UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





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


EXCHANGE
ACT OF 1934





FOR
THE QUARTERLY PERIOD ENDED JUNE 30, 2009





o  TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES


EXCHANGE ACT OF 1934





COMMISSION
FILE NUMBER 0-10999





COMPOSITE
TECHNOLOGY CORPORATION


(Exact
Name of Registrant as Specified in Its Charter)





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





2026
      McGaw Avenue, Irvine, CA
            
            92614(Address
      of Principal Executive Offices)
            
            (Zip
      Code)




(949)
428-8500


(Registrant's
Telephone Number, Including Area Code)





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




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




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





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





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





APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY


PROCEEDING
DURING THE PRECEDING FIVE YEARS:





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





APPLICABLE
ONLY TO CORPORATE ISSUERS:





Indicate
the number of shares outstanding of each of the issuer's classes of common stock
as of: August 10, 2009





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











COMPOSITE
TECHNOLOGY CORPORATION


Form 10-Q
for the Quarter ended June 30, 2009


Table of
Contents





PagePART
      I – FINANCIAL INFORMATIONItem
      1     Financial Statements
            3Item
      2     Management's Discussion and Analysis of
      Financial Condition and Results of Operations
            31Item
      3     Quantitative and Qualitative Disclosures About
      Market Risk
            42Item
      4     Controls and Procedures
            42PART
      II – OTHER INFORMATIONItem
      1     Legal Proceedings
            44Item
      1A  Risk Factors
            44Item
      2     Unregistered Sales of Equity Securities and the
      Use of Proceeds
            48Item
      3     Defaults Upon Senior Securities
            48Item
      4     Submission of Matters to a Vote of Security
      Holders
            48Item
      5     Other Information
            48Item
      6     Exhibits
            49SIGNATURE
            50EXHIBITS




2




ITEM
1




PART
1 - FINANCIAL STATEMENTS


COMPOSITE
TECHNOLOGY CORPORATION


AND
SUBSIDIARIES


CONSOLIDATED
CONDENSED BALANCE SHEETS


(IN
THOUSANDS, EXCEPT PAR VALUE PER SHARE AND SHARE AMOUNTS)





June
      30, 2009
              
              
              September 30, 2008(unaudited)
              
              
              (restated)ASSETSCURRENT
      ASSETSCash
      and Cash Equivalents
              
              $
              6,653
              
              
              $
              22,594Restricted
      Cash
              
              
              —
              
              
              
              693Accounts
      Receivable, current, net of reserve of $714 and $687
              
              
              6,023
              
              
              
              11,773Inventory,
      net of reserve of $16,396 and $2,196
              
              
              59,519
              
              
              
              42,088Advanced
      Payments for Turbine Inventory
              
              
              7,735
              
              
              
              31,245Prepaid
      Expenses and Other Current Assets
              
              
              2,702
              
              
              
              1,400Total
      Current Assets
              
              
              82,632
              
              
              
              109,793Long
      Term Trade Receivables
              
              
              304
              
              
              
              248Property
      and Equipment, net of accumulated depreciation of $6,896 and
      $5,426
              
              
              11,516
              
              
              
              7,955Goodwill
              
              
              5,913
              
              
              
              24,218Intangible
      Assets, net of accumulated amortization of $4,644 and
    $2,924
              
              
              19,829
              
              
              
              21,549Other
      Assets
              
              
              696
              
              
              
              1,289TOTAL
      ASSETS
              
              $
              120,890
              
              
              $
              165,052LIABILITIES AND SHAREHOLDERS’
      EQUITYCURRENT
      LIABILITIESAccounts
      Payable and Other Accrued Liabilities
              
              $
              26,000
              
              
              $
              32,558Deferred
      Revenues and Customer Advances
              
              
              38,837
              
              
              
              33,525Warranty
      Provision
              
              
              1,617
              
              
              
              1,462Provision
      for Loss on Turbine Contracts
              
              
              —
              
              
              
              7,597Notes Payable
      – Current, net of discount of $1,276 and $0
              
              
              12,761
              
              
              
              —Net
      Liabilities for Deconsolidated Subsidiary in Liquidation
              
              
              21,249
              
              
              
              21,169Total
      Current Liabilities
              
              
              100,464
              
              
              
