margins for continuing operations, our CTC cable
division:





Three Months Ended March 31,
                      
                      
                      Six Months Ended March 31,(Unaudited,
      In Thousands)
                      
                      2010
                      
                      
                      
                      2009
                      
                      
                      
                      2010
                      
                      
                      
                      2009Product
      Revenue
                      
                      $
                      4,252
                      
                      
                      $
                      6,202
                      
                      
                      $
                      6,953
                      
                      
                      $
                      10,562Cost
      of Revenue
                      
                      $
                      3,241
                      
                      
                      $
                      4,050
                      
                      
                      $
                      5,724
                      
                      
                      $
                      7,132Gross
      Margin
                      
                      $
                      1,011
                      
                      
                      $
                      2,152
                      
                      
                      $
                      1,229
                      
                      
                      $
                      3,430Gross
      Margin %
                      
                      
                      23.8
                      %
                      
                      
                      34.7
                      %
                      
                      
                      17.7
                      %
                      
                      
                      32.5
                      %





PRODUCT
REVENUE:  Product revenues decreased $1.9 million, or 31%, from $6.2
million in 2009 to $4.3 million for the three months ended March 31, 2010, and
decreased $3.6 million, or 34%, from $10.6 million in 2009 to $7.0 million for
the six months ended March 31, 2010.


28


The
decrease for the three months ended March 31, 2010 was primarily related to a
significant decline in shipments of 1,063 km of ACCC® products
to China, offset by increases in shipments of 300 km of ACCC® products
within North America and to Indonesia and Europe. The decrease for the six
months ended March 31, 2010 was primarily related to a significant decline in
shipments of 1,403 km of ACCC® products
to China, offset by increases in shipments of 233 km of ACCC® products
within North America and to South America, Indonesia and Europe.





COST OF
REVENUE: Cost of revenue represent materials, labor, freight, product cost
depreciation and allocated overhead costs to produce ACCC®
conductor, ACCC® core,
and related hardware.  Cost of revenue decreased $0.9 million, or 20%,
from $4.1 million in 2009 to $3.2 million for the three months ended March 31,
2010, and decreased $1.4 million, or 20%, from $7.1 million in 2009 to $5.7
million for the six months ended March 31, 2010.





Cost of
revenue and resultant gross margin: The gross margin percentages for the
three and six months ended March 31, 2010 decreased primarily due to production
inefficiencies as a result of significant idle production capacity, and
inventory reserves recorded in the respective periods.





The
following table presents a comparative analysis of operating expenses for
continuing operations:





Three
      Months Ended March 31,2010
                          
                          
                          2009(Unaudited,
      In Thousands)
                          
                          Corporate
                          
                          
                          Cable
                          
                          
                          Total
                          
                          
                          Corporate
                          
                          
                          Cable
                          
                          
                          TotalOfficer
      Compensation
                          
                          $
                          656
                          
                          
                          $
                          160
                          
                          
                          $
                          816
                          
                          
                          $
                          1,013
                          
                          
                          $
                          —
                          
                          
                          $
                          1,013General
      and Administrative
                          
                          
                          1,588
                          
                          
                          
                          1,538
                          
                          
                          
                          3,126
                          
                          
                          
                          1,628
                          
                          
                          
                          602
                          
                          
                          
                          2,230Research
      and Development
                          
                          
                          —
                          
                          
                          
                          490
                          
                          
                          
                          490
                          
                          
                          
                          —
                          
                          
                          
                          737
                          
                          
                          
                          737Sales
      and Marketing
                          
                          
                          —
                          
                          
                          
                          1,847
                          
                          
                          
                          1,847
                          
                          
                          
                          —
                          
                          
                          
                          1,458
                          
                          
                          
                          1,458Depreciation
      and Amortization
                          
                          
                          —
                          
                          
                          
                          163
                          
                          
                          
                          163
                          
                          
                          
                          —
                          
                          
                          
                          92
                          
                          
                          
                          92Total
      Operating Expenses
                          
                          $
                          2,244
                          
                          
                          $
                          4,198
                          
                          
                          $
                          6,442
                          
                          
                          $
                          2,641
                          
                          
                          $
                          2,889
                          
                          
                          $
                          5,530





Six
      Months Ended March 31,2010
                          
                          
                          2009(Unaudited,
      In Thousands)
                          
                          Corporate
                          
                          
                          Cable
                          
                          
                          Total
                          
                          
                          Corporate
                          
                          
                          Cable
                          
                          
                          TotalOfficer
      Compensation
                          
                          $
                          1,225
                          
                          
                          $
                          160
                          
                          
                          $
                          1,385
                          
                          
                          $
                          1,756
                          
                          
                          $
                          —
                          
                          
                          $
                          1,756General
      and Administrative
                          
                          
                          4,195
                          
                          
                          
                          2,796
                          
                          
                          
                          6,991
                          
                          
                          
                          3,127
                          
                          
                          
                          1,340
                          
                          
                          
                          4,467Research
      and Development
                          
                          
                          —
                          
                          
                          
                          1,146
                          
                          
                          
                          1,146
                          
                          
                          
                          —
                          
                          
                          
                          1,411
                          
                          
                          
                          1,411Sales
      and Marketing
                          
                          
                          —
                          
                          
                          
                          2,984
                          
                          
                          
                          2,984
                          
                          
                          
                          —
                          
                          
                          
                          2,747
                          
                          
                          
                          2,747Depreciation
      and Amortization
                          
                          
                          —
                          
                          
                          
                          259
                          
                          
                          
                          259
                          
                          
                          
                          —
                          
                          
                          
                          182
                          
                          
                          
                          182Total
      Operating Expenses
                          
                          $
                          5,420
                          
                          
                          $
                          7,345
                          
                          
                          $
                          12,765
                          
                          
                          $
                          4,883
                          
                          
                          $
                          5,680
                          
                          
                          $
                          10,563





OFFICER
COMPENSATION: Officer Compensation represents CTC Corporate and Cable 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
decreased $0.2 million, or 19%, from $1.0 million in 2009 to $0.8 million for
the three months ended March 31, 2010, and decreased $0.4 million, or 21%, from
$1.8 million in 2009 to $1.4 million for the six months ended March 31,
2010.  The decreases for the three and six months ended March 31, 2010
were primarily due to lower fair value share-based compensation expense for
vested stock options, offset by an increase in officer salaries with the
addition of one officer in December 2009.





