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

                                    FORM 10-Q
                                   (Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
                                    EXCHANGE
                                   ACT OF 1934

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                                  EXCHANGE
                                ACT OF 1934.

                         COMMISSION FILE NUMBER 0-10999

                        COMPOSITE TECHNOLOGY CORPORATION
             (Exact Name of Registrant as Specified in Its Charter)

          NEVADA                                        59-2025386
       -------------                                    ----------
(State or Other Jurisdiction of             (I.R.S. Employer Identification No.)
 Incorporation or Organization)

                       2026 McGaw Avenue Irvine, CA 92614
                    (Address of Principal Executive Offices)
                                   (Zip Code)
                                 (949) 428-8500
              (Registrant's Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

YES |X| NO |_|

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

YES |X| NO |_|

Indicate the number of shares outstanding of the issuer's common stock as of

August 2, 2006

            CLASS                              NUMBER OF SHARES OUTSTANDING
            -----                              ----------------------------
   Common Stock, par value                          176,091,546 shares
       $0.001 per share

<PAGE>

                        COMPOSITE TECHNOLOGY CORPORATION
                  Form 10-Q for the Quarter ended June 30, 2006
                                Table of Contents

                                                                           Page
                                                                           ----
PART I - FINANCIAL INFORMATION
Item 1   Financial Statements                                                  3
Item 2   Management's Discussion and Analysis of Financial
          Condition and Results of Operations                                 34
Item 3   Quantitative and Qualitative Disclosures About Market Risk           56
Item 4   Controls and Procedures                                              56

PART II - OTHER INFORMATION
Item 1   Legal Proceedings                                                    58
Item 1A  Risk Factors                                                         59
Item 2   Unregistered Sales of Equity Securities and the Use of Proceeds      73
Item 3   Defaults Upon Senior Securities                                      73
Item 4   Submission of Matters to a Vote of Security Holders                  73
Item 5   Other Information                                                    73
Item 6   Exhibits                                                             74
SIGNATURE                                                                     78
INDEX TO EXHIBITS                                                             77


                                       2
<PAGE>

ITEM 1

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

<TABLE>
<CAPTION>
                                                                   June 30, 2006     September 30,
                                                                                         2005
                                                                   -------------     -------------
ASSETS                                                               (unaudited)       (audited)
<S>                                                                <C>               <C>
CURRENT ASSETS
Cash and cash equivalents                                          $    261,195      $    807,815
Accounts receivable, net of reserve of $2.5 m and $2.5 m                 34,535            56,998
Inventory                                                             2,186,570         1,233,334
Prepaid expenses and other current assets                             1,584,332           395,978
                                                                   ------------      ------------
Total current assets                                                  3,847,412         2,494,125

PROPERTY AND EQUIPMENT, net                                           2,544,034         2,765,609
OTHER ASSETS                                                            667,170           511,581
                                                                   ------------      ------------
TOTAL ASSETS                                                       $  7,277,836      $  5,771,315
                                                                   ============      ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITY

Accounts payable - trade                                              2,541,986         2,315,215
Accrued Payroll                                                         211,848           131,803
Accrued officer compensation                                            255,619                --
Accrued Interest                                                        132,018           341,469
Related party payables                                                  318,040            97,200
Deferred revenue                                                        234,535           621,748
Liabilities subject to compromise                                            --         1,625,520
Deferred gain on sale of fixed assets                                     8,466            19,052
Deferred rent                                                           208,138           170,294
Accrued litigation settlements                                               --        14,244,792
Convertible notes, current, net of unamortized discount of            2,750,304                --
$749,696 and $0
Lease obligation - current                                              398,294           403,191
                                                                   ------------      ------------
Total current liabilities                                             7,059,248        19,970,284

LONG TERM LIABILITIES
Convertible Debentures, net of unamortized debt discount of $0        6,116,250        10,860,442
and $0
Lease obligation - long-term                                            148,671           444,696
                                                                   ------------      ------------
Total long-term liabilities                                           6,264,921        11,305,138
                                                                   ------------      ------------
Total Liabilities                                                  $ 13,324,169      $ 31,275,422
                                                                   ------------      ------------
SHAREHOLDERS' DEFICIT
Common stock, $.001 par value 300,000,000 shares authorized             136,818           118,744
136,818,543 and 118,744,359 shares issued and outstanding
Additional paid-in capital                                           78,379,111        40,979,912
Deficit accumulated during the development stage                    (84,562,262)      (66,602,763)
                                                                   ------------      ------------
Total Shareholder's Deficit                                          (6,046,333)      (25,504,107)
                                                                   ------------      ------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT                        $  7,277,836      $  5,771,315
                                                                   ============      ============
</TABLE>

The accompanying notes are an integral part of these financial statements


                                       3
<PAGE>

                        COMPOSITE TECHNOLOGY CORPORATION
                                AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                FOR THE THREE MONTHS ENDED JUNE 30, 2006 AND 2005
              AND FOR THE NINE MONTHS ENDED JUNE 30, 2006 AND 2005

<TABLE>
<CAPTION>
                                                                                             Nine Months         Nine Months
                                                Three Months ended   Three Months ended     ended June 30,      ended June 30,
                                                  June 30, 2006         June 30, 2005           2006                2005
                                               ------------------    ------------------   ------------------  ------------------
                                                                          Restated                                Restated
                                               ------------------    ------------------   ------------------  ------------------
                                                   (unaudited)          (unaudited)         (unaudited)         (unaudited)
                                               ------------------    ------------------   ------------------  ------------------
<S>                                               <C>                   <C>                 <C>                 <C>
Revenue:
     Product Sales                                $   1,785,420         $          --       $   2,838,839       $      46,485
     Consulting Revenue                                      --                    --             550,000                  --
                                                  -------------         -------------       -------------       -------------
Total Revenue                                     $   1,785,420         $          --       $   3,388,839       $      46,485

Cost of production sales sold                         1,252,203                    --           2,245,994              30,894
Cost of consulting revenue                                   --                    --             304,787                  --
                                                  -------------         -------------       -------------       -------------
Gross margin                                      $     533,217         $          --       $     838,058       $      15,591

OPERATING EXPENSES
Officer compensation                                    149,034                60,000             363,528             186,838
General and administrative                            1,047,201             3,191,177           2,948,107           4,574,014
Legal, professional, & consulting                       191,550               857,514           1,759,577           3,028,407
Research and development                                734,466             1,806,087           3,207,308           4,025,487
Sales and Marketing                                     406,334               287,974           1,304,312             793,216
Depreciation                                            200,624               130,795             592,677             367,123
Reorganization Expense - Bankruptcy legal fees           61,911               272,830             635,140             272,830
                                                  -------------         -------------       -------------       -------------
Total operating expenses                          $   2,791,120         $   6,606,377       $  10,810,649       $  13,247,915
                                                  -------------         -------------       -------------       -------------
LOSS FROM OPERATIONS                              $  (2,257,903)        $  (6,606,377)      $  (9,972,591)      $ (13,232,324)
                                                  -------------         -------------       -------------       -------------
OTHER INCOME /EXPENSE
Interest expense                                     (1,249,676)             (529,303)         (1,947,448)         (2,341,977)
Interest income                                             106                21,033              15,817              53,577
Gain on sale of assets                                    3,529                 3,841              10,586               8,097
Expense related to modification of warrants                  --                    --            (388,962)                 --
Expense related to inducement of convertible
debt                                                         --                    --          (2,250,005)                 --
Bankruptcy settlements - Note 11                       (702,000)                   --            (802,000)
Reorganization item - adjustment to carrying
value - Convertible Debt                                     --            (6,477,455)         (2,622,240)         (6,477,455)
                                                  -------------         -------------       -------------       -------------
Total other income/expense                        $  (1,948,041)        $  (6,981,884)      $  (7,984,252)      $  (8,757,758)
                                                  -------------         -------------       -------------       -------------
Loss before Income Taxes                          $  (4,205,944)        $ (13,588,261)      $ (17,956,843)      $ (21,990,082)
                                                  -------------         -------------       -------------       -------------
Income Taxes                                      $          --         $          --       $       2,656       $          --
                                                  -------------         -------------       -------------       -------------
NET LOSS                                          $  (4,205,944)          (13,588,261)        (17,959,499)      $ (21,990,082)
                                                  -------------         -------------       -------------       -------------
BASIC AND DILUTED LOSS PER SHARE                  $       (0.03)                (0.12)              (0.14)              (0.19)
                                                  -------------         -------------       -------------       -------------
TOTAL BASIC AND DILUTED LOSS PER SHARE            $       (0.03)                (0.12)              (0.14)              (0.19)
AVAILABLE TO COMMON SHAREHOLDERS
                                                  -------------         -------------       -------------       -------------
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING          135,918,498           114,555,791         131,272,920         113,532,412
</TABLE>

The accompanying notes are an integral part of these financial statements


                                       4
<PAGE>

                        COMPOSITE TECHNOLOGY CORPORATION
                                AND SUBSIDIARIES
                CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE NINE MONTHS ENDED JUNE 30, 2006 AND 2005

<TABLE>
<CAPTION>
                                                                For the Nine     For the Nine
                                                               Months ending    Months ending
                                                                  June 30,         June 30,
                                                                    2006             2005
                                                                (unaudited)      (unaudited)
                                                                                  (restated)
<S>                                                           <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                      $(17,959,499)    $(21,990,082)
Adjustments to reconcile net loss to net cash used in
operating activities:
    Accretion of deferred gain on PP&E                             (10,586)         (26,988)
    Loss on sale of fixed assets                                        --            6,870
    Depreciation                                                   592,677          367,123
    Inventory reserve expense                                      725,616               --
    Amortization of prepaid expenses originally paid with          275,738               --
common stock
    Interest on fixed conversion features                        1,310,930        1,614,962
    Reserve for Uncollectible Accounts                                  --        2,500,000
    Deferred rent expense                                          (20,476)              --
    Issuance of common stock for services                          926,103          286,724
    Issuance of common stock for bankruptcy settlement             702,000               --
    Issuance of common stock for inducement of debt              2,250,005               --
conversion
    Issuance of warrants for services                              410,386           86,000
    Modification of warrants due to antidilution provision         388,691
   Compensation expense related to fair value of stock             627,375          225,825
options
   Carrying value adjustment on convertible debentures           2,622,240        6,477,455
   Carrying value impairment adjustment on investments in               --            1,000
other companies

(Increase) decrease in Assets:
   Restricted Cash                                                      --       10,010,060
   Accounts Receivable                                              22,463         (564,151)
   Inventory                                                    (1,678,852)        (528,557)
   Prepaid Expenses                                               (333,892)        (218,189)
   Capitalized construction costs                                  304,787          (98,508)
   Other assets                                                    (72,269)         (59,795)
Increase (Decrease) in Liabilities
   Accounts payable - trade                                     (1,115,954)         231,872
   Accrued interest payable                                        132,018          225,000
   Accrued payroll and related expenses                             80,045           77,341
   Accrued officer compensation                                         --           (8,942)
   Related Party Payables                                          250,000          100,000
   Deferred revenue                                               (387,213)         563,614
                                                              ------------     ------------
Net cash used in operating activities                         $(10,061,767)    $   (721,366)
                                                              ------------     ------------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property and equipment                                (371,102)      (1,362,510)
                                                              ------------     ------------
Net cash used in investing activities                         $   (371,102)    $ (1,362,510)
                                                              ------------     ------------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible debt securities            9,500,000               --
Payments on capital lease assets                                  (300,922)        (243,537)
Proceeds from exercise of options                                   30,263          295,000
Proceeds from exercise of warrants                                 656,908        1,510,622
                                                              ------------     ------------
Net cash provided by financing activities                     $  9,886,249     $  1,562,085
                                                              ------------     ------------
Net increase/(decrease) in cash and cash equivalents              (546,620)        (521,791)
CASH AND CASH EQUIVALENTS, BEGINNING OF  PERIOD                    807,815        2,930,615
                                                              ------------     ------------
CASH AND CASH EQUIVALENTS, END OF  PERIOD                          261,195        2,408,824
                                                              ============     ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION
CASH PAID FOR BANKRUPTCY ITEMS                                $    899,871     $    159,390
INTEREST PAID                                                      486,979          529,655
INCOME TAX PAID                                                      2,656            1,600
</TABLE>

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


                                       5
<PAGE>

Supplemental Schedule for Non Cash Financing Activities

During the first nine months of fiscal 2006, the Company issued 3,029,236 shares
of common stock for the conversion of $4,744,191 of the August, 2004 Convertible
Debentures as follows:
      -     $680,191 of principal was converted at $1.67 per share into 407,300
            shares of common stock
      -     $4,064,000 of principal was converted at $1.55 per share into
            2,621,936 shares of common stock.
During the first nine months of fiscal 2006, the Company issued 7,971,425 shares
of common stock for settlement of bankruptcy claims and litigation settlements
valued at $14,507,521. On September 30, 2005, $14,244,792 had been recorded as
accrued litigation and $262,729 had been recorded as liabilities subject to
compromise. During the quarter and nine months ended June 30, 2006 the Company
recorded expenses of $702,000 to accrue expenses related to bankruptcy claims
settled and paid in stock in May, 2006.

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

During the first nine months of fiscal 2006, the Company issued 265,427 shares
of common stock in settlement of Accounts Payable totaling $428,424.

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

During the first nine months of fiscal 2006, the Company issued 526,840 shares
of common stock as prepayment for public and media relations consulting services
from January, 2006 through March, 2008 valued at $832,407.

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

During the first nine months of fiscal 2006, in October, 2005 the Company raised
$6,000,000 in convertible notes. In conjunction with these notes:
      -     The Company issued 1,354,838 warrants and valued the conversion
            features of the notes and warrants at $1,834,092. Under bankruptcy
            accounting, the entire balance was expensed as a reorganization item
            immediately following issuance. See also footnotes 4, 5, and 13.
      -     The Company triggered certain anti-dilution provisions in the
            August, 2004 Convertible debentures including the re-pricing of
            warrants issued to the debenture holders and a re-setting of the
            debt conversion price from $1.67 to $1.55. The company re-priced
            4,537,538 warrants and recorded an expense charge of $388,962 to
            legal, professional, and consulting. The Company recorded the
            intrinsic value of the change to the conversion price at $788,148 as
            additional debt discount to the August, 2004 debentures. Under
            bankruptcy accounting, the debt discount was immediately charged to
            expense as a reorganization item - adjustment to debt carrying value
            immediately following the re-pricing. See also footnotes 4, 5, and
            13.
      -     The Company induced full conversion of these notes in January, 2006.
            The company issued 3,870,972 shares of common stock registered under
            Bankruptcy code section 1145 at a conversion price of $1.55 per
            share for the conversion of the $6.0 million in notes. To facilitate
            the conversion and to settle other outstanding issues, the Company
            issued 1,308,142 unregistered shares valued at the previous trading
            day's closing market price of $1.72 per share. The company recorded
            a charge of $2,250,005 to other expense relating to inducement of
            convertible debt as a result of this transaction. To facilitate this
            transaction, 78,459 shares of stock valued at $1.72 per share were
            issued and the Company recorded a charge to legal, professional, and
            consulting expense of $135,000 for these services.
During the first nine months of fiscal 2006, in March, 2006 the Company issued
$3,500,000 in convertible notes due September, 2006. In conjunction with these
notes 2,900,001 warrants were issued and the company valued the conversion
features of the notes and warrants at $2,060,626 which was recorded as a
discount to the note principal on the balance sheet. Of the $3,500,000 issued,
$200,000 was converted from a short term note payable issued in February, 2006.


                                       6
<PAGE>

NOTE 1 - ORGANIZATION AND LINE OF BUSINESS

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

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

NOTE 2 - GOING CONCERN

The Company has received a report from its independent auditors for the year
ended September 30, 2005 that includes an explanatory paragraph describing the
uncertainty as to the Company's ability to continue as a going concern. These
consolidated financial statements contemplate the ability to continue as such
and do not include any adjustments that might result from this uncertainty.

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

Commercial orders: We announced our initial commercial order of our ACCC cable
under the General Cable agreement in May, 2005. From this initial commercial
order through July, 2006, we have received cumulative confirmed orders for
approximately $4.4 million of our ACCC cable and related ACCC hardware and we
have recognized approximately $1.0 million as revenue in fiscal 2005 and $2.8
million in fiscal 2006 to date.

Acquired businesses: We closed our acquisition of EU Energy, Ltd. subsequent to
the quarter ending June 30, 2006, on July 3, 2006, and acquired approximately
$1.1 million in cash with the acquisition.

We believe our cash position as of June 30, 2006 of $0.3 million and expected
cash flows from revenue orders may not be sufficient to fund operations for the
next four calendar quarters. We anticipate that additional cash is needed to
fund operations beyond October, 2006 and to the extent required the Company
intends to continue the practice of issuing stock, debt or other financial
instruments for cash or for payment of services until our cash flows from the
sales of our primary products are sufficient to provide cash from operations or
if we believe such a financing event would be a sound business strategy.