              96,311LONG
      TERM LIABILITIESLong
      Term Portion of Deferred Revenues
              
              
              382
              
              
              
              727Long-Term
      Portion of Warranty Provision
              
              
              251
              
              
              
              496Notes Payable
      – Long-Term, net of discount of $0 and $1,199
              
              
              —
              
              
              
              7,838TOTAL
      LIABILITIES
              
              
              101,097
              
              
              
              105,372COMMITMENTS AND CONTINGENCIESSHAREHOLDERS’
      EQUITYCommon
      Stock, $.001 par value 600,000,000 shares authorized, 287,988,370 and
      287,988,370 issued and outstanding
              
              
              288
              
              
              
              288Additional
      Paid-in Capital
              
              
              257,815
              
              
              
              252,445Accumulated
      Deficit
              
              
              (239,037
              )
              
              
              (193,123
              )Accumulated
      Other Comprehensive Income
              
              
              727
              
              
              
              70Total
      Shareholders’ Equity
              
              
              19,793
              
              
              
              59,680TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY
              
              $
              120,890
              
              
              $
              165,052





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


3


COMPOSITE
TECHNOLOGY CORPORATION


AND
SUBSIDIARIES


CONSOLIDATED
CONDENSED STATEMENTS OF OPERATIONS


FOR THE
THREE MONTHS ENDED JUNE 30, 2009 AND 2008


(UNAUDITED)


AND FOR
THE NINE MONTHS ENDED JUNE 30, 2009 AND 2008


(UNAUDITED)





(IN
THOUSANDS, EXCEPT PER SHARE AMOUNTS AND SHARES OUTSTANDING)





Three Months ended
              June
      30, 2009
            
            
            Three Months ended
              June
      30, 2008
            
            
            Nine Months ended
              June
      30, 2009
            
            
            Nine Months ended
              June
      30, 2008Revenue:Product
      Sales
            
            $
            3,887
            
            
            $
            20,394
            
            
            $
            29,949
            
            
            $
            58,191Service
      Revenue
            
            
            106
            
            
            
            107
            
            
            
            537
            
            
            
            1,062Total
      Revenue
            
            
            3,993
            
            
            
            20,501
            
            
            
            30,486
            
            
            
            59,253Cost
      of Product Sold
            
            
            3,585
            
            
            
            19,769
            
            
            
            26,717
            
            
            
            50,041Cost
      of Service Revenue
            
            
            305
            
            
            
            185
            
            
            
            2,140
            
            
            
            1,234Gross
      margin
            
            
            103
            
            
            
            547
            
            
            
            1,629
            
            
            
            7,978OPERATING
      EXPENSESOfficer
      Compensation
            
            
            771
            
            
            
            858
            
            
            
            2,527
            
            
            
            1,463General
      and Administrative
            
            
            3,499
            
            
            
            3,929
            
            
            
            11,175
            
            
            
            9,923Research
      and Development
            
            
            1,783
            
            
            
            2,957
            
            
            
            6,415
            
            
            
            12,412Sales
      and Marketing
            
            
            1,993
            
            
            
            1,393
            
            
            
            5,622
            
            
            
            3,760Depreciation
      & Amortization
            
            
            242
            
            
            
            558
            
            
            
            2,195
            
            
            
            1,390Impairment
      of acquired goodwill
            
            
            18,305
            
            
            
            —
            
            
            
            18,305
            
            
            
            —Total
      operating expenses
            
            
            26,593
            
            
            
            9,695
            
            
            
            46,239
            
            
            
            28,948LOSS
      FROM OPERATIONS
            
            
            (26,490
            )
            
            
            (9,148
            )
            
            
            (44,610
            )
            
            
            (20,970
            )OTHER
      EXPENSEInterest
      expense, net
            
            
            (426
            )
            
            
            (1,908
            )
            
            
            (1,375
            )
            
            
            (3,414
            )Expense
      related to modification of warrants
            
            
            (7
            )
            
            
            (553
            )
            
            
            (7
            )
            
            
            (553
            )Other
      income (expense)
            
            
            (2
            )
            
            
            56
            
            
            
            (2
            )
            
            
            132Total
      other expense
            
            
            (435
            )
            
            
            (2,405
            )
            
            
            (1,384
            )
            