GENERAL
AND ADMINISTRATIVE: General and administrative expense consists primarily of
salaries and employee benefits for administrative personnel, professional fees,
facilities costs, insurance, travel, share-based compensation charges and any
expenses related to reserves for uncollectible receivables. G&A expense
increased $0.9 million, or 40%, from $2.2 million in 2009 to $3.1 million for
the three months ended March 31, 2010, and increased $2.5 million, or 57%, from
$4.5 million in 2009 to $7.0 million for the six months ended March 31,
2010.





The
increase of $0.9 million for the three months ended March 31, 2010 was primarily
from an increase in Cable related G&A derived from increases headcount and
headcount related costs, and facilities costs due to significant idle capacity
during the three months ended March 31, 2010.





The
increase of $2.5 million for the six months ended March 31, 2010 was due to a
$1.1 million increase from corporate and $1.4 million increase from
Cable.  The corporate related G&A increase is derived primarily
from increases in professional service fees, start-up costs related to the
organization of a new entity, and payroll taxes accrued in connection with an
IRS payroll tax audit as discussed in Note 1 (“Income Taxes”) to the
consolidated financial statements.  The $1.4 million increase in Cable
related G&A is derived primarily from headcount and headcount related costs
and facilities costs due to significant idle capacity.


29





RESEARCH
AND DEVELOPMENT:  Research and development expenses consist primarily
of salaries, consulting fees, materials, tools, and related expenses for work
performed in designing and developing of manufacturing processes for the
Company's products. Research and Development expenses decreased by $0.2 million,
or 34%, from $0.7 million in 2009 to $0.5 million for the three months ended
March 31, 2010, and decreased by $0.3 million, or 19%, from $1.4 million in 2009
to $1.1 million for the six months ended March 31, 2010.





The net
decreases for the three and six months ended March 31, 2010 were primarily due
to significantly lower fair value share-based compensation expense for vested
stock options, offset by higher headcount costs, professional service fees and
R&D product testing and validation costs.





SALES AND
MARKETING: Sales and marketing expenses consist primarily of salaries,
consulting fees, materials, travel, and other expenses performed in marketing,
sales, and business development efforts for the Company. Sales and marketing
expenses increased $0.4 million, or 27%, from $1.4 million in 2009 to $1.8
million for the three months ended March 31, 2010, and increased $0.2 million,
or 9%, from $2.7 million in 2009 to $2.9 million for the six months ended March
31, 2010.





The net
increases for the three and six months ended March 31, 2010 were primarily
related to increases headcount and headcount related costs, commissions and
incentives expense, and professional service fees, offset by a decrease in
share-based compensation charges.





DEPRECIATION
AND AMORTIZATION: Depreciation and amortization expense consists of the
depreciation and amortization of the Company's capitalized assets used in
operations, excluding product cost depreciation (refer to cost of revenue
discussion above).  Depreciation expense increased $71,000, or 77%, from
$92,000 in 2009 to $163,000 for the three months ended March 31, 2010, and
increased $77,000, or 42%, from $182,000 in 2009 to $259,000 for the six months
ended March 31, 2010. The increases were primarily due to a higher
non-production based asset base compared to the prior year corresponding
period.





INTEREST EXPENSE: Interest expense
consists of the cash interest payable on the Company’s Convertible Note 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 $278,000, or 61%, from $453,000 in 2009 to $175,000 for the
three months ended March 31, 2010, and increased $158,000, or 17%, from $0.9
million in 2009 to $1.1 million for the six months ended March 31, 2010. The
decrease in the three months ended March 31, 2010 was primarily due to the
maturity and resultant payment of our convertible note in January
2010.  The increase in the six months ended March 31, 2010 was due to
additional discount amortization of a beneficial conversion feature liability
recognized in earnings from October 2009 through January 2010 (refer to Note 1
to the consolidated financial statements “Derivative Liabilities and Change in
Accounting Principle”).





INTEREST
INCOME: The interest income changes from period to period are due to changes in
the underlying cash balances.  Interest income increased by $2,000 and
$6,000 in the three and six months ended March 31, 2010, respectively, compared
to the same periods in the prior year.  The cash level at March 31,
2010 was higher than March 31, 2009 primarily due to the DeWind sale proceeds
from September 2009.





CHANGE IN
FAIR VALUE OF DERIVATIVE LIABILITIES: Refer to discussion at Note 1 (“Derivative
Liabilities”) to the consolidated financial statements.




INCOME
TAXES:  No provisions for income taxes were made for the three months
ended March 31, 2010 and 2009, respectively.  We made provisions for
income taxes of $14,000 and $4,000 for the six months ended March 31, 2010
and 2009, respectively. 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 March 31, 2010,
our deferred tax assets continued to be fully reserved. We will continue to
evaluate, on a quarterly basis, the positive and negative evidence affecting our
ability to realize our deferred tax assets.