In September, 2006 our $3.5 million Bridge financing comes due and payable. We
anticipate the need to refinance this debt through the issuance of replacement
debt, stock, or other financial instruments.

                                       7
<PAGE>


NOTE 3 - RESTATEMENT OF FINANCIAL STATEMENTS

In May 2006, the Company determined that the treatment of the issuance of
warrants in November, 2004 for the release of $10,000,000 from our August, 2004
Debenture issue was improperly expensed to legal, professional, and consulting
expense. During the quarter ended December 31, 2004, we had expensed $1,993,523
which was the fair value of the warrants that were issued to the debenture
holders in exchange for the release of $10 million of restricted cash. Under the
guidance of EITF 96-19 the issuance of the warrants constituted a modification
of a convertible debt instrument. Accordingly, the fair value of the additional
warrants issued in November 2004 should have been deferred and amortized as an
adjustment of interest expense over the remaining term of the debentures using
the interest method.

There is no impact to the balance sheet as of September 30, 2005 since as a
result of our bankruptcy filing on May 5, 2005 the carrying value of our debt
was adjusted to $15,000,000 as of May 5, 2005 which resulted in the expense of
all remaining debt discount on May 5, 2005.

Below is the effect to Statements of Operations for the three and nine months
ended June 30, 2005 have been restated as follows:

Statement of Operations for Three months ended June 30, 2005

<TABLE>
<CAPTION>
                                            As Originally    Restatement         As
                                               Reported      Adjustment       Restated
                                             ------------    -----------     ----------

<S>                                             <C>             <C>            <C>
Other Income/Expense
Interest Expense                                459,150         70,153         529,303

Reorganization Item - Adjustment to
Carrying value of Convertible Debentures      4,831,970      1,645,485       6,477,455
                                             ----------      ---------      ----------
 Net loss                                    11,872,623      1,715,638      13,588,261
                                             ----------      ---------      ----------

<CAPTION>
Statement of Operations for Nine months ended June 30, 2005

                                            As Originally    Restatement        As
                                               Reported      Adjustment      Restated
                                             ------------    -----------     ----------

<S>                                             <C>             <C>            <C>
Operating Expenses
Legal, Professional, and consulting           5,021,930     (1,993,523)      3,028,407
                                             ----------      ---------      ----------

Other Income/Expense

Interest Expense                              1,993,939        348,038       2,341,977

Reorganization Item - Adjustment to
Carrying value of Convertible Debentures      4,831,970      1,645,485       6,477,455
                                             ----------      ---------      ----------
 Net loss                                    21,990,082             --      21,990,082
                                             ----------      ---------      ----------
</TABLE>

The impact on the net loss per share for the three months ending June 30, 2005
was to increase the loss per share by $0.02. There was no change to the net loss
per share for the nine months ending June 30, 2005.


                                       8
<PAGE>

NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Composite
Technology Corporation (the "Company" or "Composite Technology") have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not contain all of the information and footnotes required for complete financial
statements. Interim information is unaudited; however, in the opinion of the
Company's management, the accompanying unaudited, consolidated financial
statements reflect all adjustments (consisting of normal, recurring adjustments)
considered necessary for a fair presentation of the Company's interim financial
information. These financial statements and notes should be read in conjunction
with the audited financial statements of the Company included in the Company's
Annual Report on Form 10-K for the year ended September 30, 2005 filed with the
Securities and Exchange Commission on December 13, 2005.

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

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

REVENUE RECOGNITION

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

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

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

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

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


                                       9
<PAGE>

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

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

The Company records payments received and invoiced amounts receivable from
customers in deferred revenues until revenue is recognized in accordance with
our revenue recognition policy.

DERIVATIVE FINANCIAL INSTRUMENTS

The Company issues derivative financial instruments in the form of stock
options, stock warrants, and debt conversion features of its convertible debt
issuances. The Company has not issued any derivative instruments for hedging
purposes since inception. The Company uses the guidance of and has adopted the
disclosure requirements of Statement of Financial Accounting Standards No. 133
Accounting for Derivative Instruments and Hedging Activities and the FASB
Emerging Issues Task Force (EITF) Issue No. 00-19 "Accounting for Derivative
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock."
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 debt. The Company has accounted for all derivative instruments
indexed to the Company's stock as equity.

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

                                               Three Months Ended
                                                    June 30,
                                             2006              2005
Risk Free Rate of Return                    4.28%-4.36%         3.97%
Volatility                                         107%          100%
Dividend yield                                       0%            0%

The accounting for derivative financial instruments related to stock-based
compensation is further described below.


                                       10
<PAGE>

STOCK-BASED COMPENSATION

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

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

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


                                       11
<PAGE>

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

<TABLE>
<CAPTION>
                                        Three Months      Three Months    Nine Months    Nine Months
                                            Ended             Ended          Ended          Ended
                                           June 30           June 30        June 30        June 30
                                            2006              2005           2006           2005
<S>                                     <C>             <C>             <C>             <C>
Officer Compensation                    $   87,373      $       --      $  161,068      $       --
Legal, Professional and Consulting         125,870              --         441,207          86,000
Selling and marketing                       17,014              --          23,331              --
Research and development                    15,253         147,848         145,459         475,821
General and administrative                 246,079              --         550,405              --
                                        ----------      ----------      ----------      ----------
Totals                                  $  491,589      $  147,848      $1,321,469      $  561,821
                                        ==========      ==========      ==========      ==========
</TABLE>

As of June 30, 2006, there was $3.8 million of total unrecognized compensation
cost related to non-vested share-based compensation arrangements related to
stock options consisting of $2.9 million related to employee grants and $0.9
million related to consultant and director grants. The costs are expected to be
recognized over a weighted-average period of 2.9 years.

Our stock options vest on an annual or a quarterly basis. For the remainder of
fiscal 2006, we expect stock based compensation expense related to employee
stock options of approximately $138,000 before income taxes for the quarter
ending September 30, 2006. We expect stock based compensation related to
non-employee stock options to be approximately $45,000 before income taxes for
the quarter ending September 30, 2006. Such amounts may change as a result of
additional grants, forfeitures, modifications in assumptions and other factors.
SFAS No. 123R provides that income tax effects of share-based payments are
recognized in the financial statements for those awards which will normally
result in tax deductions under existing tax law. Under current U.S. federal tax
law, we would receive a compensation expense deduction related to non-qualified
stock options only when those options are exercised and vested shares are
received. Accordingly, the financial statement recognition of compensation cost
for non-qualified stock options creates a deductible temporary difference which
results in a deferred tax asset and a corresponding deferred tax benefit in the
income statement. However, since we currently have a full valuation allowance
for all of our deferred tax assets, any tax consequences for fiscal 2006 is
expected to be negligible to the financial statements.

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

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

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

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

<TABLE>
<CAPTION>
                                                                  Three months         Nine Months
                                                                     ended                ended
                                                                  June 30, 2005       June 30, 2005
<S>                                                            <C>                  <C>
Net Loss:
As reported                                                    $    (13,588,261)    $   (21,990,082)
                                                               ----------------     ---------------
Deduct: Total stock-based employee compensation expense
determined under the fair value based method for all
awards, net of tax                                                     (376,026)         (1,112,657)
                                                               ----------------     ---------------
Pro forma                                                      $    (13,964,287)    $   (23,102,739)
                                                               ================     ===============
Basic earnings per share:
As reported                                                    $          (0.12)    $         (0.19)
Pro forma                                                      $          (0.12)    $         (0.20)
Diluted earnings per share:
As reported                                                    $          (0.12)    $         (0.19)
Pro forma                                                      $          (0.12)    $         (0.20)
</TABLE>


                                       12
<PAGE>

CONVERTIBLE DEBT

Convertible debt is accounted for under the guidelines established by APB
Opinion No. 14 Accounting for Convertible Debt and Debt issued with Stock
Purchase Warrants (APB14) under the direction of Emerging Issues Task Force
(EITF) 98-5, Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios, (EITF 98-5) EITF 00-27
Application of Issue No 98-5 to Certain Convertible Instruments (EITF 00-27),
and EITF 05-8 Income Tax Consequences of Issuing Convertible Debt with
Beneficial Conversion Features. Under these guidelines, the Company allocates
the value of the proceeds received from a convertible debt transaction between
the conversion feature and any other detachable instruments (such as warrants)
on a relative fair value basis. The allocated fair value is recorded as a debt
discount or premium and is amortized over the expected term of the convertible
debt to interest expense. The company values any warrants issued using the
Black-Scholes option pricing model as described above. 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.

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

PRINCIPLES OF CONSOLIDATION

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

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses are charged to operations as incurred.

ACCOUNTS RECEIVABLE

The Company extends credit to its customers. Collateral is generally not
required. Credit losses are provided for in the financial statements based on
management's evaluation of historical and current industry trends as well as
history with individual customers. Although the Company expects to collect
amounts due, actual collections may differ from estimated amounts. As of June
30, 2006, the Company had gross accounts receivable of $2,534,535 and had
recorded a reserve of $2,500,000.

INVENTORY

Inventories consist of our wrapped and unwrapped manufactured composite core and
related hardware products and raw materials used in the production of those
products. Inventories are valued at the lower of cost or market under the FIFO
method. Costs to ship product for sale or for products sold is recorded to costs
of goods sold as the expenses are incurred. Products manufactured internally are
valued at standard cost which approximates replacement cost. Inventory is
periodically evaluated for obsolescence and salability and reserves are recorded
for product that is believed by management to be impaired in value or has been
scrapped. As of June 30, 2006, the company had recorded gross inventory of
$2,405,897 and had inventory reserves of $219,327.

PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of cash payments and stock
payments that will result in future expenses. Cash payments consist primarily of
prepaid insurance, deposits, and capitalized acquisition costs for the EU
Energy, PLC acquisition. Stock payments consist of the ACTS stock issued for
future China sales commissions and stock and warrants issued to Media Relations
Services for media and investor relations services as described in note 7.

                                       13
<PAGE>

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.

As of June 30, 2006, the deferred tax assets related primarily to the Company's
net operating loss carry-forwards and which are fully reserved. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences which give rise to the deferred tax asset become deductible. The
Company's past financial performance is a significant factor which contributes
to its inability, pursuant to Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS 109"), to use projections of future
taxable income in assessing the realizability of deferred tax assets.
Considering the relevant data, management concluded that it is not "more likely
than not" that the Company will realize the benefits of certain deferred tax
assets at June 30, 2006. Consequently, the Company has a full valuation
allowance against net deferred tax assets at June 30, 2006.

BUSINESS SEGMENTS

The Company organizes itself as one segment and conducts its production
operations in the United States. Sales and marketing efforts are conducted in
China, Europe, the Middle East, and North America. The functional and operating
currency is the US Dollar.

The Company sells its products and technology to domestic and international
customers. Jiangsu-Far East in the Peoples Republic of China represented 95% of
the revenues recognized during the quarter ended June 30, 2006. Jiangsu and the
City of Kingman, KS represented 50% and 46% of the revenues recognized during
the nine months ended June 30, 2006.

LOSS PER SHARE

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

The following common stock equivalents were excluded from the calculation of
diluted loss per share for the three months ended June 30, 2006 and 2005 since
their effect would have been anti-dilutive:

                                                            June 30
                                                     2006             2005
                                                     ----             ----
  Options for common stock                            9,815,171        6,167,936
  Warrants                                           13,253,935       11,024,864
  Convertible Debentures, if converted                6,204,033        8,982,036
                                                  -------------    -------------
                                                     29,273,139       26,174,836
                                                  =============    =============


                                       14
<PAGE>

RECENT ACCOUNTING PRONOUNCEMENTS

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

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

SFAS No. 155 Accounting for Certain Hybrid Financial Instruments:
In February, 2006 the FASB issued Statement no 155, : Accounting for Certain
Hybrid Financial Instrument, an amendment of FASB Statements No. 133 and 140.
Statement 155 resolves issues related to SFAS 133 by allowing for simplified
accounting for hybrid financial instruments that contain embedded derivatives
and issues related to SFAS 140 by eliminating restrictions on passive derivative
instruments that a qualifying special-purpose entity may hold. Statement 155 is
required to be adopted as of the beginning of the fiscal year beginning after
September 15, 2006. Since the Company does not own or issue the hybrid financial
instruments referred to in the pronouncement, we do not believe adoption of
Statement 155 will have a material effect on our consolidated financial
position, results of operations or cash flows.

SFAS No. 156 Accounting for Servicing of Financial Assets - an amendment of FASB
Statement No. 140:
In March, 2006 the FASB issued Statement No. 156, Accounting for Servicing of
Financial Assets - an amendment of FASB Statement No. 140. Statement 156 relates
to accounting for the servicing of financial assets and extinguishments of
related liabilities. Statement 156 is required to be adopted as of the beginning
of the fiscal year beginning after September 15, 2006. Since the Company does
not service financial assets, we do not believe adoption of Statement 156 will
have a material effect on our consolidated financial position, results of
operations or cash flows.

FIN No. 48 Accounting for Uncertainty in Income Taxes:
In June, 2006 the FASB issued FASB Interpretation No. 48: Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in
accordance with FASB 109. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return and also provides
guidance on derecognition, classification, interest, and penalties, accounting
in interim periods, disclosure, and transition. FIN 48 is effective for fiscal
years beginning after December 15, 2006. As such, the Company has not evaluated
the financial impact to the implementation of FIN 48 on the consolidated
financial position, results of operations or cash flows.


                                       15
<PAGE>

NOTE 5 - BANKRUPTCY

On May 5, 2005 (Petition Date) Composite Technology Corporation filed a
voluntary petition for relief under the provisions of Title 11 of the Federal
Bankruptcy Code in the United States Bankruptcy Court for the Central District
of California under case number SA 05-13107 JR. On October 31, 2005, the Judge
John Ryan of the Central district court, Santa Ana division of the US Bankruptcy
court approved the Company's Third Amended Plan of Reorganization which provided
for payment of 100% of creditors allowed claims. On November 1, 2005 the Company
paid substantially all of its pre-petition liabilities payable in cash, thereby
effectively consummating the plan of Bankruptcy. On November 18, 2005, United
States Bankruptcy Judge John Ryan signed and entered the order approving the
Company's Third Amended Chapter 11 Plan of Reorganization with non-material
modifications that confirms the Company's emergence from bankruptcy.

As discussed in Note 2, for financial reporting purposes, the consolidated
financial statements have been prepared on a going concern basis. In addition,
the Company has applied the provisions of the AICPA SOP 90-7, Accounting for
Bankruptcies. We have reviewed the guidelines and determined that the following
applies to our situation:
-Assets are recorded at net realizable value. As of September 30, 2005 and
November 18, 2005, our assets consisted primarily of cash, receivables,
inventory, and equipment which were all reviewed for impairment. Based on a
review of our asset base, we determined that our carrying value as of September
30, 2005 and November 18, 2005 was equal to the net realizable value of our
assets. We therefore determined that there are no requirements to adjust our
assets since their book value approximates their net realizable value.
-All pre-petition liabilities subject to compromise have been segregated in the
September 30, 2005 Balance Sheet and classified as Liabilities Subject to
Compromise, at the estimated amount of allowable claims. June 30, 2006 balances
of remaining liabilities subject to compromise were reclassified to conform to
pre-bankruptcy classifications. See the table below for additional information.
-We adjusted our convertible debt discount that existed as of the petition date.
During the year ending September 30, 2005, coinciding with the filing of our
plan of reorganization, we determined that the allowed amount of liability
relating to our $15MM Debenture offering of August, 2004 was $15,000,000. Prior
to the filing of the plan, the carrying value of the Debentures was determined
to be $10,168,030, representing a debt discount due to conversion features of
the Convertible Debentures. Prior to the filing of the plan, we had been
amortizing this discount to interest expense at approximately $176,780 per
month. On May 5, 2005, we recorded an additional $4,831,970 in other expense in
the quarter ending June 30, 2005, to adjust the carrying value of the Debentures
to $15,000,000.
-In October, 2005 and prior to our emergence from bankruptcy, we received
$6,000,000 in exchange for Convertible Debentures and Common Stock Warrants as
described in footnotes 7 and 13. We recorded a $1,834,092 discount to the
$6,000,000 convertible notes for the value of the warrants and the conversion
features of the notes. Under bankruptcy accounting we are required to state our
liabilities at the amounts we expect to settle and we immediately expensed the
$1,834,092 as a carrying value adjustment.
-In conjunction with the $6M financing in October, certain anti-dilution
provisions were triggered in the August, 2004 convertible debentures and the
warrants held by the debenture holders. We recorded an additional discount of
$788,148 for the intrinsic value of the lower conversion price on the remaining
principal as of the date of the October financing and we immediately expensed
the $788,148 as a carrying value adjustment.