            
            (3,835
            )Net
      Loss from Continuing Operations before Income Taxes
            
            
            (26,925
            )
            
            
            (11,553
            )
            
            
            (45,994
            )
            
            
            (24,805
            )Minority
      Interest in Consolidated Subsidiary
            
            
            —
            
            
            
            —
            
            
            
            (87
            )
            
            
            —Income
      Taxes (Benefit)
            
            
            —
            
            
            
            7
            
            
            
            (4
            )
            
            
            17NET
      LOSS from Continuing Operations
            
            
            (26,925
            )
            
            
            (11,560
            )
            
            
            (45,903
            )
            
            
            (24,822
            )Discontinued
      Operations (Note 1)Loss
      from Discontinued Operations (including a net loss on sales of $0 and $0
      for the three and nine months ended June 30, 2009, respectively, and net
      loss on sales of $366 and $1,280 for the three and nine months
      ended  June 30, 2008, respectively)
            
            
            —
            
            
            
            1,632
            
            
            
            12
            
            
            
            7,073NET
      LOSS
            
            
            (26,925
            )
            
            
            (13,192
            )
            
            
            (45,915
            )
            
            
            (31,895
            )OTHER
      COMPREHENSIVE LOSSForeign
      Currency Translation Adjustment net of tax of $0, $0, $0 and
      $0
            
            
            (1,566)
            
            
            
            (2
            )
            
            
            658
            
            
            
            (606
            )COMPREHENSIVE
      LOSS
            
            $
            (28,491
            )
            
            $
            (13,194
            )
            
            $
            (45,257
            )
            
            $
            (32,501
            )BASIC
      AND DILUTED LOSS PER SHARELoss
      from continuing operations
            
            $
            (0.09
            )
            
            $
            (0.05
            )
            
            $
            (0.16
            )
            
            $
            (0.11
            )Loss
      from discontinued operations
            
            $
            (0.00
            )
            
            $
            (0.01
            )
            
            $
            (0.00
            )
            
            $
            (0.03
            )WEIGHTED-AVERAGE
      COMMON SHARES OUTSTANDING
            
            
            287,988,370
            
            
            
            235,860,477
            
            
            
            287,988,370
            
            
            
            228,534,651





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




4


COMPOSITE
TECHNOLOGY CORPORATION


AND
SUBSIDIARIES


CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS


FOR
THE NINE MONTHS ENDED JUNE 30, 2009 AND 2008


(IN
THOUSANDS)





For the Nine
              Months ended
              June
      30, 2009
            
            
            For the Nine
              Months ended
              June
      30, 2008(unaudited)
            
            
            (unaudited)CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
            
            $
            (45,915
            )
            
            $
            (31,895
            )Loss
      from discontinued operations
            
            
            12
            
            
            
            7,073Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      & amortization
            
            
            3,162
            
            
            
            2,354Amortization
      of prepaid expenses paid in stock
            
            
            246
            
            
            
            211Interest
      amortization related to detachable warrants and fixed conversion
      features
            
            
            818
            
            
            
            2,362Expense
      related to fair value of vested options
            
            
            4,585
            
            
            
            2,175Issuance
      of warrants for services
            
            
            22
            
            
            
            —Compensation
      expense related to modification of stock warrants
            
            
            7
            
            
            
            553Bad
      debt expense
            
            
            14
            
            
            
            —Inventory
      reserve expense and impairment on obsolete inventory
            
            
            6,559
            
            
            
            4,723Gain
      on sale of equipment
            
            
            2
            
            
            
            (86
            )Impairment
      of acquired goodwill
            
            
            18,305
            
            
            
            —Changes
      in Assets / Liabilities:Accounts
      receivable
            
            
            5,680
            
            
            
            (4,603
            )Inventory
            
            
            (31,586
            )
            
            
            (23,744
            )Advanced
      payments for inventory
            
            
            23,510
            
            
            
            1,003Prepaid
      expenses
            
            
            (673
            )
            
            
            711Restricted
      cash
            
            
            693
            
            
            
            (200
            )Other
      assets
            
            
            (125
            )
            
            
            (955
            )Accounts
      payable and accrued expenses
            
            
            (10,070
            )
            
            
            15,801Accrued
      warranty liability
            
            
            (89
            )
            