EFFECTS
OF INFLATION: We are subject to inflation and other price risks arising from
price fluctuations in the market prices of the various raw materials that we use
to produce our products. Price risks are managed through cost-containment
measures. Except as noted below, we do not believe that inflation risk or other
price risks with respect to raw materials used to produce our products are
material to our business, financial position, results of operations or cash
flows. Due to a decrease in demand for composite quality carbon materials
worldwide in particular in the aerospace and defense industries and despite a
restricted supply of high quality carbon due to a limited number of suppliers,
the Company experienced a price decline in unit costs of such
carbon.  However, the Company may be exposed to raw material price
increases or carbon material shortfalls should demand increase with the
worldwide economic recovery and if additional suppliers or supplies do not
become available. We cannot quantify any such price or material impacts at this
time.





EFFECTS
OF EXCHANGE RATE CHANGES: 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.


30




RECONCILIATION
OF NON-GAAP MEASURES




The
following tables present a reconciliation of consolidated non-GAAP EBITDAS
or Earnings before Interest, Taxes, Depreciation & Amortization, and
Share-based Compensation charges for continuing operations for the three and six
months ended March 31, 2010 and 2009:





The
Company has provided non-GAAP measures such as EBITDAS in the following
management discussion and analysis. The Company uses the non-GAAP information
internally as one of several measures used to evaluate its operating performance
and believes these non-GAAP measures are useful to, and have been requested by,
investors as they provide additional insight into the underlying operating
results viewed in conjunction with US GAAP operating results.  For the
non-GAAP EBITDAS measure, a significant portion of non-cash expenses is
excluded, primarily for interest, depreciation and for share-based compensation
charges that are valued based on the share price and volatility at the date of
grant and then expensed as earned, typically upon vesting of service over
time.  The material limitation of non-GAAP EBITDAS compared with Net
Income is that significant non-cash expenses are excluded.  Management
compensates for such limitation by utilizing EBITDAS only for particular
purposes and that it evaluates EBITDAS in the context of other metrics such as
Net Income when evaluating the Company’s performance and financial condition.
Non-GAAP measures are not stated in accordance with, should not be considered in
isolation from, and are not a substitute for, US GAAP measures. A reconciliation
of US GAAP to non-GAAP results has been provided in the financial tables
below.  We will include the change in fair value of derivative
liabilities, asset impairments and warrant modification expense in our
reconciliation as well.





Three
      Months Ended March 31,2010
                          
                          
                          2009(Unaudited,
      In Thousands)
                          
                          Corporate
                          
                          
                          Cable
                          
                          
                          Total
                          
                          
                          Corporate
                          
                          
                          Cable
                          
                          
                          TotalEBITDAS:Net
      loss from continuing operations
                          
                          $
                          (2,350
                          )
                          
                          $
                          (3,185
                          )
                          
                          $
                          (5,535
                          )
                          
                          $
                          (3,091
                          )
                          
                          $
                          (737
                          )
                          
                          $
                          (3,828
                          )Depreciation
      & Amortization
                          
                          
                          —
                          
                          
                          
                          192
                          
                          
                          
                          192
                          
                          
                          
                          —
                          
                          
                          
                          224
                          
                          
                          
                          224Share-based
      compensation
                          
                          
                          625
                          
                          
                          
                          200
                          
                          
                          
                          825
                          
                          
                          
                          1,076
                          
                          
                          
                          595
                          
                          
                          
                          1,671Change
      in fair value of derivative liabilities
                          
                          
                          (66
                          )
                          
                          
                          —
                          
                          
                          
                          (66
                          )
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Interest
      expense, net
                          
                          
                          173
                          
                          
                          
                          (3
                          )
                          
                          
                          170
                          
                          
                          
                          449
                          
                          
                          
                          1
                          
                          
                          
                          450Income
      tax expense
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —EBITDAS
      Income (Loss)
                          
                          $
                          (1,618
                          )
                          
                          $
                          (2,796
                          )
                          
                          $
                          (4,414
                          )
                          
                          $
                          (1,566
                          )
                          
                          $
                          83
                          
                          
                          $
                          (1,483
                          )





Six
      Months Ended March 31,2010
                          
                          
                          2009(Unaudited,
      In Thousands)
                          
                          Corporate
                          
                          
                          Cable
                          
                          
                          Total
                          
                          
                          Corporate
                          
                          
                          Cable
                          
                          
                          TotalEBITDAS:Net
      loss from continuing operations
                          
                          $
                          (5,824
                          )
                          
                          $
                          (6,197
                          )
                          
                          $
                          (12,021
                          )
                          
                          $
                          (5,783
                          )
                          
                          $
                          (2,249
                          )
                          
                          $
                          (8,032
                          )Depreciation
      & Amortization
                          
                          
                          —
                          
                          
                          
                          318
                          
                          
                          
                          318
                          
                          
                          
                          —
                          
                          
                          
                          465
                          
                          
                          
                          465Share-based
      compensation
                          
                          
                          1,126
                          
                          
                          
                          363
                          
                          
                          
                          1,489
                          
                          
                          
                          1,772
                          
                          
                          
                          1,028
                          
                          
                          
                          2,800Change
      in fair value of derivative liabilities
                          
                          
                          (840
                          )
                          
                          
                          —
                          
                          
                          
                          (840
                          )
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Interest
      expense, net
                          
                          
                          1,061
                          
                          
                          
                          (14
                          )
                          
                          
                          1,047
                          
                          
                          
                          895
                          
                          
                          
                          —
                          
                          
                          