                                       16
<PAGE>

-Since we paid our creditors at 100% and modifications to existing contracts and
liability are primarily non-financial in nature, we recorded no gains related to
the bankruptcy for any liability modification.
-Our bankruptcy related expenses consist primarily of professional fees. During
the nine months ended June 30, 2006 we incurred $635,140 in bankruptcy related
legal and professional fees. We have segregated these fees in our Statement of
Operations.
-Interest expense recorded related to the bankruptcy filing consists of 3%
annual interest on our pre-petition liabilities and totals $15,720 for fiscal
2005 and $2,841 for the nine months ended June 30, 2006.
-We have disclosed the cash payments for reorganization costs as a supplemental
disclosure to our Statement of Cash Flows. Reorganization costs consist
primarily of trustee fees, and professional services.
-We issued common stock in payment of liabilities upon emergence from
bankruptcy. We have disclosed the impact of our share issuances below.
-We determined that we did not qualify for Fresh-Start reporting upon emergence
from bankruptcy.

Since we had emerged from bankruptcy on November 18, 2005, presentation of
Liabilities subject to compromise was not required as of June 30, 2006.
Consistent presentation of liabilities subject to compromise between September
30, 2005 and June 30, 2006 balances are as follows:

<TABLE>
<CAPTION>
                                                      Remaining at           September
                                                     June 30, 2006            30, 2005
                                                   <C>                    <C>
Pre-petition Accounts Payable                                 --          $    1,180,202
Accrued Officer Compensation                      $      255,619   (1)           255,619
Accrued disputed balances                                     --                  65,000
Accrued pre-petition interest payable                         --                  89,286
Accrued bankruptcy settlements payable                    80,120   (2)                --
Accrued pre-petition employee benefits                    12,955   (3)            35,413
                                                     -----------             -----------
Total                                             $      348,694          $    1,625,520
</TABLE>


(1) Included as a separate balance sheet line item as of June 30, 2006
(2) Included in Accounts Payable as of June 30, 2006
(3) Included in Accrued payroll as of June 30, 2006

The common stock issued during the nine months ending June 30, 2006 for payment
of litigation related and bankruptcy related liabilities consist of:

                                                       Shares issued
Litigation settlements                                       7,175,000
Bankruptcy claim settlements                                   737,301
Debenture interest payable to 9/30/05                          259,790
Pre-petition liabilities and other                              59,124
                                                         -------------
Total Bankruptcy related issuances                           8,231,215

The shares represent 6.0% of the shares issued and outstanding as of June 30,
2006. The issuance of these shares had no incremental impact on the loss per
share reported during the quarter ended June 30, 2006.

On August 3, 2006, Judge John Ryan of the US Bankruptcy Court entered a final
decree that formally closed our Federal Bankrupty case under Chapter 11.


                                       17
<PAGE>

NOTE 6. EQUITY BASED COMPENSATION

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

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

Key assumptions used in valuing options issued in the quarters ending June 30,
2006 and 2005 are as follows:

                                                          2006           2005
Risk Free Rate of Return                           4.28%-4.36%          3.97%
Volatility                                                107%           100%
Dividend yield                                              0%             0%


                                       18
<PAGE>

Classification of Stock-Based Compensation Expense

Employee stock-based compensation expense for the three and nine months ended
June 30, 2006 and 2005 are as follows:

<TABLE>
<CAPTION>
                                Three Months     Three Months      Nine Months       Nine Months
                                    Ended           Ended             Ended             Ended
                                   June 30         June 30           June 30           June 30
                                    2006            2005              2006              2005
<S>                          <C>               <C>              <C>                <C>
Officer Compensation         $        87,373   $           --   $        161,068   $            --
Selling and marketing                     --               --              6,317                --
Research and development              15,253               --             54,059                --
General and administrative            36,215               --            211,178                --
                             ---------------   --------------   ----------------   ---------------
Totals                       $       138,841   $           --   $        432,622   $            --
                             ===============   ==============   ================   ===============
</TABLE>

Our stock options vest on an annual or a quarterly basis. For the remainder of
fiscal 2006, we expect stock based compensation expense related to employee
stock options of approximately $138,000 before income taxes for the quarter
ending September 30, 2006. Such amounts may change as a result of additional
grants, forfeitures, modifications in assumptions and other factors. SFAS No.
123R provides that income tax effects of share-based payments are recognized in
the financial statements for those awards which will normally result in tax
deductions under existing tax law. Under current U.S. federal tax law, we would
receive a compensation expense deduction related to non-qualified stock options
only when those options are exercised and vested shares are received.
Accordingly, the financial statement recognition of compensation cost for
non-qualified stock options creates a deductible temporary difference which
results in a deferred tax asset and a corresponding deferred tax benefit in the
income statement. However, since we currently have a full valuation allowance
for all of our deferred tax assets, any tax consequences for fiscal 2006 is
expected to be negligible to the financial statements.

As of June 30, 2006, there was $2.9 million of total unrecognized compensation
cost related to non-vested share-based compensation arrangements related to
employee stock options. The costs are expected to be recognized over a
weighted-average period of 2.9 years.

Tax Effect related to Stock-based Compensation Expense

SFAS No. 123R provides that income tax effects of share-based payments are
recognized in the financial statements for those awards that will normally
result in tax deductions under existing tax law. Under current U.S. federal tax
law, the Company would receive a compensation expense deduction related to
non-qualified stock options only when those options are exercised and vested
shares are received. Accordingly, the financial statement recognition of
compensation cost for non-qualified stock options creates a deductible temporary
difference which results in a deferred tax asset and a corresponding deferred
tax benefit in the income statement. Due to the uncertainty surrounding the
future utility of the Company's deferred tax assets, all deferred tax assets are
fully allowed for as of June 30, 2006.

                                       19

<PAGE>


NOTE 7 EQUITY

During the quarter ended June 30, 2006, on April 27, 2006 during a special
shareholders meeting, we increased our authorized share capital as follows:

Common shares authorized increased to 300,000,000 shares
Preferred A shares authorized increased to 5,000,000 shares

As of June 30, 2006, we had 136,818,543 common shares issued and outstanding and
no Preferred A shares issued and outstanding.

COMMON STOCK

During the nine months ended June 30, 2006 a total of 530,263 shares of the
Company's Common Stock was issued pursuant to exercises of warrants as follows:
- 230,263 Debenture warrants originally priced at $1.75 per warrant with a
revised exercise price of $1.55 for total cash consideration of $356,908.
-300,000 Series S warrants were exercised for cash proceeds of $300,000.

During the nine months ended June 30, 2006 a total of 86,465 shares of the
Company's Common Stock were issued pursuant to the exercise of options with an
exercise price of $0.35 per option for total cash proceeds of $30,263.

During the nine months ended June 30, 2006, the Company issued a total of
407,300 shares of common stock pursuant to conversions of $680,191 in principal
of the August, 2004 convertible debt at a conversion price of $1.67 per share.

During the nine months ended June 30, 2006, the Company issued a total of
2,621,936 shares of common stock pursuant to conversions of $4,064,000 in
principal of the August, 2004 convertible debt at a conversion price of $1.55
per share.


                                       20
<PAGE>

During the nine months ended June 30, 2006, the Company issued a total of
8,538,776 shares of Common stock registered pursuant to Bankruptcy Code 1145 for
satisfaction of the following liabilities:

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

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

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

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

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

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

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


                                       21
<PAGE>

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

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

-450,000 shares were issued to four Debenture holders on June 15, 2006 for
payment of $702,000 in settlement of liquidated damages claims related to the
delay in filing an effective registration statement for the conversion shares
and related warrants issued or issuable in conjunction with the August, 2004 $15
million Debentures. The $1.56 per share value as directed by the Bankruptcy
Court and was calculated as 93% of the 20 day Volume Weighted Average price for
the 20 trading days prior to November 18, 2005 under the terms of the Bankruptcy
Plan of reorganization.

During the nine months ended June 30, 2006, on January 30, 2006 the Company
issued a total of 3,870,972 shares of common stock pursuant to conversions all
of the $6.0 million in principal of the October, 2005 convertible debt at a
conversion price of $1.55 per share. These shares were registered pursuant to
Bankruptcy Code 1145. As an additional incentive to convert the debt and to
resolve all other issues with the holders of the $6.0 million debt, an
additional 1,308,142 shares of unregistered common stock were issued. The
unregistered shares were valued at the market value on the date prior to
settlement at $2,250,000, or $1.72 per share.

During the nine months ended June 30, 2006, on January 30, 2006 the Company
issued a total of 78,489 unregistered shares of common stock valued at $135,000
in exchange for services rendered in conjunction with the settlement and
conversion of the $6.0 million financing entered into in October, 2005.

The unregistered shares issued to induce conversion and the unregistered shares
issued for services rendered both carry "piggyback" registration rights on the
next available stock registration.

During the nine months ended June 30, 2006, on May 11, 2006 the Company issued
526,840 unregistered shares of common stock valued at $1.58 per share, the
market price on the date of issuance, calculated to be $832,407 in payment of
services under a contract to Media Relations dated in December, 2005 for media
relations services through March, 2008. We recorded $832,407 as a prepaid
expense and recognized expense of $184,979 for the nine months ended June 30,
2006. We will amortize the remaining $647,428 to compensation expense for
$92,490 per quarter through the end of the contract. Of these shares, 263,420
carry piggyback registration rights.

During the nine months ended June 30, 2006, on May 24, 2006 the Company issued
191,466 of S-8 registered shares valued at $1.55 per share, the market value on
the date of issuance in exchange for legal services valued at $296,773, the fair
value of the services provided.

STOCK OPTIONS

On May 15, 2001, Transmission Technology Corporation ("TTC") established the
2001 Incentive Compensation Stock Option Plan (the "TTC Plan"). The TTC Plan was
administered by the Company's Board of Directors. Under the TTC Plan, the Board
had reserved 4,764,000 shares of common stock to support the underlying options
which may be granted. As part of TTC's acquisition by CTC on November 3, 2001,
the TTC Plan was terminated, and the options were converted into options to
purchase shares of CTC's common stock pursuant to the 2002 Non-Qualified Stock
Compensation Plan (the "Stock Plan"). The number of shares reserved initially
under the Stock Plan was 9,000,000. This number was increased to 14,000,000 on
October 24, 2002 and to 24,000,000 on April 27, 2006.


                                       22
<PAGE>

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

The following table summarizes the Stock Plan stock option activity as of June
30, 2006.

                                                                        Average
                                                           Number      Exercise
                                                         of Options      Price
                                                         ----------    ---------
Outstanding, September 30, 2005                           6,167,936    $   0.57
     Granted                                              3,966,000    $   1.05
     Exercised                                               86,465    $   0.35
     Cancelled                                              232,300    $   1.98
                                                         ----------
OUTSTANDING, June 30, 2006                                9,815,171    $   0.73
                                                         ==========

EXERCISABLE, June 30, 2006                                4,636,828    $   0.50
                                                         ==========

The weighted-average remaining contractual life of the options outstanding at
June 30, 2006 was 5.37 years. The exercise prices of the options outstanding at
June 30, 2006 ranged from $0.25 to $2.00, and information relating to these
options is as follows:

<TABLE>
<CAPTION>
Range of         Stock Options   Stock          Weighted        Weighted         Weighted Average
Exercise         Outstanding     Options        Average         Average          Exercise Price of
Prices                           Exercisable    Remaining       Exercise Price   Options
                                                Contractual     of Options       Exercisable
                                                Life in years   Outstanding
<C>               <C>            <C>               <C>                <C>               <C>
$0.25-0.49        2,633,967      2,433,967         5.5                $0.30             $0.30
$0.50-$0.99       2,775,000      1,715,000         5.5                $0.59             $0.55
$1.00-$1.49       4,256,204        337,861         5.4                $1.04             $1.09
$1.50-$1.99          50,000         50,000         0.5                $1.75             $1.75
$2.00-$2.99         100,000        100,000         0.5                $2.00             $2.00
                  ---------      ---------
        Total     9,815,171      4,636,828
                  =========      =========
</TABLE>

During the nine months ended June 30, 2006 86,465 options were exercised for
$0.35 per option for cash proceeds of $30,263.


                                       23
<PAGE>

WARRANTS

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

The following table summarizes the Warrant activity for the nine months ending
June 30, 2006:

                                                 Number         Weighted-Average
                                               of Warrants       Exercise Price
                                               -----------       --------------

Outstanding, September 30, 2005                     8,796,383      $   1.40
     Granted                                        5,046,305      $   1.94
     Exercised                                        530,263      $   1.24
     Cancelled                                         58,500      $   1.95
                                                   ----------      --------
OUTSTANDING, June 30, 2006                         13,253,935      $   1.61

                                                   ==========
EXERCISABLE, June 30, 2006                         13,253,935      $   1.61
                                                   ==========

During the nine months ended June 30, 2006, 530,263 warrants were exercised for
cash proceeds of $656,908 and, 58,500 Series R warrants expired unexercised.

During the nine months ended June 30, 2006 we issued the following warrants
exercisable to purchase an equal number of shares of common stock of the
Company:

In October, 2005 we issued 1,354,838 warrants in conjunction with our October,
2005 $6.0 million Convertible Note offering including 193,548 warrants issued to
Lane Capital as part of their financing fees and 1,161,290 warrants issued to
the note holders. Under the terms of the financing, 50% of the warrants were
issued at an exercise price of $1.78 and 50% at an exercise price of $1.94. We
valued the warrants using the Black Scholes option pricing model with a
volatility of 100%, a risk free rate of 3.97%, a life of 3 years, a 0% dividend
rate and a market price of $1.55 at $0.9452 and $0.9191 for the $1.78 and $1.94
warrants respectively. The fair value of the warrants issued to the note holders
was used as part of the beneficial conversion feature allocation described in
footnote 12 below. The 193,548 warrants issued to Lane Capital were valued at
$180,416 and were expensed under SOP 90-7.


                                       24
<PAGE>

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

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

The re-pricing resulted in a warrant value difference per warrant of $0.0367,
$0.0487, and $0.2226 for the $1.75, $1.82, and $3.23 warrants respectively
resulting in a compensation charge of $388,692 recorded in fiscal 2006 into
other expense related to modification of warrants.

In March, 2006 we issued 2,750,001 warrants in conjunction with our March, 2006
$3.5 million Bridge Notes offering. Of these warrants, 750,001 warrants are
exercisable at $1.55 per share and 2,000,000 are exercisable at $2.00 per share.
The warrants were valued using the Black Scholes model and were included in the
calculation of the beneficial conversion feature of the Convertible Debt as
described in Footnote 13.

In May, 2006 we issued 150,000 $1.55 warrants under the same terms and
conditions as the March, 2006 $1.55 warrants to Lane Capital for services
performed in conjunction with the March, 2006 $3.5 million Bridge Notes
offering. We valued the warrants using the Black Scholes Merton option pricing
model with a volatility of 107%, a risk free rate of 4.36%, a life of 2.9 years,
a 0% dividend rate and a market price of $1.15 at $0.694 per warrant. We
recorded an additional debt discount of $104,100 as a result of this issuance.
The additional discount will be amortized over the remaining life of the debt.

In May, 2006 we issued 191,466 $2.00 warrants under the same terms and
conditions as the March, 2006 $2.00 warrants to our external legal counsel for
litigation related and general counsel services. We valued the warrants using
the Black Scholes Merton option pricing model with a volatility of 107%, a risk
free rate of 4.36%, a life of 3 years, a 0% dividend rate and a market price of
$1.15 at $0.6574 per warrant. We recorded a compensation charge to legal,
professional, and consulting expense of $125,870 as a result of this issuance.

In May, 2006 we issued a total of 600,000 warrants to Media Relations under the
terms of our December, 2005 media relations services contract with exercise
prices of $2.00, $2.50, and $3.00 in equal 200,000 warrant amounts. The warrants
expire on December 31, 2008. We valued the warrants using the Black Scholes
Merton option pricing model with a volatility of 107%, a risk free rate of 4.3%,
a life of 2.6 years, a 0% dividend rate and a market price of $1.15 at $0.6035,
$0.5499, and $0.5061 per warrant. We recorded the value of these warrants as
deferred equity compensation of $331,900. We amortized $73,747 to general and
administrative expense during the nine months ended June 30, 2006 and will
amortize $36,878 to expense per quarter over the remaining life of the services
contract.