            
            826Deferred
      revenue
            
            
            4,966
            
            
            
            (1,440
            )Net
      Liabilities of Discontinued Operations
            
            
            —
            
            
            
            435Cash
      used in operating activities
            
            
            (19,877
            )
            
            
            (24,696
            )CASH
      FLOW FROM INVESTING ACTIVITIESProceeds
      from sale of equipment
            
            
            —
            
            
            
            110Purchase
      of property and equipment
            
            
            (1,516
            )
            
            
            (3,022
            )Cash
      used in investing activities
            
            
            (1,516
            )
            
            
            (2,912
            )CASH
      FLOW FROM FINANCING ACTIVITIESProceeds
      from exercise of warrants
            
            
            —
            
            
            
            3,721Proceeds
      from issuance of common stock (net of issuing costs of
$91)
            
            
            —
            
            
            
            49,909Proceeds
      from senior secured debt agreements (net of fees of
    $295)
            
            
            4,705
            
            
            
            2,500Proceeds
      from exercise of options
            
            
            —
            
            
            
            12Repayments
      of notes payable and factoring arrangements
            
            
            —
            
            
            
            (2,500
            )Payments
      on capital lease assets
            
            
            —
            
            
            
            (109
            )Cash
      provided by financing activities
            
            
            4,705
            
            
            
            53,533Effect
      of exchange rate changes on cash from continuing
operations
            
            
            747
            
            
            
            (893
            )Net
      increase/(decrease) in cash and cash equivalents from continuing
      operations
            
            
            (15,941
            )
            
            
            25,032CASH
      FLOWS FROM DISCONTINUED OPERATIONS:Cash
      used in operating activities – discontinued
operations
            
            
            —
            
            
            
            (150
            )Effect
      of exchange rate changes on cash – discontinued
      operations
            
            
            —
            
            
            
            13Net
      increase/(decrease) in cash and cash equivalents from discontinued
      operations
            
            
            —
            
            
            
            (137
            )Total
      net increase/(decrease) in cash and cash equivalents
            
            $
            (15,941
            )
            
            $
            24,895Cash
      and cash equivalents at beginning of period – continuing
      operations
            
            
            22,594
            
            
            
            22,389Cash
      and cash equivalents at beginning of period – discontinued
      operations
            
            
            —
            
            
            
            268Cash
      and cash equivalents at beginning of period
            
            $
            22,594
            
            
            $
            22,657Cash
      and cash equivalents at end of period – continuing
      operations
            
            
            6,653
            
            
            
            47,421Cash
      and cash equivalents at end of period – discontinued
      operations
            
            
            —
            
            
            
            131Cash
      and cash equivalents at end of period
            
            $
            6,653
            
            
            $
            47,552SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONINTEREST
      PAID
            
            $
            560
            
            
            $
            958INCOME
      TAX PAID
            
            $
            3
            
            
            $
            1





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




5





Supplemental Schedule for Non Cash
Financing Activities





During
the first nine months of fiscal 2009, the Company issued the
following:





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





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





In June,
2009 the Company issued 4,000,000 warrants at an exercise price of $0.25 per
share in conjunction with a $5,000,000 Bridge Note financing.  The
Company recorded $726,000 as debt discount for the warrants
issued.  The issuance triggered anti-dilution exercise price
protection between $0.01 and $0.02 per warrant for warrants issued in
conjunction with the 2007 Convertible Debt and Private Equity Placement
financings.  The Company recorded $7,000 to general and administrative
expense and $27,000 as additional debt discount to the convertible notes as a
result of the re-pricings.





6





COMPOSITE
TECHNOLOGY CORPORATION


AND
SUBSIDIARIES


NOTES
TO FINANCIAL STATEMENTS





NOTE
1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES





Company




Composite
Technology Corporation originally incorporated in Florida and reincorporated in
Nevada, is an Irvine, CA based company operating in two segments: CTC Cable
(“Cable”) and DeWind (“Wind”). The Cable Segment sells high energy efficiency
patented composite core conductors known as “ACCC TM
conductors” for use in electric transmission and distribution
lines.  ACCC conductor is commercially available in the United States
and Canada, China, Europe, the Middle East, and South America through direct
sales to utilities and through distribution and purchase agreements. The Wind
segment sells electricity generating wind turbines under the brand name DeWind,
and during the current fiscal year, the Company entered into a joint venture
development agreement with Higher Perpetual Energy to create DeWind SWI Wind
Farms, LLC to jointly develop up to 620 Megawatts of wind farm properties using
leases obtained by Higher Perpetual and DeWind wind turbines.  See
Note
11.