                          895Income
      tax expense
                          
                          
                          14
                          
                          
                          
                          —
                          
                          
                          
                          14
                          
                          
                          
                          4
                          
                          
                          
                          —
                          
                          
                          
                          4EBITDAS
      Loss
                          
                          $
                          (4,463
                          )
                          
                          $
                          (5,530
                          )
                          
                          $
                          (9,993
                          )
                          
                          $
                          (3,112
                          )
                          
                          $
                          (756
                          )
                          
                          $
                          (3,868
                          )





Consolidated
EBITDAS Loss for the three months ended March 31, 2010 for continuing
operations increased by $2.9 million as compared to 2009 primarily due to a
$2.9 million increase from our Cable operations.  Consolidated EBITDAS
Loss for the six months ended March 31, 2010 for continuing
operations increased by $6.1 million as compared to 2009 due to a $1.3
million increase from corporate and $4.8 million increase from our Cable
operations.  The total increases were primarily due reduced gross
margins and increased operating expenses including additional payroll tax
expense in connection with an IRS audit, increases in professional service fees
and headcount, and increased facilities costs due to significant idle
capacity.





NET
LOSS





The
following table presents the components of our total net loss:


31




Three Months Ended March 31,
                        
                        
                        Six Months Ended March 31,(Unaudited,
      In Thousands)
                        
                        2010
                        
                        
                        
                        2009
                        
                        
                        
                        2010
                        
                        
                        
                        2009Net
      Loss from Continuing Operations
                        
                        $
                        (5,535
                        )
                        
                        $
                        (3,828
                        )
                        
                        $
                        (12,021
                        )
                        
                        $
                        (8,032
                        )Income
      (Loss) from Discontinued Operations (Note 2)
                        
                        
                        2,307
                        
                        
                        
                        (6,825
                        )
                        
                        
                        1,085
                        
                        
                        
                        (10,957
                        )Net
      Loss
                        
                        $
                        (3,228
                        )
                        
                        $
                        (10,653
                        )
                        
                        $
                        (10,936
                        )
                        
                        $
                        (18,989
                        )





Net loss
decreased by $7.4 million to $3.2 million for the three months ended March 31,
2010 from $10.6 million in 2009, and decreased by $8.1 million to $10.9 million
for the six months ended March 31, 2010 from $19.0 million in
2009.  The $8.1 million net loss decrease for the six months ended
March 31, 2010 was due to:





·
            A
      decrease in Gross Margin from continuing operations of $2.2 million from
      2009 to 2010.





·
            An
      increase in Total Operating Expense from continuing operations of $2.2
      million from 2009 to 2010.





·
            A
      decrease in Total Other Expense (including income taxes) from continuing
      operations of $0.5 million from 2009 to
2010.




·
            A
      decrease in Income (Loss) from Discontinued Operations of $12.0 million
      from 2009 to 2010.





Gross
Margin: As discussed above, the gross margin decrease of $2.2 million was
primarily due to production inefficiencies as a result of significant idle
production capacity, and inventory reserves recorded in the six months ended
March 31, 2010 compared to 2009.





Total
Operating Expense: As detailed above, the total increase in operating expense of
$2.2 million was primarily driven by significant increases in general and
administrative expenses totaling $2.5 million, offset by decreases in research
and development expenses of $0.3 million and officer compensation of $0.4
million for the six months ended March 31, 2010 compared to 2009.





Total
Other Expense (including income taxes): As discussed above, the total other
expense decrease is primarily due to a $0.8 million increase in the change in
fair value of derivatives liabilities, offset by additional interest expense of
$0.2 million in the six months ended March 31, 2010 compared to
2009.





Income
(Loss) from Discontinued Operations: As discussed above and detailed in Note 2
to the consolidated financial statements, the decrease in the Income (loss) from
discontinued operations of $12.0 million is derived from the September 2009
DeWind asset sale and related discontinuation of the DeWind business
segment.





LIQUIDITY
AND CAPITAL RESOURCES





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





For the
six months ended March 31, 2010, we had a net loss from continuing operations of
$12.0 million. At March 31, 2010 we had $2.7 million of cash and cash
equivalents, which represented a decrease of $21.3 million from September 30,
2009. The decrease was due to cash used in operations of $12.1 million, cash
used in investing activities of $124,000 and cash used in financing activities
of $9.0 million.





Cash used
in operations during the six months ended March 31, 2010 of $12.1 million was
primarily the result of a net loss of $10.9 million and income from discontinued
operations of $1.1 million, offset by net non-cash items of $3.1 million
(primarily comprised of depreciation and amortization of $0.3 million, stock
related net charges of $2.3 million and inventory charges of $1.1 million, a
loss on disposal of fixed assets of $0.1 million, offset by a gain from the
change in fair value of derivative liabilities of $0.8 million). Additionally,
cash used in operations was impacted by a negative change in net
assets/liabilities from discontinued operations of $2.5 million and net cash
used for working capital requirements of $0.6 million (primarily comprised
of negative changes in accounts payable of $0.7 million and prepaid
expenses of $0.3 million, offset by a positive change in inventory of $0.4
million).





Cash used
in investing activities during the six months ended March 31, 2010 of $124,000
was related to cash used from the purchase of computer hardware and software,
and equipment put in service in anticipation of increased cable manufacturing
activities.


32





Cash used
in financing activities during the six months ended March 31, 2010 of $9.0
million was related to the repayment notes payable, offset by the exercise of
stock options in the amount of $7,000.