                                       25
<PAGE>

The following table summarizes the warrants issued, outstanding, and exercisable
as of June 30, 2006:

<TABLE>
<CAPTION>
Warrant Series          Grant Date     Strike      Expiration Date      Warrants      Proceeds if     Anti-    Call
                                        Price                          remaining       Exercised    Dilution   feature
<S>                      <C>           <C>          <C>                   <C>           <C>               <C>    <C>
"Red Guard"              July, 2001        $1.26         July, 2006       1,897,660     $2,391,052         No     None
2002 Numbered            June, 2002        $0.50         July, 2006          83,333         41,667         No     None
"December 2003"          Dec., 2003        $2.04     December, 2008         120,000        244,800         No      (1)
Debenture $1.75           Aug, 2004    $1.55 (4)       August, 2008       1,496,710      2,319,901        (6)     None
Debenture $1.82           Aug, 2004    $1.55 (4)       August, 2008       1,726,973      2,676,808        (6)     None
Series S                 Sept, 2004        $1.00         July, 2007       1,127,000      1,127,000         No      (2)
Series T                 Sept, 2004        $1.00         July, 2008         160,000        160,000         No     None
Series U                 Sept, 2004        $1.83       August, 2008         512,362        937,622         No      (3)
Debenture Amend           Nov, 2004    $1.55 (4)     November, 2008       1,083,592      1,679,568        (6)     None
Oct 2005 $1.78            Oct, 2005        $1.78      October, 2008         677,419      1,205,806        (6)     None
Oct 2005 $1.94            Oct, 2005        $1.94      October, 2008         677,419      1,314,193        (6)     None
March 2006 $1.55          Mar, 2006        $1.55        March, 2009         900,001      1,395,002        (6)     None
March 2006 $2.00          Mar, 2006        $2.00        March, 2009       2,191,466      4,382,932         No      (5)
May, 2006 $2.00           May, 2006        $2.00     December, 2008         200,000        400,000         No     None
May, 2006 $2.50           May, 2006        $2.50     December, 2008         200,000        500,000         No     None
May, 2006 $3.00           May, 2006        $3.00     December, 2008         200,000        600,000         No     None
                                                                         ----------    -----------
Total                                                                    13,253,935    $21,376,349
</TABLE>

(1) Callable if closing market price is 200% of strike price for 20 consecutive
trading days
(2) Callable if closing market price is 200% of strike price for 5 consecutive
trading days
(3) Callable if closing market price is 200% of strike price for one trading day
(4) Re-priced pursuant to anti-dilution provisions of the October, 2005
debenture offering
(5) Callable if closing market price is 125% of strike price for 10 consecutive
trading days
(6) Subject to exercise price adjustment if certain common stock or common stock
derivative securities are issued with values or exercise prices below $1.55 per
share.

NOTE 8 - PROPERTY AND EQUIPMENT

Property and equipment at June 30, 2006 consisted of the following:

Manufacturing equipment                                       $     3,095,034
Office Furniture and equipment                                        308,130
Leasehold improvements                                                408,096
                                                                  -----------
                                                              $     3,811,260
Less accumulated depreciation                                      (1,267,227)
                                                                  -----------
Total                                                         $     2,544,033
                                                                  ===========

Depreciation expense was $592,677 and $367,123, for the nine months ended June
30, 2006 and 2005 respectively


                                       26
<PAGE>

NOTE 9 - INVENTORY

Inventories consist of the following:

                                            June 30,        September
                                            2006             30, 2005
Raw Materials                             $ 1,073,688      $   473,007
Finished Goods Available for Sale           1,306,622          970,318
FG Inventory allocated for Sale                25,587           24,681
                                          -----------      -----------
Gross Inventory                           $ 2,405,897      $ 1,468,006
Reserve for Raw Materials                    (171,031)        (186,376)
Reserve for FG Inventory                      (48,296)         (48,296)
                                          -----------      -----------
Net Inventory                             $ 2,186,570      $ 1,233,334
                                          ===========      ===========

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

NOTE 10- COMMITMENT AND CONTINGENCIES

LEASES

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

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

Rent expense was $730,868, and $681,178, for the nine months ended June 30, 2006
and 2005, respectively. Future minimum operating lease payments at June 30, 2006
were as follows:

          Year ending June 30,                   Operating Leases
          2007                                    $    1,012,362
          2008                                         1,050,205
          2009                                         1,066,570
          2010                                         1,095,342
          Thereafter                              $      555,836


                                       27
<PAGE>

Future minimum capital lease payments under the new leases at June 30, 2006 were
as follows:

   12 months ending June 30
   2007                                                            $  438,546
   2008                                                               155,969
   2009                                                                    --
   Thereafter                                                              --
                                                                   ----------
   Total Payments                                                  $  594,515
   Less:  Amounts representing interest                               (47,550)
                                                                   ----------
   Fair Value of Capital Leases                                    $  546,965
                                                                   ----------
   Less Current Portion                                              (398,294)
                                                                   ----------
   Non Current Portion                                             $  148,671

Property and equipment under capital leases consisted of the following at June
30, 2006:

   Machinery and Equipment                                         $1,282,339
   Accumulated Depreciation                                          (777,121)
                                                                   ----------
   Net Property and Equipment                                      $  505,218

PROFESSIONAL SERVICES AGREEMENTS

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

o A contract with two professional services corporations for legal, intellectual
property, and business advisory consulting services at a rate of $500,000 per
year, payable at the Company's option in cash or in registered common stock. In
fiscal 2005, the entity was issued 150,000 shares of stock registered under form
S-8 in fiscal 2005 for services valued at $325,769. This agreement commenced in
March 2002, expired in March 2005 and was extended for three years to March,
2008. The initial agreement also contained the granting of options to purchase
up to 1,000,000 shares of common stock pursuant to a Registration Statement
under the Securities Act of 1933 on Form S-8 at a price of $0.10 per share. The
options vested in pro-rata equal segments in April 2002, January 2003, and
January 2004. The options were exercised in fiscal 2005 for cash. Subsequent to
quarter end, on January 6, 2006 the principal owner of the two professional
services corporations, Michael McIntosh, was appointed a Director of the
Company. See also related party disclosure in footnote 12.


                                       28
<PAGE>

NOTE 11 - LITIGATION

Except for the Bankruptcy cases and claims listed below, the Company had
resolved all material litigation prior to the quarter ending June 30, 2006. All
remaining bankruptcy claims were resolved as described below. The Company is the
subject of other legal disputes and legal activity from time to time in the
regular course of doing business, none of which is expected to be material in
nature.

BANKRUPTCY CLAIMS

Under our Chapter 11 Bankruptcy filing dated May 5, 2005 the Bankruptcy Court
established August 9, 2005 as the bar date for the filing of claims for
liabilities or damages that existed prior to May 5, 2005. Substantially all
claims filed had been resolved as of the end of November, 2005. During the
quarter ended June 30, 2006, we resolved all remaining claims relating to our
Chapter 11 Bankrutpcy filing as follows:

A claim was filed by Patricia vanMidde for 250,000 shares of the Company's
common stock. VanMidde, a former consultant to the Company, claimed that the
Company did not issue 250,000 shares of common stock alleged to have been
promised in 2004 for services rendered. The Company represented that there was
no promise of such a share issuance and believed the claim to be without merit.
During the quarter ended June 30, 2006, Judge Ryan of the Bankruptcy Court
agreed with the Company and rejected the claim for the shares of common stock.

A claim was filed by Zenith Insurance Company ("Zenith") for $157,323 based on
the results of a workers compensation inquiry for the time period of July, 2004
to January, 2005 representing additional workers compensation premiums due
Zenith by the Company. During the quarter ended June 30, 2006, in April, 2006
Zenith and the Company agreed to a settlement amount of $100,000 payable in ten
equal monthly installments of $10,000. The Company had recorded a settlement
accrual of $100,000 as of March 31, 2006. The Company has paid $20,000 during
the quarter ended June 30, 2006.

During the bankruptcy proceedings, the holders of the $15 million August, 2004
Debentures reserved their right to make a claim in the Bankruptcy against the
Company for liquidated damages resulting from a delay in the registration of the
common shares issuable in the event the Debentures and warrants were converted.
The claim, under the terms of the original Debenture agreement, would encompass
damages of 2% per month of the remaining principal plus interest at 18% per
annum covering the time period from July 1, 2005 to August 19, 2005. During the
quarter ended June 30, 2006, the Debenture holders filed a claim for $860,994
and a hearing was set before the Bankruptcy Court. Prior to the hearing, the
Company and the Debenture holders settled the claim for $702,000 payable in
450,000 shares of Common stock registered under section 1145 of the Bankruptcy
code. The shares were valued at the direction of the Bankruptcy Court and were
priced at $1.56 per share. The settlement balance was included in bankruptcy
settlements expense in the statement of operations during the three and nine
months ended June 30, 2006.

As a result of the settlement of all remaining claims under the Bankruptcy, on
June 29, 2006, we applied for the issuance of a final decree with the Bankruptcy
court which, when granted, will result in the formal exit from Chapter 11
Bankruptcy protection.


                                       29
<PAGE>

NOTE 12 - RELATED PARTIES

The Company currently has contracts with two companies owned by one of its
directors, Michael McIntosh: a legal services agreement with The McIntosh Group
(TMG) for legal and intellectual property services and a consulting agreement
with Technology Management Advisors, LLC (TMA) for strategic business advisory
services related to technology and international patent and intellectual
property filings. The agreements were executed on March 1, 2002 for a term of
three years and were renewed in March, 2005 for an additional three years
expiring on February 29, 2008. Each contract provides for payment of service
fees of $250,000 per annum plus out of pocket expenses. The contracts expire on
February 29, 2008.

For the fiscal quarter ended June 30, 2006 we recorded fees of $62,500 and
incidental expenses of $0 for TMG and fees of $62,500 and incidental expenses of
$9,348 for TMA. For the fiscal quarter ended June 30, 2005 we recorded fees of
$62,500 and incidental expenses of $12,257 for TMA and fees of $62,500 and
incidental expenses of $475 for TMG. All of these expenses were recorded to
Research and Development expenses for the respective time periods.

For the nine months ended June 30, 2006 we recorded fees of $187,500, passed
through patent and international filing fees of $16,838 and incidental expenses
of $2,426 for TMG and fees of $187,500 and incidental expenses of $26,075 for
TMA. For the nine months ended June 30, 2005 we recorded fees of $187,500,
passed through patent and international filing fees of $141,607 and incidental
expenses of $58,559 for TMA and fees of $83,333 and expenses of $475 for TMG.
All of these expenses were recorded to Research and Development expenses for the
respective time periods.

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

As of June 30, 2006 the Company had outstanding balances due to TMA and TMG of
$92,681 and $226,312 respectively, included in accounts payable.

During the quarter ended June 30, 2006 the Company received $250,000 in cash
from our acquisition candidate, EU Energy for payment of acquisition costs
incurred. The balance was recorded in Related Party Payables.


                                       30
<PAGE>

NOTE 13 - CONVERTIBLE DEBT

As of June 30, 2006 we had two series of convertible debt outstanding consisting
of $6,116,250 in principal remaining on the August, 2004 Debentures with no
remaining debt discount and $3,500,000 in principal remaining on the $3,500,000
Bridge notes with $683,731 in debt discount remaining. Both series of debt
contain restrictive covenants including restrictions on the declaration of
dividends, limitations through anti-dilution provisions on issuances of equity
securities or convertible debt at prices below the current conversion prices,
and limitations on further debt issuances. Convertible debt outstanding or
issued during the nine months ended June 30, 2006 consisted of:

A. August, 2004 Convertible Debentures: On August 17, 2004, CTC closed a
financing transaction in which it sold 6% convertible debentures (the "August,
2004 Debentures") to select institutional accredited investors, in order to
raise a total of $15,000,000. We received $5,000,000 upon closing and
$10,000,000 was deposited into a Custodian Account to secure repayment of the
Debentures. The Debentures will mature on August 17, 2007. The investors may
convert the Debentures into our common stock for $1.67 per share, subject to
adjustment (the "Conversion Price"). Shares issued for conversions are
registered for resale under a Registration Statement on Form S-1, as amended
originally declared effective in August, 2005.

On November 18, 2004, we obtained the release of the $10,000,000 from the
custodial account modifying the terms of the original August, 2004 agreement. In
conjunction with the modification, we issued 1,083,592 warrants with an exercise
price of $3.23 per warrant valued using the Black-Scholes option pricing model
at $1.84 per warrant. We determined that this issuance did not affect the fair
value of the beneficial conversion feature of the August, 2004 Debentures and we
recorded $1,993,523 as additional debt discount that will be amortized over the
remaining term of the Debentures. See also restatement footnote 3. Until
bankruptcy filing, the discount had been amortized to interest expense over the
expected duration of the Convertible Debentures which are scheduled for
repayment in August, 2007. On May 5, 2005 pursuant to the requirements under
Bankruptcy accounting (AICPA SOP 90-7) we adjusted the carrying value of our
Debentures to their face value of $15,000,000. The adjustment resulted in a
non-cash charge to earnings of $6,477,455 and reduced the prospective monthly
amortization of the debt discount to $0.

Between August 19, 2005 and September 30, 2005 the holders of the convertible
debentures converted a total of $4,139,558 of principal to 2,478,777 shares of
Common Stock at a conversion price of $1.67 per share.

Between October 1, 2005 and June 30, 2006, the holders of the convertible
debentures converted a total of $4,744,192 of principal as follows: $4,064,001
of principal was converted at $1.55 per share into 2,621,936 shares of common
stock $680,191 of principal was converted at $1.67 per share into 407,300 shares
of common stock.

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


                                       31
<PAGE>

Prior to May 5, 2005, we paid the Debenture holders interest at a rate of 6% per
annum, payable quarterly in cash. Under our Bankruptcy Plan of Reorganization,
interest accrued but unpaid as of the bankruptcy date in addition to interest
payable since the bankruptcy is to be paid in common stock upon plan
confirmation. As of September 30, 2005 we had accrued interest payable of
$430,755. On November 9, 2005 we issued 259,790 shares of common stock in full
payment of all interest accrued through September 30, 2005. On December 30,
2005, we paid all interest earned for the quarter ended December 31, 2005 in
cash. We have paid all interest since December, 2005 in cash and we expect to
continue to do so until the maturity or conversion of the debt.

B. October, 2005 Convertible Notes

On October 13, 2005, CTC closed a financing transaction in which it sold 6%
convertible notes (the "October, 2005 Notes") to select institutional accredited
investors, in order to raise a total of $6,000,000. The Notes bear interest at
6% and will mature on January 14, 2007. The Notes are redeemable by the Company
for 110% of the principal outstanding. The investors may convert the Notes into
our common stock for $1.55 per share (the "Conversion Price") at any time prior
to maturity or redemption by the Company. Shares issued under conversion are
registered for resale pursuant to Bankruptcy Code Section 1145.

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

In conjunction with this note issuance, on October 14, 2005, the Company issued
232,258 shares of common stock for services valued at $360,000 to Lane Capital
for services rendered to broker the convertible notes. Lane Capital also
received warrants to purchase 96,774 shares of common stock at $1.78 per share
valued at $0.9452 per warrant and warrants to purchase 96,774 shares of common
stock at $1.94 per share valued at $0.9191 per warrant under the same terms as
the warrants issued to the investors. The warrants were valued using the
Modified Black-Scholes-Merton option pricing model at an aggregate value of
$180,416. The key assumptions to value the warrants were a volatility of 100%, a
risk free rate of 3.97%, a market price of $1.55, a life of three years, and a
0% dividend yield. The warrants were expensed as appropriate under SOP 90-7.

On January 30, 2006 in exchange for the issuance of 1,308,140 shares of
restricted common stock, valued at the market price of $1.72 per share or
$2,250,000 the holders of the October, 2005 Convertible notes converted the
entire principal balance of $6,000,000 at $1.55 per share, and agreed to certain
modifications in the Note Purchase Agreement and the related Warrant Agreements.
The Company recorded a charge of $2,250,005 into other expense - inducement of
convertible debt as a result of this transaction.

Lane Capital Management provided services to facilitate this transaction and was
paid $135,000 in 78,489 shares of restricted stock valued at the market price of
$1.72 per share. This Balance was expensed under SOP 90-7.


                                       32
<PAGE>

C. March, 2006 Bridge Financing

On March 3, 2006, the Company closed a financing transaction in which we sold
14% convertible notes (the "March, 2006 Bridge Notes") to select institutional
accredited investors, in order to raise a total of $3,500,000. The Bridge Notes
bear interest at 14% payable monthly in arrears and will mature on September 3,
2006. The investors may convert the Bridge Notes into our common stock for $1.55
per share (the "Conversion Price") at any time prior to maturity or redemption
by the Company. The notes are redeemable by the Company for 110% of the
principal outstanding if the underlying conversion shares are not registered for
resale or at 100% of the principal outstanding if the underlying conversion
shares have been declared registered for resale by an effective registration
statement with the Security & Exchange Commission. The shares underlying the
bridge financing were not registered as of June 30, 2006.

Concurrent with the issuance of the Bridge Notes, the investors also received
warrants to purchase in the aggregate of 2,900,001 shares of common stock,
900,001 of which are at an exercise price of $1.55 per share and 2,000,000 of
which are at an exercise price of $2.00 per share. The combined value of the
allocated conversion features of the Bridge Notes and the value allocated to the
warrants issued was $2,060,626 which was recorded as paid in capital and as a
discount to the Convertible Bridge Notes. In conjunction with this note
issuance, the Company paid Lane Capital $180,000 for services rendered.

NOTE 14 - SUBSEQUENT EVENTS

On July 3, 2006, the Company completed the acquisition of EU Energy Ltd., a
company formerly known as EU Energy plc., and its subsidiaries (EUE). EUE is a
United Kingdom supplier of wind turbines and turbine services under the trade
name DeWind. DeWind has approximately 600 wind turbines installed, primarily in
Germany. The purchase price as determined by management and reviewed by an
independent fairness valuation consultant was approximately $60.7 million
consisting of approximately 39.1 million restricted shares of the Company's
common stock. The stock issued is subject to registration rights and lock-up
provisions.