Our cash
position as of March 31, 2010 was $2.7 million.  On January 31, 2010,
we repaid all outstanding convertible notes payable in the principal amount of
$9.0 million.  As discussed in Note 12 (“Subsequent Events”) to the
consolidated financial statements, due to the repayment of debt, we raised an
additional $9.7 million in cash in April 2010.  We believe our current
cash position, future capital raises, expected cash flows from revenue orders,
potential recovery of escrowed cash, and value of “in-the-money” options
and warrants will be sufficient to fund our operations for the next twelve
months ending March 31, 2011 on a consolidated basis.  Due to the sale
of substantially all of the DeWind business, recorded as discontinued
operations, the cash requirements of the Company have decreased due to
significantly lower cash operating expenses and the elimination of inventory
purchases for costly wind turbine parts.  As CTC Cable has sufficient
production capacity in its existing plant to achieve profitability, it is not
expected that significant capital expenditures will be required to expand
production, as seen in prior years.  CTC Cable has also significantly
reduced its reliance on one customer as compared to prior fiscal years, which
has lowered its customer concentration risk.  Additionally, as needed,
we intend to continue the practice of issuing stock, debt, or other financial
instruments for cash or for payment of services or debt extinguishment until our
cash flows from the sales of our primary products is sufficient to fully provide
for cash used in operations or if we believe such a financing event would
be a sound business strategy.




CAPITAL
EXPENDITURES





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





OFF-BALANCE
SHEET ARRANGEMENTS





As of
March 31, 2010, we have no off-balance sheet arrangements.





CONTRACTUAL
OBLIGATIONS





The
following table summarizes our contractual obligations (including interest
expense) and commitments as of March 31, 2010:




(Unaudited,
      In Thousands)
                      
                      Total
                      
                      
                      Less than 1
                        year
                      
                      
                      1-3 years
                      
                      
                      In excess of 3
                        YearsDebt
      Obligations (A)
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      —Operating
      Lease Obligations
                      
                      $
                      846
                      
                      
                      $
                      846
                      
                      
                      $
                      —
                      
                      
                      
                      —




(A)
            Refer
      to Note 12 (“Subsequent Events”) to the consolidated financial statements
      for discussion of new debt financing in April
  2010.





Not
included in the table above are amounts included on our balance sheet under
Warranty Provisions in the amount of $597,000 at March 31, 2010.





CRITICAL
ACCOUNTING POLICIES AND ESTIMATES





Our
discussion and analysis of our financial condition and results of operations is
based on our Consolidated Financial Statements, which have been prepared in
accordance with accounting principles generally accepted in the United States,
or US GAAP.  Critical accounting policies and estimates,
included in Note 1 to the Consolidated Financial Statements, are as
follows:





Revenue
Recognition





Revenues
are recognized based on guidance provided by the SEC. Accordingly, our general
revenue recognition policy is to recognize revenue when there is persuasive
evidence of an arrangement, the sales price is fixed or determinable, collection
of the related receivable is reasonably assured, and delivery has occurred or
services have been rendered.




The
Company derives, or seeks to derive revenues from product revenue sales of
composite core, stranded composite core, core and stranded core hardware, and
other electric utility related products.





In
addition to the above general revenue recognition principles prescribed by the
SEC, our specific revenue recognition policies for each revenue source are as
follows:


33





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, and (ii) composite core and related hardware sold to a
cable stranding entity. 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 and six months ended March 31, 2010 and 2009 consisted of
stranded ACCC®
conductor and ACCC® hardware
sold to end user utilities and sales of ACCC®
conductor core and ACCC® hardware
to our stranding manufacturers. All ACCC® product
related sales were recognized upon delivery of product and transfer of title.
For ACCC®
conductor product sales made directly by us and not through a manufacturer or
distributor, through a third-party insurance company, we provide the option to
purchase an extended warranty for periods up to five, seven or ten 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.





CONSULTING
REVENUE. Consulting revenues are generally recognized as the consulting services
are provided. We have entered into service contract agreements with electric
utility and utility services companies that generally require us to provide
engineering or design services, often in conjunction with current or future
product sales. In return, we receive engineering service fees payable in
cash.  For the three and six months ended March 31, 2010 and 2009, we
recognized no consulting revenues.





Currently,
multiple element contracts where there is no vendor specific objective evidence
(VSOE) or third-party evidence (TPE) that would allow the allocation of an
arrangement fee amongst various pieces of a multi-element contract, fees
received in advance of services provided are recorded as deferred revenues until
additional operational experience or other VSOE or TPE becomes available, or
until the contract is completed.





Warranty
Provisions





Warranty
provisions consist of the insured costs and liabilities associated with any
post-sales associated with our ACCC®
conductor and related hardware parts.





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.  Warranty related liabilities for time
periods in excess of one year are classified as non-current
liabilities.





Use of
Estimates





The
preparation of our financial statements conform with US GAAP, 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, share-based compensation,
warranty provisions and goodwill and intangibles, as applicable. 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
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
US 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.





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





-
                  the
      estimates pertaining to the likelihood of our accounts receivable
      collectability. 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.




34




-
                the
      assumptions used to calculate fair value of our share-based compensation
      and derivative liabilities, 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 as well as the estimate of the
      option life.-
                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 and the likelihood that the values assigned during the initial
      valuations will be recoverable over time through increased revenues,
      profits, and enterprise value. Currently, we have no reportable goodwill
      or intangible assets.-
                the
      estimates and assumptions used to determine the settlement of certain
      accounts related to the sale of the DeWind assets for which a final
      accounting has not been completed and which may result in the increase or
      decrease of asset reserves or increase or decrease of accrued liabilities,
      principally penalty payments, interest, and other costs associated with
      the turbine parts suppliers for DeWind turbine parts. See related
      discussion at Note 2 to the consolidated financial
    statements.
 
 Derivative Financial
Instruments





The
Company issues financial instruments in the form of stock options and stock
warrants, and debt conversion features as part of its convertible debt
issuances. The Company has not issued any derivative instruments for hedging
purposes since its inception. The Company uses the specific guidance and
disclosure requirements provided in US GAAP. Generally, freestanding derivative
contracts where settlement is required by physical share settlement or in net
share settlement; or where the Company has a choice of share or net cash
settlement are accounted for as equity. Contracts where settlement is in cash or
where the counterparty may choose cash settlement are accounted for as a
liability. Under current US GAAP, certain of our warrants and debt conversion
features are subject to liability accounting treatment (see discussion below
under “Derivative Liabilities”), while our stock options are considered indexed
to the Company’s stock and are accounted for as equity.




The
values of the financial instruments are estimated using the Black-Scholes-Merton
(Black-Scholes) option-pricing model. Key assumptions used to value options and
warrants granted, issued or repriced are as follows:




Six Months EndedMarch 31,2010
                    
                    
                    2009Risk
      Free Rate of Return
                    
                    
                    0.82-2.43
                    %
                    
                    
                    0.50-2.02
                    %Volatility
                    
                    
                    95.6-108
                    %
                    
                    
                    75-96
                    %Dividend
      yield
                    
                    
                    0
                    %
                    
                    
                    0
                    %Expected
      life
                    
                    2-5
      yrs
                    
                    
                    .5-5
      yrs




Derivative
Liabilities





Our
derivative liabilities include fair value based warrant liabilities and debt
conversion features pursuant to US GAAP applied to the terms of the underlying
agreements. The Company issues warrants to purchase common shares of the Company
as additional incentive for investors who purchase unregistered, restricted
common stock or convertible debentures. The fair value of certain warrants
issued and debt conversion features in conjunction with financing events are
recorded as a discount for debt issuances. Certain warrant agreements and debt
conversion arrangements include provisions that require us to record them as a
liability, at fair value, pursuant to Financial Accounting Standards Board
(FASB) accounting rules, including certain provisions designed to protect a
holder’s position from being diluted. The derivative liabilities are
marked-to-market each reporting period and changes in fair value are recorded as
a non-operating gain or loss in our consolidated statement of operations, until
they are completely settled or expire. The fair value of the warrants and debt
conversion features are determined each reporting period using the Black-Scholes
valuation model, using inputs and assumptions consistent with those used in our
estimate of fair value of employee stock options, except that the remaining
contractual life of the warrant is used.  Such fair value is affected
by changes in inputs to that model including our stock price, expected stock
price volatility, interest rates and expected term.  Refer to “Fair
Value Measurements” in Note 1 for additional derivative liabilities
disclosures.





For the
three and six months ended March 31, 2010, we recognized gains of $66,000 and
$840,000, respectively, related to the revaluation of our derivative
liabilities.  The fiscal 2010 revaluation gain resulted mainly from
the decrease in our stock price from the prior year.





In
connection with the warrants issued to investors as discussed above, the Company
has issued warrants to compensate for financing fees and other service fees
incurred.  Such compensatory warrants are recorded at fair value in
the same manner as non-compensatory warrants, however, the recognized expense is
offset to additional paid-in-capital.  Such warrants are considered
equity transactions in accordance with US GAAP.  Additionally,
warrants issued without anti-dilution provisions are generally considered equity
transactions in accordance with US GAAP. All of our outstanding warrants
including those subject to liability accounting treatment are further discussed
in Note 8 to the consolidated financial statements.


35





Share-Based
Compensation





US GAAP
requires that compensation cost relating to share-based payment arrangements be
recognized in the financial statements. US GAAP requires measurement of
compensation cost for all share-based awards at fair value on date of grant and
recognition of compensation over the service period for awards expected to vest.
The fair value of stock options is determined using the Black-Scholes valuation
model. Such fair value is recognized as expense over the service period, net of
estimated forfeitures.





US GAAP
requires that equity instruments issued to non-employees in exchange for
services be valued at the more accurate of the fair value of the services
provided, or the fair value of the equity instruments issued. For equity
instruments issued that are subject to a required service period, the expense
associated with the equity instruments is recorded as the instruments vest or
the services are provided. The Company has granted options and warrants to
non-employees and recorded the fair value of these equity instruments on the
date of issuance using the Black-Scholes valuation model, for options and
warrants not subject to vesting terms. For non-employee option and warrant
grants subject to vesting terms, vested shares are recorded at fair value using
the Black-Scholes valuation model and the associated expense is recorded
simultaneously or as the services are provided. The Company has granted stock to
non-employees for services and values the stock at the more reliable of the
market value on the date of issuance or the value of the services provided. For
stock grants subject to vesting or service requirements, expenses are deferred
and recognized over the more appropriate of the vesting period, or as services
are provided.





SEC
guidance requires share-based compensation to be classified in the same
expense line items as cash compensation.  Additionally,  the
SEC issued guidance regarding the use of a "simplified" method in
developing an estimate of expected term of "plain vanilla" share options in
accordance with US GAAP rules. The Staff indicated that it will accept a
company's election to use the simplified method, regardless of whether the
company has sufficient information to make more refined estimates of expected
term. The Staff believed that more detailed external information about employee
exercise behavior (e.g., employee exercise patterns by industry and/or other
categories of companies) would, over time, become readily available to
companies; however, the Staff continues to accept, under certain circumstances,
the use of the simplified method. The Company currently uses the simplified
method for the expected term in “plain vanilla” share options and
warrants.