The Company expects that the acquisition of EUE will provide sales opportunities
for our ACCC cable products and will provide opportunities for substantial
revenue growth and profitability for sales of EUE's next generation wind
turbines. To date, EUE has approximately $2.85 billion in backlogged orders
under turbine reserve agreements issued to four separate wind farm operators in
North America. The acquisition will be recorded using the purchase method of
accounting. The Company issued all 39.1 million unregistered shares on July 3,
2006. The operations of EU will be included as a Wind segment beginning in the
fourth fiscal quarter of 2006. It is expected that the operations of EU will be
accretive to the Company's earnings.

Through June 30, 2006, the Company incurred $219,220 in direct costs related to
the acquisition. These costs are included in capitalized acquisition costs
located with prepaid expenses and other current assets.

On August 3, 2006, Judge John Ryan of the US Bankruptcy Court entered a final
decree that formally closed our Federal Bankrupty case under Chapter 11.


                                       33
<PAGE>

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

You should read the following discussion and analysis of our financial condition
and results of operations together with our interim financial statements and the
related notes appearing at the beginning of this report. The interim financial
statements and this Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with the financial
statements and notes thereto for the year ended September 30, 2005 and the
related Management's Discussion and Analysis of Financial Condition and Results
of Operations, both of which are contained in our Annual Report on Form 10-K
filed with the Securities and Exchange Commission on December 13, 2005.

The following discussion and other parts of this Form 10-Q contain
forward-looking statements that involve risks and uncertainties. Forward-looking
statements can be identified by words such as "anticipates," "expects,"
"believes," "plans," and similar terms. Our actual results could differ
materially from any future performance suggested in this report as a result of
factors, including those discussed in Part II, Item 1A Risk Factors and
elsewhere in this report and in our Annual Report on Form 10-K for the fiscal
year ended September 30, 2005. All forward-looking statements are based on
information currently available to Composite Technologies and we assume no
obligation to update such forward-looking statements, except as required by law.
Service marks, trademarks and trade names referred to in this Form 10-Q are the
property of their respective owners.

The Company has received a report from its independent auditors for the year
ended September 30, 2005 that includes an explanatory paragraph describing the
uncertainty as to the Company's ability to continue as a going concern. These
consolidated financial statements contemplate the ability to continue as such
and do not include any adjustments that might result from this uncertainty.

In May 2006, the Company determined that the treatment of the issuance of
warrants in November, 2004 for the release of $10,000,000 from our August, 2004
Debenture issue was improperly expensed to legal, professional, and consulting
expense. During the quarter ended December 31, 2004, we had expensed $1,993,523
which was the fair value of the warrants that were issued to the debenture
holders in exchange for the release of $10 million of restricted cash. Under the
guidance of EITF 96-19 the issuance of the warrants constituted a modification
of a convertible debt instrument. Accordingly, the fair value of the additional
warrants issued in November 2004 should have been deferred and amortized as an
adjustment of interest expense over the remaining term of the debentures using
the interest method.

There is no impact to the balance sheet as of September 30, 2005 since as a
result of our bankruptcy filing on May 5, 2005 the carrying value of our debt
was adjusted to $15,000,000 as of May 5, 2005 which resulted in the expense of
all remaining debt discount on May 5, 2005.

OVERVIEW

We develop and market composite related products for the electrical utility
industry and provide engineering, product design, and other services related to
the design and installation of our products to the global electrical utility
industry that are designed to improve the performance and capacity of
transmission and distribution electrical grids. Beginning after the end of our
fiscal quarter ended June 30, 2006 on July 3, 2006 with the acquisition of our
wholly owned UK subsidiary, EU Energy, Ltd. we also develop, manufacture, and
sell wind turbines. Additional information regarding the wind turbine business
can be found under "Developments this Quarter, EU Energy Acquisition."

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

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

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


                                       34
<PAGE>

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

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

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

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


                                       35
<PAGE>

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

CRITICAL ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Composite
Technology Corporation (the "Company" or "CTC") have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not contain all of the information and footnotes required for complete financial
statements. Interim information is unaudited; however, in the opinion of the
Company's management, the accompanying unaudited, consolidated financial
statements reflect all adjustments (consisting of normal, recurring adjustments)
considered necessary for a fair presentation of the Company's interim financial
information. These financial statements and notes should be read in conjunction
with the audited financial statements of the Company included in the Company's
Annual Report on Form 10-K for the year ended September 30, 2005 filed with the
Securities and Exchange Commission on December 13, 2005.

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

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

REVENUE RECOGNITION

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

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

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

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


                                       36
<PAGE>

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

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

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

The Company records payments received and invoiced amounts receivable from
customers in deferred revenues until revenue is recognized in accordance with
our revenue recognition policy.

DERIVATIVE FINANCIAL INSTRUMENTS

The Company issues derivative financial instruments in the form of stock
options, stock warrants, and debt conversion features of its convertible debt
issuances. The Company has not issued any derivative instruments for hedging
purposes since inception. The Company uses the guidance of and has adopted the
disclosure requirements of Statement of Financial Accounting Standards No. 133
Accounting for Derivative Instruments and Hedging Activities and the FASB
Emerging Issues Task Force (EITF) Issue No. 00-19 "Accounting for Derivative
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock."
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 debt. The Company has accounted for all derivative instruments
indexed to the Company's stock as equity.


                                       37
<PAGE>

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

                                                          2006           2005
Risk Free Rate of Return                           4.28%-4.36%          3.97%
Volatility                                                107%           100%
Dividend yield                                              0%             0%

The accounting for derivative financial instruments related to stock-based
compensation is further described below.

STOCK-BASED COMPENSATION

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

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

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


                                       38
<PAGE>

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

<TABLE>
<CAPTION>
                                         Three Months   Three Months     Nine Months   Nine Months Ended
                                             Ended          Ended           Ended
                                            June 30        June 30         June 30        June 30
                                             2006            2005            2006           2005
<S>                                     <C>             <C>             <C>             <C>
Officer Compensation                    $   87,373      $       --      $  161,068      $       --
Legal, Professional and Consulting         125,870              --         441,207          86,000
Selling and marketing                       17,014              --          23,331              --
Research and development                    15,253         147,848         145,459         475,821
General and administrative                 246,079              --         550,405              --
                                        ----------      ----------      ----------      ----------
Totals                                  $  491,589      $  147,848      $1,321,469      $  561,821
                                        ==========      ==========      ==========      ==========
</TABLE>

As of June 30, 2006, there was $3.8 million of total unrecognized compensation
cost related to non-vested share-based compensation arrangements related to
stock options consisting of $2.9 million related to employee grants and $0.8
million related to consultant and director grants. The costs are expected to be
recognized over a weighted-average period of 2.9 years.

Our stock options vest on an annual or a quarterly basis. For the remainder of
fiscal 2006, we expect stock based compensation expense related to employee
stock options of approximately $138,000 before income taxes for the quarter
ending September 30, 2006. We expect stock based compensation related to
non-employee stock options to be approximately $45,000 before income taxes for
the quarter ending September 30, 2006. Such amounts may change as a result of
additional grants, forfeitures, modifications in assumptions and other factors.
SFAS No. 123R provides that income tax effects of share-based payments are
recognized in the financial statements for those awards which will normally
result in tax deductions under existing tax law. Under current U.S. federal tax
law, we would receive a compensation expense deduction related to non-qualified
stock options only when those options are exercised and vested shares are
received. Accordingly, the financial statement recognition of compensation cost
for non-qualified stock options creates a deductible temporary difference which
results in a deferred tax asset and a corresponding deferred tax benefit in the
income statement. However, since we currently have a full valuation allowance
for all of our deferred tax assets, any tax consequences for fiscal 2006 is
expected to be negligible to the financial statements.


                                       39
<PAGE>

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

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

CONVERTIBLE DEBT

Convertible debt is accounted for under the guidelines established by APB
Opinion No. 14 Accounting for Convertible Debt and Debt issued with Stock
Purchase Warrants (APB14) under the direction of Emerging Issues Task Force
(EITF) 98-5, Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios, (EITF 98-5) EITF 00-27
Application of Issue No 98-5 to Certain Convertible Instruments (EITF 00-27),
and EITF 05-8 Income Tax Consequences of Issuing Convertible Debt with
Beneficial Conversion Features. Under these guidelines, the Company allocates
the value of the proceeds received from a convertible debt transaction between
the conversion feature and any other detachable instruments (such as warrants)
on a relative fair value basis. The allocated fair value is recorded as a debt
discount or premium and is amortized over the expected term of the convertible
debt to interest expense. The company values any warrants issued using the
Black-Scholes option pricing model as described above. 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.

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

PRINCIPLES OF CONSOLIDATION

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

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses are charged to operations as incurred.


                                       40
<PAGE>

ACCOUNTS RECEIVABLE

The Company extends credit to its customers. Collateral is generally not
required. Credit losses are provided for in the financial statements based on
management's evaluation of historical and current industry trends as well as
history with individual customers. Although the Company expects to collect
amounts due, actual collections may differ from estimated amounts. As of June
30, 2006, the Company had gross accounts receivable of $2,534,535 and had
recorded a reserve of $2,500,000.

INVENTORY

Inventories consist of our wrapped and unwrapped manufactured composite core and
related hardware products and raw materials used in the production of those
products. Inventories are valued at the lower of cost or market under the FIFO
method. Costs to ship product for sale or for products sold is recorded to costs
of goods sold as the expenses are incurred. Products manufactured internally are
valued at standard cost which approximates replacement cost. Inventory is
periodically evaluated for obsolescence and salability and reserves are recorded
for product that is believed by management to be impaired in value or has been
scrapped. As of June 30, 2006, the Company had recorded gross inventory of
$2,405,897 and had inventory reserves of $219,327.

PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of cash payments and stock
payments that will result in future expenses. Cash payments consist primarily of
prepaid insurance, deposits, and capitalized acquisition costs for the EU
Energy, Ltd. acquisition. Stock payments consist of our common stock to American
China Technology Solutions issued for future China sales commissions and stock
and warrants issued to Media Relations Services for media and investor relations
services as described in note 7.


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.

As of June 30, 2006, the deferred tax assets related primarily to the Company's
net operating loss carry-forwards and which are fully reserved. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences which give rise to the deferred tax asset become deductible. The
Company's past financial performance is a significant factor which contributes
to its inability, pursuant to Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS 109"), to use projections of future
taxable income in assessing the realizability of deferred tax assets.
Considering the relevant data, management concluded that it is not "more likely
than not" that the Company will realize the benefits of certain deferred tax
assets at June 30, 2006. Consequently, the Company has a full valuation
allowance against net deferred tax assets at June 30, 2006.


                                       41
<PAGE>

BUSINESS SEGMENTS

The Company organizes itself as one segment and conducts its production
operations in the United States. Sales and marketing efforts are conducted in
China, Europe, the Middle East, and North America. The functional and operating
currency is the US Dollar.

The Company sells its products and technology to domestic and international
customers. Jiangsu-Far East in the Peoples Republic of China represented 95% of
the revenues recognized during the quarter ended June 30, 2006. Jiangsu and the
City of Kingman, Kansas represented 50% and 46% of the revenues recognized
during the nine months ended June 30, 2006.

LOSS PER SHARE

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

The following common stock equivalents were excluded from the calculation of
diluted loss per share for the three months ended June 30, 2006 and 2005 since
their effect would have been anti-dilutive:

<TABLE>
<CAPTION>
                                                                     June 30
                                                               2006           2005
                                                               ----           ----
<S>                                                          <C>            <C>
     Options for common stock                                9,815,171      6,167,936
     Warrants                                               13,253,935     11,024,864
     Convertible Debentures, if converted                    6,204,033      8,982,036
                                                            ----------     ----------
                                                            29,273,139     26,174,836
                                                            ==========     ==========
</TABLE>

RECENT ACCOUNTING PRONOUNCEMENTS

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


                                       42
<PAGE>

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

SFAS No. 155  Accounting for Certain Hybrid Financial Instruments:
In February, 2006 the FASB issued Statement no 155, : Accounting for Certain
Hybrid Financial Instrument, an amendment of FASB Statements No. 133 and 140.
Statement 155 resolves issues related to SFAS 133 by allowing for simplified
accounting for hybrid financial instruments that contain embedded derivatives
and issues related to SFAS 140 by eliminating restrictions on passive derivative
instruments that a qualifying special-purpose entity may hold. Statement 155 is
required to be adopted as of the beginning of the fiscal year beginning after
September 15, 2006. Since the Company does not own or issue the hybrid financial
instruments referred to in the pronouncement, we do not believe adoption of
Statement 155 will have a material effect on our consolidated financial
position, results of operations or cash flows.

SFAS No. 156 Accounting for Servicing of Financial Assets - an amendment of FASB
Statement No. 140:
In March, 2006 the FASB issued Statement No. 156, Accounting for Servicing of
Financial Assets - an amendment of FASB Statement No. 140. Statement 156 relates
to accounting for the servicing of financial assets and extinguishments of
related liabilities. Statement 156 is required to be adopted as of the beginning
of the fiscal year beginning after September 15, 2006. Since the Company does
not service financial assets, we do not believe adoption of Statement 156 will
have a material effect on our consolidated financial position, results of
operations or cash flows.

FIN No. 48 Accounting for Uncertainty in Income Taxes:
In June, 2006 the FASB issued FASB Interpretation No. 48: Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in
accordance with FASB 109. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return and also provides
guidance on derecognition, classification, interest, and penalties, accounting
in interim periods, disclosure, and transition. FIN 48 is effective for fiscal
years beginning after December 15, 2006. As such, the Company has not evaluated
the financial impact to the implementation of FIN 48 on the consolidated
financial position, results of operations or cash flows.


                                       43
<PAGE>

RESULTS OF OPERATIONS

PRODUCT REVENUES. Product revenues for the three months ending June 30, 2006 of
$1.79 million consisted substantially of three commercial sales to the Jiangsu
New Far East Cable Company in the Peoples Republic of China. The commercial
sales to the Jiangsu New Far East Cable Company consisted of 103.5 kilometers of
ACCC cable and related ACCC hardware for $1.67 million. We had no product sales
for the three months ending June 30, 2005.

Product revenues for the nine months ending June 30, 2006 were $2.84 million and
consisted primarily of the Jiangsu New Far East Cable Company sales and the $1.0
million City of Kingman sale. Product revenues for the nine months ending June
30, 2005 of $46,485 consisted of one small, non-commercial trial sale.

CONSULTING REVENUES. Consulting revenues for the nine months ended June 30, 2006
consisted of consulting and technical services performed in fiscal 2004 and
fiscal 2005 to the City of Kingman but which had been deferred under the
original City of Kingman contract. The original contract had been accounted for
based on the completed contract method due to a requirement that funds paid to
the Company could be required to be refunded if the entire contract were not
completed. The original contract also required the Company to provide
construction services and provided for future products that the Company has not
developed. On November 18, 2005, the Bankruptcy court approved a revised
contract with the City of Kingman that removed the refund provision and the
requirements to deliver future products and services. Accordingly, the Company
recognized the revenue for the consulting services performed in the amount of
$550,000 on the date the revised contract was approved. There were no consulting
services transactions during the three or nine months ended June 30, 2005 or for
the three months ended June 30, 2006.

COST OF PRODUCT REVENUES. Cost of product revenues for the three and nine months
ending June 30, 2006 represent materials, labor, freight, and allocated overhead
costs to produce ACCC cable and related hardware, primarily for the Jiangsu
China orders for the quarter ended June 30, 2006 and the Jiangsu and City of
Kingman orders or the nine months ended June 30, 2006. The cost of product
revenues for 2005 consists of the cost of product related to the small trial
sale in 2005.

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

No consulting contracts were completed during the three or nine months ended
June 30, 2005 or the three months ended June 30, 2006 and accordingly, no costs
of contract revenue were recorded for those periods.


                                       44
<PAGE>

OPERATING EXPENSES. Due to the Company's history in fiscal 2005 and fiscal 2006
to date of incurring expenses not related to the current business environment,
in the discussion of each operating expense line item discussed below, expenses
that are not related to the Company's expected pro-forma operating expenses are
identified as non-recurring and expenses that are expected to continue in the
ordinary course of business are identified as recurring. Non-recurring items
include primarily one time charges for equity or convertible debt related
actions, modification to debt agreements, bankruptcy legal expenses, litigation
settlements, legal expenses related to our now resolved litigation, financing
and acquisition fees. The total operating expenses as broken down for recurring
and non-recurring expenses is:

<TABLE>
<CAPTION>
In millions                        Quarter ending     Quarter ending    Nine months       Nine months
(unaudited)                         June 30, 2006      June 30, 2005  ending June 30,   ending June 30,
                                                                           2006              2005
<S>                                           <C>             <C>               <C>               <C>
Recurring Operating Expenses                  $2.7            3.2               8.8               7.7
Non-recurring Operating Expenses              $0.1            3.4               2.0               5.5
                                     -------------  -------------     -------------     -------------
Total Operating Expenses                      $2.8            6.6              10.8              13.2
</TABLE>

The following table provides information on the primary expense drivers to the
recurring operating expenses for the three and nine months ended June 30, 2005
to 2006, rounded to the nearest $0.1 million.