Additional
information about share-based compensation is disclosed in Note 9 to the
consolidated financial statements.





Convertible
Debt





Convertible
debt is accounted for under specific guidelines established in US GAAP. The Company records a
beneficial conversion feature (BCF) related to the issuance of convertible
debt that have conversion features at fixed or adjustable rates that are
in-the-money when issued and records the fair value of warrants issued with
those instruments. The BCF for the convertible instruments is recognized and
measured by allocating a portion of the proceeds to warrants and as a reduction
to the carrying amount of the convertible instrument equal to the intrinsic
value of the conversion features, both of which are credited to paid-in-capital
or liabilities as appropriate. The Company calculates the fair value of warrants
issued with the convertible instruments using the Black-Scholes valuation
method, using the same assumptions used for valuing employee options, except
that the contractual life of the warrant is used. Upon each issuance, the
Company evaluates the variable conversion features and determines the
appropriate accounting treatment as either equity or liability, in accordance
with US GAAP. The Company first allocates the value of the proceeds
received to the convertible instrument and any other detachable instruments
(such as detachable warrants) on a relative fair value basis and then determines
the amount of any BCF based on effective conversion price to measure the
intrinsic value, if any, of the embedded conversion option. Using the effective
yield method, the allocated fair value is recorded as a debt discount or premium
and is amortized over the expected term of the convertible debt to interest
expense. For a conversion price change of a convertible debt issue, the
additional intrinsic value of the debt conversion feature, calculated as the
number of additional shares issuable due to a conversion price change multiplied
by the previous conversion price, is recorded as additional debt discount and
amortized over the remaining life of the debt.  The accounting for
debt conversion features subject to liability treatment are further discussed
above in “Derivative Liabilities”.





US GAAP
rules specify that a contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether issued
as a separate agreement or included as a provision of a financial instrument or
other agreement, should be separately recognized and measured in accordance with
US GAAP contingency rules. The contingent obligation to make future payments or
otherwise transfer consideration under a registration payment arrangement should
be separately recognized and measured in accordance with said rules, pursuant to
which a contingent obligation must be accrued only if it is more likely than not
to occur. Historically, the Company has not been required to accrue any
contingent liabilities in this regard.





RECENT
ACCOUNTING PRONOUNCEMENTS





Refer to
Note 1 to the Consolidated Financial Statements.




36




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.
Historically, our debt obligations bear a fixed rate of
interest.  Refer to Note 12 (“Subsequent Events”) to the consolidated
financial statements for discussion of new debt financing in April
2010.





As of
March 31, 2010 we did not hold any derivative financial instruments for
speculative or trading purposes. The primary objective of our investment
activities is the preservation of principal while maximizing investment income
and minimizing risk. As of March 31, 2010, we had $2.7 million in cash and cash
equivalents including short-term investments purchased with original maturities
of 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.





Item
4. Controls and Procedures





Evaluation of Disclosure
Controls and Procedures





Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act of 1934.  Disclosure controls and procedures are controls and
other procedures of a company that are designed to ensure that information
required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the company’s management, including its principal executive and principal
financial officers, as appropriate to allow timely decisions regarding required
disclosure. Management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving their objectives and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Based on that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were ineffective
as of March 31, 2010 because of the material weaknesses identified during
management’s annual assessment of internal control over financial reporting for
the fiscal year ended September 30, 2009.





Internal Control over
Financial Reporting





Refer to
“Item 9A – Controls and Procedures” in our Form 10-K filed with the Securities
and Exchange Commission on December 14, 2009 for management’s annual report on
internal control over financial reporting.   The Company’s
management assessed the effectiveness of the Company’s internal control over
financial reporting as of September 30, 2009.  In making this
assessment, the Company’s management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission in
Internal Control-Integrated Framework.  Based on their assessment,
management concluded that, as of September 30, 2009, the Company’s internal
control over financial reporting is not effective based on those criteria,
because of the material weaknesses identified.





Changes in Internal Control
over Financial Reporting





There was
no change in our internal control over financial reporting during the second
quarter ended March 31, 2010 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting,
except as noted below.





During
the six months ended March 31, 2010 and through the date of this report, the
Company improved the internal control over financial reporting to address
certain material weaknesses identified as of September 30, 2009, as
follows:





(1) In
January 2010, we implemented a share-based compensation and equity
administration software system. Transactions are now processed and reported by
the accounting department, our legal department reviews contractual terms, and
accounting executives perform a complete review of inputs and outputs prior to
recording in the general ledger.





(2) In
March 2010, we implemented a financial planning and analysis (FP&A) process,
which included creating a complete consolidated and departmental fiscal 2010
annual budget.  Departmental and executive management are now
reviewing budget to actual data on a monthly basis.  Additionally,
accounting management reviews the FP&A results, assists with the process and
records accounting adjustments when appropriate.





The
Company's management has identified the additional steps necessary to address
the material weaknesses identified as of September 30, 2009, as
follows:


37





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





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





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




(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 an 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 2010;




(6)
Invest in additional enhancements to our IT systems including enhancements to
processing manufacturing and inventory transactions, and security over user
access and administration;




(7)
Create policy and procedures manuals for the accounting, finance and IT
functions; and




(8)
Improve our purchasing and accounts payable cycle controls.




The
Company began to execute the remediation plans identified above in the first
fiscal quarter of 2010. These remediation efforts are expected to continue
through fiscal 2010.