<TABLE>
<CAPTION>
In millions                          Quarter ending     Quarter ending    Nine months       Nine months
(unaudited)                           June 30, 2006      June 30, 2005  ending June 30,   ending June 30,
                                                                             2006              2005
<S>                                            <C>             <C>            <C>               <C>
Headcount costs (employees &                   $ 1.5           $ 2.0          $ 4.6             $ 4.9
consultants) payable in cash
Legal & Accounting Professional Fees             0.1             0.2            0.5               0.3
Rents and overheads                              0.5             0.5            1.5               1.5
Supplies, tools and other                        0.1             0.4            0.7               0.6
Amortization of prepaid expenses
paid or payable in stock                         0.1              --            0.3                --
Equity compensation                              0.2              --            0.6                --
Depreciation                                     0.2             0.1            0.6               0.4
                                       -------------   -------------  -------------     -------------
Total Recurring Expenses                       $ 2.7           $ 3.2          $ 8.8             $ 7.7
</TABLE>

The figures listed above do not contemplate the additional cost structure
inherited as a result of our acquisition of EU Energy Ltd. We expect that the
acquisition, completed on July 3, 2006, will result in additional headcount
related costs, legal and accounting fees and additional rents, overhead, and
other expenses as we combine and integrate of EU Energy's operations, business
systems and subsidiaries with our own.


                                       45
<PAGE>

The following table provides information on the primary expense drivers to the
changes in non-recurring operating expenses for the three and nine months ended
June 30, 2006 and 2005. All material non-recurring item changes for the reported
periods have been listed, rounded to the nearest $0.1 million.

<TABLE>
<CAPTION>
In millions                            Quarter ending   Quarter ending        Nine months       Nine months
(unaudited)                             June 30, 2006    June 30, 2005      ending June 30,    ending June 30,
                                                                                 2006               2005
<S>                                          <C>               <C>            <C>               <C>
Fees and FMV warrant expenses                   $ --            $ --          $ 0.8              $ --
relating to $6M October, 2005
financing and subsequent conversion
in January, 2006
Fees and FMV warrant expense
relating to $3.5M March, 2006
financing                                         --              --            0.2                --
Fees related to November, 2004
modification recorded in fiscal 2005              --              --             --               0.4
Bad debt reserve - Global American                --             2.5             --               2.5
Litigation related legal fees                     --             0.6            0.4               2.3
Bankruptcy related legal costs                   0.1             0.3            0.6               0.3
                                       -------------   -------------  -------------     -------------
Total Non-recurring  Expenses                $   0.1           $ 3.4          $ 2.0             $ 5.5
</TABLE>

We expect that all non-recurring expenses listed above will not recur in the
future except that we expect to incur additional expenses relating to any
potential financings as they occur.

OFFICER COMPENSATION. Officer compensation expense consisted of salaries and
SFAS 123R option expenses for our Chief Executive and Secretary. Officer
compensation expenses increased 148% or $89,034 from $60,000 for the three
months ended June 30, 2005 to $149,034 in the current year quarter and increased
$176,690 or 95% from $186,838 for the nine months ended June 30, 2005 to
$363,528 for the current year period. The dollar increase was primarily due to
SFAS 123R option expenses of approximately $87,000 in the three month period and
$161,000 in the nine month period.

GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense consisted
primarily of salaries and employee benefits for administrative personnel,
facilities costs, stock exchange fees, audit and Sarbanes Oxley compliance fees,
and insurance expenses. General and administrative decreased 67% or
approximately $2,145,000 from $3,191,177 for the three months ended June 30,
2005 to $1,047,201 for the current year period. The dollar decrease was due
primarily to a bad debt expense charge of $2,500,000 recorded in 2005 offset by
increased SFAS 123R options expenses of $117,000 in the fiscal 2006 quarter, a
$129,000 increase in expense related to the Media Relations contract, an
increase in Directors fees to $29,000 from $0 in the similar 2005 period,
shareholder meeting expense of $16,000 and increased overhead and other costs of
$58,000.

General and administrative expenses decreased 36% or approximately $1,626,000
from $4,574,014 for the nine months ended June 30, 2005 to $2,948,107 in the
2006 period. The decrease was due primarily to the reduction in bad debt expense
of $2,500,000 offset by increased SFAS 123R option expenses of $292,000,
Sarbanes Oxley related expenses of $213,000, investor relations fees related to
the Media Relations contract of $258,000 and Director fees of $58,000, none of
which were incurred in the fiscal 2005 period, increased overhead and other
costs of $53,000.

LEGAL, PROFESSIONAL, AND CONSULTING EXPENSE. Legal, professional, and consulting
expense consisted of professional legal or litigation related expenses,
financing related expenses, and equity related non-cash expense charges but
excludes bankruptcy related legal expenses which are captured in reorganization
costs. Legal, professional, and consulting expense decreased 78% or $666,000
from $857,514 for the quarter ended June 30, 2005 to $191,550 for the 2006
quarter and decreased 42% or $1,269,000 from $3,028,407 for the nine months
ended June 30, 2005 to $1,759,577 for the similar 2006 period.


                                       46
<PAGE>

For the three month period ended June 30, 2006, legal, professional, and
consulting expense consisted primarily of warrants issued for services of
$126,000 and SEC and general legal expenses of $66,000.

For the three month period ended June 30, 2005, legal , professional, and
consulting expense consisted primarily of litigation and SEC related legal
expenses of $730,000 and general legal expenses of $128,000.

For the nine month period ended June 30, 2006, legal, professional, and
consulting expense of $1,759,577 consisted primarily of: $135,000 in legal fees
for the inducement of the $6.0 million DIP financing inducement, finance related
legal fees of $337,000 for the $6.0 million and $3.5 million financings,
brokerage fees of $540,000 for the $6.0 and $3.5M financings, and warrants
issued for services of $205,000. Litigation related legal expenses decreased to
$279,000 and SEC and general legal was $273,000.

For the nine month period ended June 30, 2005, legal, professional, and
consulting expense of consisted primarily of: $86,000 in warrants issued for
leasing services, $368,000 in finders fees paid in cash for the $15MM debenture,
a litigation settlement of $116,000, $203,000 in SEC legal expenses and
$2,255,000 in litigation related legal expenses.

RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense consisted
primarily of salaries for engineers, and expenses for consultants, recruiting,
supplies, equipment, and facilities related to engineering projects to enhance
and extend our composite materials intellectual property offerings, and our
composite materials product technology and production processes. In 2005 through
June 30, 2005, all manufacturing related expenses were included in research and
development expenses since the company was ramping up to production during that
time period. During 2006, certain headcount, equipment, and overhead related
manufacturing related expenses were capitalized into inventory and therefore
excluded from Research and Development expenses.

Research and development expense decreased $1,072,000 or 59% from $1,806,087 in
the third quarter of fiscal 2005 to $734,466 in the third quarter of fiscal
2006. Research and development expenses for the nine months ended June 30
decreased $818,000 or 20% from $4,025,487 for the fiscal 2005 period to
$3,207,308 for the fiscal 2006 period.


                                       47
<PAGE>

Research and development expense for nine months ended June 30, 2006 included
expenses capitalized into inventory. For consistency of presentation, the table
below lists reconciles the classification of the combined R&D and Manufacturing
related expenses between the respective reporting periods:

<TABLE>
<CAPTION>
                            Quarter ending  Quarter ending     Increase     Nine months     Nine months    Increase
                            June 30, 2006   June 30, 2005     (Decrease)    ending June     ending June   (Decrease)
                                                                             30, 2006        30, 2005
<S>                        <C>             <C>             <C>             <C>             <C>            <C>
Cash basis headcount       $   659,000     $ 1,288,000     $  (629,000)    $ 2,480,000     $ 2,816,000    $  (336,000)
related costs
Equipment, supplies &
tools purchases                 68,000         372,000        (304,000)        704,000         649,000        (55,000)
Rents and overhead             222,000         146,000          76,000         600,000         530,000         70,000
Fair value stock option
expense                         15,000              --          15,000         145,000              --        145,000
                           -----------     -----------     -----------     -----------     -----------    -----------
Expenses capitalized to
inventory                     (230,000)             --        (230,000)       (722,000)             --       (722,000)
                           -----------     -----------     -----------     -----------     -----------    -----------
Expense reported on
Income Statement           $   734,000     $ 1,806,000     $(1,072,000)    $ 3,207,000     $ 4,025,000    $  (818,000)
</TABLE>

For the quarter ended June 30, the combined cash basis headcount cost decrease
of $629,000 represents decreased consulting related development costs from
fiscal 2005 to 2006. Of the $659,000 cash headcount total in the third fiscal
2006 quarter, $141,000 was capitalized into inventory for a net R&D cash basis
headcount expense of $518,000 for the June 30, 2006 quarter. Equipment and tools
purchases decreased $305,000 to $67,000 in the fiscal 2006 quarter due to very
high expensed equipment, supplies, and tools purchases in the quarter ending
June 30, 2005 as we were starting commercial production in that quarter.
Overhead expense increased $76,000 due to a revised overhead allocation as
compared to fiscal 2005. In fiscal 2006, we expanded our production capacity for
our pultrusion machines from four machines to nine machines. A much lower
percentage of our facility was used for research and development in fiscal 2006.
Of the overhead, $89,000 was capitalized into inventory during the quarter. The
increase in stock option expense is due to vesting of consultant stock options
and expense of employee stock options under SFAS 123R.

For the nine months ended June 30 2006, the combined cash basis headcount cost
decrease of $336,000 represents decreased consulting development costs as
compared to 2005. The increase in equipment, supplies, and tools represents
increased activities related to production of ACCC core which began in June,
2005. The increase in overhead is due to the increase in the June, 2006 fiscal
quarter relating to increased manufacturing space for the additional pultrusion
machines. The increase in stock option expense is due to vesting of consultant
stock options and expense of employee options under SFAS 123R. Of the expenses
related to the nine months ended June 30, 2006, $722,000 was capitalized into
inventory and consisted of: $403,000 cash headcount, $282,000 for overhead, and
$37,000 for equipment and tools.

SALES AND MARKETING EXPENSE. Sales and marketing expense consisted primarily of
salaries for sales and marketing personnel, expenses for consultants, equipment,
travel, and printed marketing literature and sales materials. For the quarter
ended June 30, Sales and Marketing expenses increased $118,000 or 41% from
$287,974 in the 2005 quarter to $406,334 in the 2006 quarter. The increase was
entirely due to higher employee and consultant headcount related expenses as we
continue to expand our sales and marketing efforts. For the nine months ended
June 30, Sales and Marketing expenses increased $511,000 or 64% from $793,216 in
the 2005 period to $1,304,312 in the 2006 period. The increase was due to
increased sales headcount related expenses.


                                       48
<PAGE>

DEPRECIATION EXPENSE. Depreciation expense consisted of depreciation on
capitalized equipment, leasehold improvements, and other capital assets.
Depreciation expense increased by $70,000 or 53% from $130,795 in the third
quarter of fiscal 2005 to $200,624 in the third quarter of fiscal 2006 and
increased by $226,000 or 61% from $367,123 for the nine months ended June 30,
2005 to $592,000 for the nine months ended June 30, 2006. The dollar increase
for the three and nine month periods ended June 30, 2006 was primarily due to a
higher depreciable base resulting from equipment purchased during the last three
quarters of fiscal 2006.

REORGANIZATION EXPENSE - BANKRUPTCY LEGAL FEES: Bankruptcy legal fees consist of
legal and professional fees and costs associated with the preparation for our
bankruptcy confirmation hearings, our bankruptcy financing hearings, and work
performed subsequent to our bankruptcy confirmation.

The balance for the three and nine months ended June 30, 2006 of $61,911
decreased 77% or $211,000 from $272,830 from the prior year quarter and
increased 133% or $362,000 from $272,830 for the nine months ended June 30, 2005
to $635,140 for the nine months ended June 30, 2006.

The changes reflect the timing of the activity of our Chapter 11 bankruptcy. Our
bankruptcy was filed in May, 2005 and the charges for the quarter and nine
months ended June 30,2005 represents the legal costs incurred in preparation of
our Bankruptcy Plan. The costs incurred for the quarter ending June 30, 2006
represent legal costs related to the final bankruptcy settlements and filing for
our final decree. The costs for the nine months ending June 30, 2006 represent
the costs incurred to defend our Bankruptcy plan which was confirmed in
November, 2005 and the costs to execute on our plan. We expect that future legal
costs related to our Bankruptcy will be nominal.

INTEREST INCOME. Interest income decreased to $106 and $15,817 for the three and
nine months ended June 30, 2006, a decrease from $21,033 and $53,577 for the
similar periods in the prior year. The decrease was due to interest earned on
lower cash balances.

INTEREST EXPENSE. Interest expense increased $720,000 or 136% from $529,303 in
the third quarter of fiscal 2005 to $1,249,676 in the third quarter of fiscal
2006. The increase was due to non-cash interest expenses related to the discount
on our $3.5 million convertible notes issued in March, 2006. Interest expense
decreased $395,000 or 17% from $2,341,977 for the nine months ended June 30,
2005 to $1,947,448 for the nine months ended June 30, 2006. The decrease was due
to lower net non-cash interest expense on our debt balances. The fiscal 2005
balances included non-cash interest expense through May 5, 2005 on our $15M
August, 2004 Debentures. The expense did not exist in fiscal 2006 due to the
requirements of bankruptcy accounting. The fiscal 2006 balances included the
non-cash interest for our $3.5 million convertible notes issued in March, 2006.

INCOME TAXES. We made no provision for income taxes in the three or nine months
ending June 30, 2006 and 2005 due to net losses incurred. In 2002, we determined
that due to our continuing operating losses as well as the uncertainty of the
timing of profitability in future periods, we should fully reserve our deferred
tax assets. Tax expense represents minimum tax payments. As of June 30, 2006,
our deferred tax assets continued to be fully reserved. We will continue to
evaluate, on a quarterly basis, the positive and negative evidence affecting the
realization of our deferred tax assets.


                                       49
<PAGE>

Net Loss

Our net loss improved to $4.2 million and $18.0 million for the three and nine
months ended June 30, 2006 compared to $13.6 million and $22.0 million during
the corresponding periods in 2005. The improvement of $9.4 million from the
quarter ended June 30, 2005 to 2006 was due to increased gross margin of $0.5
million, lower operating expenses of $3.8 million and a charge of $6.5 million
for an adjustment to the carrying value of the convertible debentures recorded
in the prior year offset by $0.7 million in current year bankruptcy settlement
expenses and $0.7 million increase in interest expense. The improvement of $4.0
million for the nine months ended June 30, 2005 to 2006 was primarily due to an
increase in gross margins of $0.8 million, operating expense decline of $2.4
million, a decrease in the convertible debt reorganization adjustment of $3.9
million, and lower interest expenses of $0.4 million. These lower expenses were
partially offset by an adjustment of $2.2 million recorded in the current year
related to the debt convertible inducement, $0.8 recorded for bankruptcy
settlements, and $0.4 million for expenses related to the modification of
warrants caused by the repricing of the $15M debentures in October, 2005.

Gross margin increased by $0.5 million in the current quarter mainly due to the
recognition of product sales to the the Jiangsu New Far East Cable Company.
Gross margin increased by $0.8 million for the nine months ending June 30, 2006
due to revenues and margins from Jiangsu, and the City of Kingman sales.

For the three months ended June 30, 2006 the Company settled the final two
bankruptcy claims and recorded expenses of $702,000. For the nine months ended
June 30, 2006, the Company settled the Tarbox claim and accrued $100,000 for
this settlement. See note 11 to the financial statements.

Interest expense increased from the three months ended June 30, 2005 to 2006 by
approximately $0.7 million due to non-cash interest expense related to the
amortization of the conversion features of the $3.5 million notes issued in
March, 2006. For the nine month period, interest expense decreased by
approximately $0.4 million due to the net effect of the amortization of the
conversion features of the August, 2004 debentures through the Bankruptcy filing
date of May, 2005, which was zero for 2006, and the conversion feature
amortization of the $3.5 million notes in 2006.

For the nine months ended June 30, 2006 the Company incurred charges of $0.4
million for warrant modifications due to the re-pricing of the August, 2004
convertible debentures, $2.6 million for the combined carrying value adjustment
expense for our $15 million August, 2004 and $6 million DIP financing in October
as a result of the acceleration of the debt discount under bankruptcy accounting
in October, 2005, and $2.25 million for common stock issued as an inducement to
convert the $6.0 million DIP financing in January, 2006.

LIQUIDITY AND CAPITAL RESOURCES

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

For the nine months ended June 30, 2006, we had a net loss of $18.0 million. At
June 30, 2006, we had $0.3 million of cash and cash equivalents, which
represented a decrease of $0.5 million from September 30, 2005. The decrease was
due to $6,000,000 of cash proceeds from the issuance of convertible notes in
October, 2005, $3.5 million of cash proceeds from the issuance of convertible
notes in March, 2006 and $0.7 million of cash received from the exercise of
warrants offset by cash used in operations of $10.0 million, cash used to
purchase equipment of $0.4 million, and cash used to pay capital leases of $0.3
million.


                                       50
<PAGE>

Cash used by operations during the nine months ended June 30, 2006 of
$10,061,767 was the result of operating losses, offset by depreciation,
amortization, and non-cash compensation expenses and working capital
requirements. In particular, we used approximately $1.1 million to pay our
pre-bankruptcy accounts payable, incurred additional bankruptcy related cash
expenditures, and purchased approximately $2.4 million in industrial grade
carbon and other key raw materials in anticipation of future sales growth. Due
to our Chapter 11 bankruptcy, our carbon vendors required cash payment prior to
delivery of these materials. Cash used for investing activities of $371,102 was
related to the purchase of computer hardware and software, certain leasehold
improvements, and equipment put in service in anticipation of manufacturing
activities offset by the sale of equipment. Cash provided by financing of
$9,886,249 was primarily due to the cash proceeds from the $6M in convertible
notes in October, 2005, $3.5M in convertible notes in March, 2006 and $687,171
from warrant and option exercises net of principal payments made on capital
lease obligations of $300,922.

We anticipate that sales of our ACCC cable will not be sufficient to sustain our
operations as they existed prior the EU Energy acquisition, and further
anticipate that we will continue to incur net losses due to our costs exceeding
our revenues for an indefinite period of time. However, we also anticipate that
our acquisition of EU Energy that closed on July 3, 2006 will result in near
term cash flows that will be sufficient to fund operations on a consolidated
basis through October, 2006. These cash flows are reliant upon the payment of
several large invoices from international customers, some of whom are new
customers and have not provided funds to EU Energy or its subsidiaries in the
past. If existing cash and cash generated from operations are insufficient to
satisfy our liquidity requirements, we may seek to raise additional capital
through issuances of equity or debt securities. Any additional financing may not
be available in amounts or on terms acceptable to us, or at all.

CAPITAL EXPENDITURES

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

EFFECTS OF INFLATION

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


                                       51
<PAGE>

DEVELOPMENTS THIS QUARTER

Sales and Marketing

During this quarter we continued to make progress towards the full
commercialization of our primary product, ACCC conductor cable in both the US
and International markets. We completed shipment of our ACCC orders to China and
recognized revenues of approximately $1.8 million from these orders.

Our North American sales and marketing efforts in the quarter continued the
strategy of leveraging the successes at Pacificorp and American Electric Power
(AEP) to sell additional products to those customers, and to use their
recognition in the industry as a tool to open up sales opportunities with other
domestic utilities. Accordingly, a number of opportunities were identified that
would appear to benefit from the unique attributes of our ACCC product. These
included repeat projects with AEP and Pacificorp and new inquiries from a number
of other domestic utilities that recognize the value of ACCC. The inquiries were
quoted by CTC directly or by General Cable in accordance with the non-exclusive
sales and distribution agreement between the companies. The projects are
expected to move to the procurement and installation phases in the next two
quarters.

Additionally we increased our focus on the engineering and design firms often
responsible for the overall line design and components for transmission and
electrical distribution projects. These firms are usually engaged by smaller
utilities and providers that do not possess extensive engineering groups. We
believe their understanding of the uses and benefits of ACCC will provide a
number of design-in opportunities, some even before they are apparent to our
sales team.

On the international front we gained substantial traction in quoting ACCC for
high temperature low sag applications. Jiangsu Far East placed additional orders
for 5 km of our Cardinal ACCC conductor and 40 km of Linnet ACCC conductor for
installation in China at the end of the quarter and continuing into the next
quarter. These orders, totaling roughly $600,000, signify the start of a
continuing series of orders for the coming quarters. In the quarter ACCC
installations were successfully completed in Shenzen and Liaoning, China.
Additional installations are planned for Longyan and Wuxi, China in July. We
have quoted a number of other opportunities in the region and we maintain an
active technical dialogue for new projects. We have approval for ACCC use by all
regional power bureaus and we have completed testing for approval by State Grid
of China, which opens the door for large scale national projects at 345KV and
above.

We are also active in the Middle East, France, the U.K. and Australia, with
projects quoted throughout the regions, as part of our strategy of partnering
with key suppliers and engineering organizations that enjoy substantial market
positions for bare overhead cable. We expect these quoted projects will be
awarded in the next two quarters.


                                       52
<PAGE>

Research and Development and ACCC production

We continue to develop and refine the ACCC product and our production processes.
During this quarter, refinements to the product and production process have
resulted in processing optimizations, including materials usage efficiencies and
improvements in our quality control processes. In addition, we certified the
operational capability of five of our new pultrusion machines during the
quarter. We now have a total of nine pultrusion machines available for
production representing over 400 miles of potential ACCC core production
capacity per month at current operating speeds. We believe that process
optimization can increase this capacity to over 550 miles of production per
month without adding additional machinery and we are focusing development
efforts on those process improvements.

We are also working on improving product yield on our key raw material - carbon
fiber. We believe that such efforts will result in decreased scrap and decreased
materials costs for our finished goods product. Such efficiencies in addition to
those gained as a result of producing ACCC core at higher speeds should create
lower per mile or per unit costs which could result in gross margin improvements
on future ACCC sales.

We have also made significant progress on our ISO certification. We have been in
communication with the ISO certification boards and we have enacted numerous
additional controls and procedures in our in-house production of our ACCC core
and our ACCC hardware components. We anticipate ISO certification in late
calendar year 2006.

General Corporate, Finance, Administrative, Bankruptcy, and Litigation

The quarter ending June 30, 2006 saw the culmination of all of our remaining
bankruptcy claims and resulted in our filing for our final bankruptcy decree.
With the settlement of the August 2004 Debenture claim for 450,000 shares of
stock and the successful outcome of the vanMidde claim in our favor, we resolved
all remaining litigation and bankruptcy issues and allowed the company to file
for our final bankruptcy decree. See also note 11. On August 3, 2006, Judge John
Ryan of the US Bankruptcy Court entered a final decree that formally closed our
Federal Bankrupty case under Chapter 11. For the first time in several years,
the company has no outstanding litigation and management can now focus on
building our businesses and building shareholder value.

On April 27, 2006 we conducted a special shareholders meeting that resulted in
the increase of our authorized share capital to 300,000,000 common shares from
200,000,000 common shares. This increase allows the issuance of common shares
for acquisitions such as for the EU Energy acquisition.

EU Acquisition

During the quarter ending June 30, 2006 we focused considerable attention on the
EU Energy, Ltd. (formerly known as EU Energy plc) acquisition.

In March, 2006 we signed a letter of intent to purchase EU Energy, plc a United
Kingdom holding company that owns several subsidiaries including EU Energy Wind
Ltd, that owns rights to manufacture and sell the DeWind family of wind turbines
designed and certified in Germany. The DeWind models 1.25 MW D6 and 2MW D8
models of wind turbines have proven themselves in over 150 installations as
being highly reliable and demonstrate consistently high performance for
converting wind energy to electricity. We believe that the new DeWind 8.2 and
8.1 models incorporate technologies that enable next-generation wind turbine
machines and which should result in substantial improvements in electrical
generation, power grid integration, and increased reliability as compared to the
existing wind turbines on the market.


                                       53
<PAGE>

Beginning in April, 2006 we began the due diligence and work on the securities
purchase agreement that defined the acquisition. In June, 2006 we completed the
diligence and we executed a Share Exchange Agreement with substantially all of
the shareholders of EU Energy Ltd. In June, 2006 EU Energy Plc re-organized as a
private company and became EU Energy Ltd. The Share Exchange Agreement includes
provisions for a 12 month lock-up for all CTC stock issued or issuable to major
shareholders and allows for indemnification of CTC by major shareholders of EU
under certain events. The Share Exchange Agreement is available on Form 8-K
filed on June 8, 2006.

On July 3, 2006, we issued 39,169,665 of restricted CTC common stock in exchange
for 100% of EU Energy stock outstanding. We expect to operate EU Energy as a
wholly owned subsidiary of CTC and we expect the earnings of EU to be accretive
to CTC.

The purchase of EU Energy is a long term investment in wind energy. EU Energy
currently has nearly $3.0 billion in Turbine Reserve Agreements (TRAs) for their
current and future wind turbines, substantially all of which are for deliveries
scheduled to begin in late 2007 through 2012 and which represents a substantial
portion of the projected production capacity of EU Energy during that time
frame. The TRAs represent the intent for wind farm operators and other
individuals to purchase wind turbines and as such are not binding agreements to
purchase turbines, although they call for advance payments according to a
schedule in advance of intended delivery dates. We have reviewed the TRAs during
our due diligence procedures and we believe that they represent valid intents to
purchase the turbines at the prices indicated and that should the turbines be
produced at a reasonable cost that EU Energy has the opportunity to potentially
realize substantial profits should these sales materialize. We also believe that
in the event that one of these customers decides to cancel their TRA, due to the
worldwide wind turbine production capacity shortage, that additional customers
will be willing to purchase our turbines.

However, since the TRAs are not binding contracts and few penalties exist should
one or more of the customers cancel, there exists substantial risk that these
sales and related profits could not materialize. Further, most of the turbines
sold under the TRAs represent the next generation turbine that incorporates the
use of a proven technology that is novel to wind generation that we believe will
result in a more effective approach to converting wind energy to electrical
energy. Although the technology used in this approach has been proven in other
industrial applications, it has not yet been demonstrated in our D8.2 and D8.1
wind turbines. Those models are based upon our proven and type certified D8
model and is expected to be demonstrated in October/November of 2006 and
presented for type certification. They should be certified in early 2007. We
believe that the success of this prototype and the resultant certification will
be a milestone event for this next generation product.


                                       54
<PAGE>




EU Energy has also licensed its D6 and D8 wind turbines production to three
entities in China for sale in China and has received initial payments from those
entities and orders for assembled turbines, unassembled turbines, and parts.

For the near term, we have assessed the financial condition of EU Energy and its
operating activities. A preliminary, unaudited condensed balance sheet is listed
below as of the acquisition date:



   In millions of $                                 As of July  3, 2006
   -----------------------------------------------------------------------------
   Cash                                                           $      1.1
   Accounts receivable, net                                              9.3
   Inventories, net                                                     23.5
   VAT receivable                                                        1.3
   Prepaid expenses and other receivables                                4.4
   Fixed Assets                                                          2.5
                                                                  ----------
   Total Assets                                                         42.1

   Accounts Payable                                                      6.1
   Warranty provisions                                                  12.5
   Other accruals and provisions                                         3.6
                                                                  ----------
   Total liabilities                                                    22.2
                                                                  ----------
   Net assets acquired                                            $     19.9

This condensed, unaudited balance sheet was prepared under IFRS GAAP and has not
been adjusted to US GAAP, to reflect the fair value adjustment required under
purchase accounting, and a purchase price allocation which is underway, has not
been completed. Actual recorded figures under proper purchase accounting under
US GAAP may differ significantly from the balances listed above.

We believe, based on this review, that EU Energy will generate cash flows from
their existing service and maintenance operations and licensing agreements of
older technology. In addition, we believe that they will be able to successfully
liquidate a substantial amount of their current assets including their remaining
existing inventory and realize a substantial amount of cash. We expect to use
this cash to build the prototype of the next generation and to fund operations
of EU Energy and, to the extent required, CTC's Cable division for the next two
quarters.

OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

There are no off balance sheet arrangements. The following table summarizes our
contractual obligations (including interest expense) and commitments as of June
30, 2006:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
Contractual           Total         Less than       1-3 years      3-5 years     More than 5
Obligations                         1 year                                       Years
----------------------------------------------------------------------------------------------
<S>                  <C>            <C>            <C>            <C>            <C>
Debt Obligations     $9,616,250     $ 3,500,00     $6,116,250     $       --      $       --
----------------------------------------------------------------------------------------------
Capital Lease
Obligations          $  594,515        438,546        155,969             --              --
----------------------------------------------------------------------------------------------
Operating Lease
Obligations          $4,780,315     $1,012,362     $3,212,117     $  555,836      $       --
----------------------------------------------------------------------------------------------
</TABLE>


                                       55
<PAGE>

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

As of June 30, 2006 we did not hold any derivative financial instruments for
speculative or trading purposes. The primary objective of our investment
activities is the preservation of principal while maximizing investment income
and minimizing risk. As of June 30, 2006, we had $0.3 million in cash, cash
equivalents and short-term investments that mature in twelve months or less. Due
to the short duration of these financial instruments, we do not expect that a
change in interest rates would result in any material loss to our investment
portfolio.

ITEM 4: CONTROLS AND PROCEDURES

Based on an evaluation under the supervision and with the participation of the
Company's management, including the Chief Executive Officer, the acting Chief
Operating Officer, the Company's principal executive officer and principal
financial officer have concluded that the Company's disclosure controls and
procedures (as defined under the Securities Exchange Act of 1934, as amended
(Exchange Act)) were not effective as of June 30, 2006 to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.

During management's review of our internal control structure under Sarbanes
Oxley section 404, for the fiscal year ending September 30, 2005, we determined
the following to be material weaknesses:

Entity level Processes and weaknesses . As of September 30, 2005, the following
material weaknesses existed related to general processes and weaknesses for the
entity taken as a whole:
o Proper segregation of duties and inadequate training did not exist due to
inadequate accounting and finance staff at fiscal year end.
o The Company did not have an Audit Committee, a Compensation Committee, and did
not designate a financial expert on the Board of Directors since we only had a
two person non-independent Board of Directors during the year.
o The Company did not have an independent internal audit function due to the
small size of the organization.


                                       56
<PAGE>

Information Technology Controls (ITCs). ITCs are policies and procedures that
relate to many applications and support the effective functioning of application
controls by helping to ensure the continued proper operation of information
systems. ITGCs include four basic information technology (IT) areas relevant to
internal control over financial reporting: program development, program changes,
computer operations, and access to programs and data. As of September 30, 2005,
a material weakness existed relating to our information technology general
controls, including ineffective controls relating to:

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

Inventory Processes. As of September 30, 2005, the following material weaknesses
existed related to ineffective controls over our inventory processes:

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

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

During the three and nine months ended June 30, 2006 the Company improved the
internal control structure and addressed the identified material weaknesses as
follows:

During the nine months ended June 30, 2006 the Company added two Directors, one
of whom is considered to be independent, is a financial expert, and who will
chair the Audit and Compensation Committees. The Company is actively seeking
qualified, independent Directors to achieve our goal of having a Board comprised
of independent Directors and to properly fill the vacancies on the required
Board committees.

During the quarter and nine months ended June 30, 2006 the Company improved the
user administration and user access validation procedures to address our ITC
weaknesses.

During the quarter and nine months ended June 30, 2006 the Company improved the
tracking of inventory movement and implemented additional procedures to properly
monitor manufacturing variances.

During the quarter and nine months ended June 30, 2006 the Company reviewed and
assessed the lack of an internal audit function including outsourcing options
and possibilities.

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

The Company anticipates significant changes will need to be made for the
Company's internal control over financial reporting subsequent to June 30, 2006
related to the reporting and disclosure of the assets and operations of our
acquisition of EU Energy. The Company is currently reviewing and assessing
the state of the internal control structure for the acquired entity.


                                       57
<PAGE>

                           PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

Bankruptcy Proceedings and Summary of Reorganization Plan

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

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

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

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

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

--------------------------------------------------------------------------------------------------------------------------
2-B          Debenture Holders, which means                      Allowed Claims in this class will be paid pursuant to
             Midsummer Investment, Ltd.,                         their existing agreements with CTC subject to
             Islandia, L.P., Omicron Master                      modifications.
             Trust and Bristol Investment Fund,
             Ltd.                                                Post-petition accrued interest due to the Debenture
                                                                 Holders as governed by the documents shall be paid in
             Four Claims totaling                                common stock of CTC on the Effective Date pursuant to
             $15,087,500.00                                      Bankruptcy Code section 1145. The approximate quarterly
                                                                 interest payment is $225,000 based on simple interest at
                                                                 six percent on the balance of $15 million.


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

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

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

--------------------------------------------------------------------------------------------------------------------------
</TABLE>

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


                                       58
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ITEM 1A. RISK FACTORS

RISKS RELATED TO OUR BUSINESS

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

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

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

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

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

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

                                       59
<PAGE>


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

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

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

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

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

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
$3.85 million in ACCC product sales since inception. Historically, we have
incurred substantial losses and we may experience significant quarterly and
annual losses for the foreseeable future.