38


PART
II - OTHER INFORMATION




Item
1. Legal Proceedings





There
have been no material changes to the Legal Proceedings described in Form 10-K
filed with the Securities and Exchange Commission on December 14, 2009. See
Note 10 (“Litigation”) to the Consolidated 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 filed with the Securities
and Exchange Commission on December 14, 2009. Such risk factors should be read
in conjunction with the risk factors listed in such Form 10-K.





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 $82 million in
ACCC product sales since inception. Historically, we have incurred substantial
losses and we may experience significant quarterly and annual losses for the
foreseeable future. We may 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.





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 may not
be sufficient enough to sustain our current level of operations and that we will
continue to incur net losses.  Further, on January 31, 2010 we repaid
$9.1 million in debt and interest on our remaining convertible debt outstanding
at December 31, 2009.  On April 12, 2010 we raised $10.0 million of
debt that has restrictive debt covenant requirements and which places limits on
our losses and limits our cash spending to minimum cash levels. For these
reasons, we believe that we will need to either raise additional capital, 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.





THE
SENIOR SECURED DEBT ISSUED BY THE COMPANY IN APRIL 2010 INCLUDES RESTRICTIVE
DEBT COVENANTS WHICH MAY LIMIT OUR ABILITY TO OPERATE, OBTAIN FINANCING, OR
WHICH MAY IMPAIR THE ASSETS OF THE COMPANY IN THE EVENT OF A LOAN
DEFAULT.


We
entered into a loan agreement in April 2010 which includes restrictive debt
covenants that include both a liquidity covenant, which requires a minimum
combined cash and accounts receivable balance in excess of $7.5 million, and a
profitability covenant which allows for a maximum level of accumulated non-GAAP
losses after March 31, 2010 of $5 million, adjusted for non-cash items and
timing of revenue recognition.   The debt is secured by
substantially all assets of the Company.  If we were to violate the
debt covenants, the lenders could pursue remedies included in the loan agreement
which may include any or all of the following: immediate collection of the loan,
assignment of cash receipts, control of the Company’s bank accounts, or
liquidation of the Company’s assets in part or in full.





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 $0.75 to a low of $0.15. Fluctuations in the
trading price or liquidity of our common stock may adversely affect our ability
to raise capital through future equity financings.


39





AS OF MAY
3, 2010, WHILE CURRENT MARKET PRICES ARE BELOW SUBSTANTIALLY ALL OF OUR
CONVERTIBLE EQUITY SECURITIES, INCLUDING OPTIONS AND WARRANTS, A SUBSTANTIAL
NUMBER OF OPTIONS ARE PRICED AT $0.35 PER SHARE OR BELOW.  A PRICE
INCREASE ABOVE THAT STRIKE PRICE WOULD RESULT IN APPROXIMATELY 27,600,000
OPTIONS AT $0.35 PER OPTION OF WHICH FULL CONVERSION OF SUCH SHARES WOULD
INCREASE THE OUTSTANDING COMMON SHARES BY 9.6% TO APPROXIMATELY 315,900,000
SHARES.
 The
exercise price of outstanding options and warrants may be less than the current
market price for our common shares. In the event of the exercise of these
securities, a shareholder could suffer substantial dilution of his, her or its
investment in terms of the percentage ownership in us as well as the book value
of the common shares held. At the May 3, 2010 market price of $0.23 per share,
no shares would be exercisable for less than the current market
price.







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




On April
12, 2010, the Company issued (i) warrants in favor of Partners for Growth II,
L.P. (“PFG”) to purchase 5,000,000 shares of the Company’s common stock at $0.29
per share and (ii) warrants in favor of PFG to purchase 5,000,000 shares of the
Company’s common stock at $1.00 per share. The Company relied upon the exemption
from registration as set forth in Section 4(2) of the Securities Act for the
issuance of these securities. The recipient represented that it took its
securities for investment purposes without a view to distribution and had access
to information concerning the Company and its business prospects, as required by
the Securities Act. In addition, there was no general solicitation or
advertising for the acquisition of these securities.  Refer to Item 6
exhibit number 10.3.




Item
3. Defaults Upon Senior Securities





None.





Item
4. (Removed and Reserved)




Item
5. Other Information





None.


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)
                  
                  Offer
      letter between the Registrant and John Brewster dated December 14,
      200910.2(5)
                  
                  Loan and Security
      Agreement dated as of April 12, 201010.3(5)
                  
                  Warrant Purchase
      Agreement dated April 12, 201010.4(5)
                  
                  Intellectual Property
      Security Agreement dated April 12, 201010.5(6)
                  
                  Form of 2010 Composite
      Technology Corporation Omnibus Incentive Plan31.1(7)
                  
                  Rule
      13a-14(a) / 15d-14(a)(4) Certification of Chief Executive
      Officer31.2(7)
                  
                  Rule
      13a-14(a) / 15d-14(a)(4) Certification of Chief Financial
      Officer32.1(7)
                  
                  Section
      1350 Certification of Chief Executive Officer32.2(7)
                  
                  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 December 18, 2009.





(5)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on April 16, 2010.





(6)
Incorporated herein by reference to Form 8-K filed with the U.S. Securities and
Exchange Commission on April 30, 2010.





(7) Filed
herewith.


41


SIGNATURES





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





COMPOSITE
TECHNOLOGY CORPORATION


(Registrant)





Date:
      May 10, 2010
                By: /s/ Benton H
      WilcoxonBenton
      H WilcoxonChief
      Executive Officer
                  (Principal
      Executive Officer)





Date:
      May 10, 2010
              By: /s/ Domonic J.
      CarneyDomonic
      J. CarneyChief
      Financial Officer
                (Principal
      Financial and
Accounting  Officer)


42