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


                                       60
<PAGE>

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

In previous filings, our accountants have issued a report relating to our
audited financial statements which contains a qualification with respect to our
ability to continue as a going concern because, among other things, our ability
to continue as a going concern is dependent upon our ability to generate
profitable operations in the future or to obtain the necessary financing to meet
our obligations and repay our liabilities from normal business operations when
they come due. There is no guarantee that the product will be accepted or
provide a marketable advantage, and therefore, no guarantee that the
commercialization will ever be profitable.

For the nine months ended June 30, 2006, we had a net loss of $17,959,499 and
negative cash flows from operations of $10,061,767. For the fiscal year ended
September 30, 2005, we had a net loss of $40,163,407 and negative cash flows
from operations of $2,439,151. For the fiscal years ended September 30, 2004 and
2003, we had net losses of $14,687,874 and $6,751,252 respectively. For the same
periods, we had negative cash flows from operations of $18,735,430 and
$2,022,935, respectively.

As of June 30, our accumulated deficit was $(84,562,262).

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

Our management believed the $2.5 million receivable to be collectible from
Global American Energy for work carried out between March 31, 2003 and September
30, 2004 as of the original filing date of our annual report for the year ended
September 30, 2004 through the date that the initial payment from Global
American Energy was returned for insufficient funds. We recorded the entire
balance outstanding of $2,500,000 as services revenue in fiscal 2004 and
included it in our accounts receivable balance as of September 30, 2004. As of
August 9, 2005, all payments made to us were returned for insufficient funds and
no additional payments have been received. As such, we recorded into the quarter
ending June 30, 2005 an allowance for uncollectible accounts in the amount of
2.5 million that remained uncollectible as of June 30, 2006.

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


                                       61
<PAGE>


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

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

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


                                       62
<PAGE>

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

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

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

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

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

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

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


                                       63
<PAGE>

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

We rely to a substantial extent on the management, marketing and product
development skills of our key employees, particularly Benton H Wilcoxon, our
Chief Executive Officer, and Marv Sepe, President of our Cable Division. If Mr.
Wilcoxon or Mr. Sepe were unable to provide services to us for whatever reason,
our business would be adversely affected. Neither Mr. Wilcoxon nor Mr. Sepe have
not entered into an employment agreement with the Company.

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

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

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

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

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


                                       64
<PAGE>

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

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

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

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

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

As of August 7, 2006, Benton H Wilcoxon, our Chairman of the Board, Chief
Executive Officer and Acting Chief Financial Officer, and C. William Arrington,
our former COO and former director, in the aggregate beneficially own or control
approximately 23% of the outstanding common stock. As a result, these persons
have controlling influence in determining the outcome of any corporate matters
submitted to our stockholders for approval, including mergers, consolidations
and the sale of all or substantially all of our assets, election of directors
and other significant corporate actions. They also have the power to prevent or
cause a change in control. The interests of these stockholders may differ from
the interests of the other stockholders, and may limit the ability of other
stockholders to affect our management and affairs.

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

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


                                       65
<PAGE>

OUR BUSINESS MAY BE SUBJECT TO INTERNATIONAL RISKS.

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

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

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

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


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<PAGE>

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

As a manufacturer and distributor of wire and cable products we are subject to a
number of industry standard-setting authorities, such as the Institute of
Electrical and Electronic Engineers, the European based International Council on
Large Electric Systems, the American Society of Testing and Materials and the
Canadian Standards Association. In addition, many of our products may become
subject to the requirements of federal, state and local or foreign regulatory
authorities. Changes in the standards and requirements imposed by such
authorities could have an adverse effect on us. In the event we are unable to
meet any such standards when adopted our business could be adversely affected.
In addition, changes in the legislative environment could affect the growth and
other aspects of important markets served by us.

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

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


                                       67
<PAGE>

RISKS RELATED TO OUR SECURITIES

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

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

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

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

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


                                       68
<PAGE>

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

The market price of our common stock may be subject to significant fluctuations
in response to our operating results, announcements of new products or market
expansions by us or our competitors, changes in general conditions in the
economy, the financial markets, the electrical power transmission and
distribution industry, or other developments and activities affecting us, our
customers, or our competitors, some of which may be unrelated to our
performance. The sale or attempted sale of a large amount of common stock into
the market may also have a significant impact on the trading price of our common
stock. During the last 12 months, the closing bid prices for our common stock
have fluctuated from a high of $2.87 to a low of $0.75. Fluctuations in the
trading price or liquidity of our common stock may adversely affect our ability
to raise capital through future equity financings.

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

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

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

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

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


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<PAGE>

AS OF AUGUST 2, 2006 5,673,828 COMMON SHARES ARE ISSUABLE UPON EXERCISE OF ALL
OUTSTANDING OPTIONS, WARRANTS AND CONVERSION OF CONVERTIBLE DEBENTURES FOR LESS
THAN THE MARKET PRICE OF $1.16 PER SHARE. CASH PROCEEDS RESULTING FROM THE FULL
EXERCISE AND CONVERSION OF THESE SECURITIES WOULD BE APPROXIMATELY $3,196,860.
THE EXERCISE OR CONVERSION OF THESE SECURITIES COULD RESULT IN THE SUBSTANTIAL
DILUTION OF THE COMPANY IN TERMS OF A PARTICULAR PERCENTAGE OWNERSHIP IN THE
COMPANY AS WELL AS THE BOOK VALUE OF THE COMMON SHARES. THE SALE OF A LARGE
AMOUNT OF COMMON SHARES RECEIVED UPON EXERCISE OF THESE OPTIONS OR WARRANTS ON
THE PUBLIC MARKET TO FINANCE THE EXERCISE PRICE OR TO PAY ASSOCIATED INCOME
TAXES, OR THE PERCEPTION THAT SUCH SALES COULD OCCUR, COULD SUBSTANTIALLY
DEPRESS THE PREVAILING MARKET PRICES FOR OUR SHARES. FULL CONVERSION OF SUCH
SHARES WOULD INCREASE THE OUTSTANDING COMMON SHARES BY 3.2% TO APPROXIMATELY
181,765,000 SHARES.

The exercise price or conversion price of outstanding options, warrants and
convertible debentures may be less than the current market price for our common
shares. In the event of the exercise of these securities, a shareholder could
suffer substantial dilution of his or her investment in terms of the percentage
ownership in us as well as the book value of the common shares held. At the
August 7, 2006 market price of $1.11 per share, 5,673,828 shares would be
exercisable or convertible for less than the market prices. Full exercise and
conversion of these below market shares would result in us receiving cash
proceeds of $3,196,860 and would increase the outstanding common shares by 3.2%
to approximately 181,765,000 shares.

OUR DEBT AND RELATED COMMON STOCK WARRANTS ARE SUBJECT TO ANTI-DILUTION
PROVISIONS WHICH MAY RESULT IN THE ISSUANCE OF ADDITIONAL COMMON STOCK,
ADDITIONAL COMMON STOCK WARRANTS, CHANGES TO THE DEBT CONVERSION PRICE, OR
CHANGES TO THE WARRANT EXERCISE PRICE OF CERTAIN OF OUR ISSUED OR ISSUABLE
SECURITIES. SUCH ISSUANCES MAY RESULT IN SUBSTANTIAL DILUTION OF OUR CURRENT
COMMON SHARES AND MAY RESULT IN SUBSTANTIAL CHARGES TO EARNINGS.

As of August 2, 2006 we have $9,523,250 in debt convertible at $1.55 per share
into 6,144,033 common shares and 6,562,114 warrants currently exercisable for
$10,591,276 in cash issued to current and former debt holders. See also
footnotes 7 and 13. In the event that we issue additional convertible debt or
common stock warrants with conversion or exercise prices below $1.55 or common
shares at a price below $1.55 per share, as adjusted for splits or stock
dividends, we may be required under the terms and conditions of our Debt
agreements to: (i) issue additional shares upon future debt conversions by
reducing the conversion price; (ii) receive less cash upon stock warrant
exercises by reducing the warrant exercise price, or (iii) issue additional
shares of common stock for stock warrants subject to "full ratchet"
anti-dilution of their exercise price. If we were to issue common shares at the
August 7, 2006 closing market price of $1.11 per share, upon full conversion and
exercise of the debt and warrants subject to anti-dilution we would be required
to issue 8,579,506 shares in exchange for the conversion of the $9,523,250 in
convertible debt and we would receive $8,454,522 upon complete exercise of
6,918,872 common stock warrants. The expense associated with such a re-pricing
would be approximately $3.5 million.


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<PAGE>



RISKS RELATED TO THE ACQUISITION WITH EU ENERGY

COMPOSITE TECHNOLOGY CORPORATION MAY NOT REALIZE ANY BENEFITS FROM THE
ACQUISITION OF EU ENERGY.

Composite Technology Corporation will be integrating EUE's products and services
offerings. If Composite Technology Corporation cannot integrate the products
effectively or if management spends too much time on integration issues, it
could harm the combined company's business, financial condition and results of
operations. The difficulties, costs and delays involved in integrating the
companies, which could be substantial, include the following:

      -     distraction of management and other key personnel from the business
            of the combined company;
      -     integrating technology, product lines, services and development
            plans;
      -     inability to demonstrate to customers and suppliers that the
            business combination will not result in adverse changes in product
            standards or business focus;
      -     inability to retain and integrate key personnel;
      -     disruptions in the combined sales forces that may result in a loss
            of current customers or the inability to close sales with potential
            customers;
      -     expending time, money and attention on integration that would
            otherwise be spent on developing either company's own products and
            services;
      -     additional financial resources that may be needed to fund the
            combined operations; and
      -     impairment of relationships with employees and customers as a result
            of changes in management.

Composite Technology Corporation has no experience in integrating operations on
the scale represented by the acquisition, and we are not certain that Composite
Technology Corporation and EU Energy can be successfully integrated in a timely
or efficient manner or that any of the anticipated benefits of the acquisition
will be realized. Failure to do so could have a material adverse effect on the
business, financial condition and operating results of the combined company.

The purchase of EU Energy is a long term investment in wind energy. EU Energy
currently has nearly $3.0 billion in Turbine Reserve Agreements (TRAs) for their
current and future wind turbines, substantially all of which are for deliveries
scheduled to begin in late 2007 through 2012 and which represents a substantial
portion of the projected production capacity of EU Energy during that time
frame. The TRAs represent the intent for wind farm operators and other
individuals to purchase wind turbines and as such are not binding agreements to
purchase turbines, although they call for advance payments according to a
schedule in advance of intended delivery dates. We have reviewed the TRAs during
due diligence procedures and we believe that they represent valid intents to
purchase the turbines at the prices indicated and that should the turbines be
produced at a reasonable cost that EU Energy has the opportunity to potentially
realize substantial profits should these sales materialize. We also believe that
in the event that one of these customers decides to cancel their TRA, due to the
worldwide wind turbine production capacity shortage, that additional customers
will be willing to purchase our turbines.

However, since the TRAs are not binding contracts and few penalties exist should
one or more of the customers cancel, there exists substantial risk that these
sales and related profits could not materialize. Further, most of the turbines
sold under the TRAs represent the next generation turbine that incorporates the
use of a proven technology that is novel to wind generation that we believe will
result in a more effective approach to converting wind energy to electrical
energy. Although the technology used in this approach has been proven in other
industrial applications, it has not yet been demonstrated in our D8.2 and D8.1
wind turbines. Those models are based upon our proven and type certified D8
model and is expected to be demonstrated in October/November of 2006 and
presented for type certification. They should be certified in early 2007. We
believe that the success of this prototype and the resultant certification will
be a milestone event for this next generation product.

IF THE COSTS OF THE BUSINESS ACQUISITION EXCEED THE BENEFITS REALIZED, THE
COMBINED COMPANY MAY EXPERIENCE CONTINUED AND INCREASED LOSSES.

If the benefits of the acquisition do not exceed the associated costs, the
combined company could be adversely affected by incurring additional or
increased losses from its operations. The survival of Composite Technology
Corporation during this post-acquisition period depends on making the combined
operations profitable through increased revenues and reduced expenses.


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<PAGE>

SALES OF SUBSTANTIAL AMOUNTS OF COMPOSITE TECHNOLOGY CORPORATION COMMON STOCK
AFTER THE ACQUISITION COULD MATERIALLY ADVERSELY AFFECT THE MARKET PRICE OF
COMPOSITE TECHNOLOGY CORPORATION COMMON STOCK.

The EUE shareholders, as a condition of the acquisition will acquire 39,169,665
shares of unregistered, restricted Composite Technology Corporation common
stock. The shares to be issued carry piggyback registration rights. As a
condition precedent to closing, the majority shareholders will enter into
contractual arrangements that limit the amount of shares of Composite Technology
Corporation common stock that they may sell into the public market after closing
of the proposed acquisition. The specific limits are currently under negotiation
but are generally leak out provisions extending at least twelve months from the
date of registration.

The issuance of the stock represents 28.4% of the issued and outstanding common
shares prior to the transaction and 24.1% of the fully diluted shares, assuming
full conversion and exercise of all convertible debt, and common stock options
and warrants. The sale of substantial amounts of Composite Technology
Corporation common stock following the acquisition may cause substantial
fluctuations in the public market price of Composite Technology Corporation
common stock.

THE ACQUISITION OF EU ENERGY MAY RESULT IN ADDITIONAL SARBANES-OXLEY ISSUES AND
MATERIAL WEAKNESSES IN THE CONTROL STRUCTURE OF COMPOSITE TECHNOLOGY
CORPORATION.

EU Energy is a UK company that has not been subject to the requirements of the
Sarbanes-Oxley Act of 2002. The operations of EU Energy are expected to be
material to the results of the post-acquisition combined entity and management
may not have sufficient time to document, assess, test, and remedy the control
structure of EU; to identify any material control weaknesses; and to disclose
any such weaknesses in time to comply with the reporting requirements of
Sarbanes-Oxley.


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<PAGE>

As of June 30, 2006, all allowed general unsecured claims under the plan have
been paid in full and there are no unresolved claims remaining to be adjudicated
by the Bankruptcy Court. All stock required to be issued under the plan to
holders of allowed claims and/or pursuant to court-approved settlements has been
distributed. The company is in compliance with all applicable bankruptcy code
provisions, with the plan of reorganization, and with guidelines of the Office
of the United States Trustee. On June 29, 2006 the Company filed a motion for
final decree from the Bankruptcy Court.

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

On July 21, 2006, Composite Technology Corporation issued 83,333 shares of its
common stock for the exercise of 83,333 warrants with an exercise price of $0.50
per warrant for cash proceeds of $41,667. The warrants were originally issued on
June 30, 2002 in conjunction with the issuance of the sale of unregistered
common stock to an accredited investor for cash. The Company relied upon the
exemption from registration as set forth in Section 4 (2) of the Securities Act
for the issuance of these securities. The recipient took its securities for
investment purposes without a view to distribution and had access to information
concerning the Company and its business prospects, as required by the Securities
Act. In addition, there was no general solicitation or advertising for the
acquisition of these securities.

On July 24, 2006, the Company issued 60,000 shares of its common stock to one
accredited investor upon the conversion of $93,000 of principal of Convertible
Debentures at a conversion price of $1.55 per share. The Debentures were
originally issued in August, 2004 and had been carried on the Company's balance
sheet as long term debt prior to the conversion. The Company relied upon the
exemption from registration as set forth in Section 4 (2) of the Securities Act
for the issuance of these securities. The recipient took its securities for
investment purposes without a view to distribution and had access to information
concerning the Company and its business prospects, as required by the Securities
Act. In addition, there was no general solicitation or advertising for the
acquisition of these securities.

ITEM 3 - DEFAULTS ON SENIOR SECURITIES

None

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

On April 27, 2006 a Special Shareholders' Meeting of the Corporation was held at
our Corporate Headquarters, 2026 McGaw Avenue, Irvine, CA 92614 USA. Two
proposals, as described in our proxy statement dated March 24, 2006 were voted
on at the meeting. Following is a brief description of the matters voted upon
and the results of the voting:

1. To amend the Company's Articles of Incorporation to increase the number of
authorized shares of common stock from 200,000,000 to 300,000,000;

                           Number of Shares
         For                92,344,542
         Against             7,294,218
         Abstain               162 821

2. To amend the Company's 2002 Non-Qualified Stock Compensation Plan to increase
the number of shares available under the plan by 10,000,000 shares.

                           Number of Shares
         For                26,183,448
         Against             5,231,185
         Abstain               107,943

ITEM 5 - OTHER INFORMATION

None


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<PAGE>

ITEM 6 - EXHIBITS

EXHIBIT INDEX

Number       Description

3.1(1)       Articles of Incorporation of the Company.

3.2(2)       Bylaws as revised January 13, 2005.

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

32.1         Section 1350 Certification

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

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

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<PAGE>

                                    SIGNATURE

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

                        COMPOSITE TECHNOLOGY CORPORATION
                                  (Registrant)


                                        By: /s/ Benton H Wilcoxon
                                        -------------------------
                                        Benton H Wilcoxon
                                        Chief Executive Officer

August 8, 2006


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