Accounting





The
accompanying unaudited consolidated financial statements of Composite Technology
Corporation (the “Company” or “Composite Technology”) have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, they do not contain all of the
information and footnotes required for complete financial statements. Interim
information is unaudited; however, in the opinion of the Company's management,
the accompanying unaudited, consolidated financial statements reflect all
adjustments (consisting of normal, recurring adjustments) considered necessary
for a fair presentation of the Company's interim financial information. These
financial statements and notes should be read in conjunction with the audited
financial statements of the Company included in the Company's Annual Report on
Form 10-K/A for the fiscal year ended September 30, 2008 filed with the
Securities and Exchange Commission on March 9, 2009.





Discontinued
Operations





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





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





On
September 1, 2008 the board of directors of DeWind GmbH filed to place that
subsidiary into insolvency in Lubeck, Germany. This subsidiary primarily served
the acquired turbines under warranty and had operated at a substantial loss
since the July 3, 2006 acquisition of EU Energy. The directors faced a near term
requirement to recapitalize this subsidiary for approximately 5 million Euros.
The filing of insolvency for this subsidiary is not expected to have a material
impact on the future operations of the Company’s DeWind segment.  The
assets and liabilities of DeWind GmbH have been classified on the balance sheet
as Net Liabilities for Deconsolidated Subsidiary in Liquidation. See Note
4.




On
January 9, 2009 the directors of DeWind Holdings Ltd. filed for insolvency
proceedings in the Queen’s Bench Court. DeWind Holdings’ owned the share capital
of the now insolvent DeWind GmbH and, as of the date of the insolvency filing,
had other assets and liabilities consisting only of $23,000 of other current
assets and $1,936,000 of accounts payable and other accrued liabilities
consolidated into the Company’s balance sheet. The consolidated financial
statements of Composite Technology Corporation have been restated to present the
DeWind Holdings operations, assets and liabilities as discontinued
operations.





Assets
and Liabilities Held and Used





Subsequent to June 30,
2009, the Company determined that it was probable that a transaction comprising
a substantial portion of the operating assets and liabilities of the DeWind
segment would be sold.  The Company evaluated the expected transaction
under the Financial Accounting Standards Board Statements of Financial
Accounting Standards No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, and determined that
the assets and liabilities to be sold should be reclassified as assets and
liabilities held for sale subsequent to the June 30, 2009 balance sheet
date.  Accordingly, the assets and liabilities are incorporated into
the June 30, 2009 balance sheet and the operations for the DeWind
segment are included in the three and nine months ended June 30,
2009.  The transaction is expected to close during the year ending
September 30, 2009.  See Note6
“Assets
and Liabilities Held and Used.”




7




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 following
sources:





(1)
Product revenue which includes revenue from:


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


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





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




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





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





CTC Cable
sales for the three and nine months ended June 30, 2009 and 2008 consisted of
stranded ACCC conductor and ACCC hardware sold to end user utilities, sales of
ACCC conductor sold to our Chinese distributor, and sales of ACCC conductor core
and ACCC hardware to two of our stranding manufacturers. All ACCC related
product sales were recognized upon delivery of product and transfer of title.
There is no right of return for sales of ACCC conductor or ACCC core to our
Chinese distributor.  For ACCC conductor product sales made directly
by us and not through a manufacturer or distributor, we offer a product
replacement warranty of two years with an optional purchase of up to seven
years. We allocate a portion of sales proceeds to the estimated fair value of
the cost to provide such a warranty. To date, most of our ACCC related product
sales have been without warranty coverage.





DeWind
Turbine related sales for the three and nine months ended June 30, 2009 and 2008
consisted of a completed and installed wind turbine unit, turbine parts, and
license fees. For DeWind turbine revenues, for turbine sales, we recognized
revenues for completed and installed wind turbine units upon the commissioning,
or operational viability of each wind turbine unit. We recognized revenues on
turbine parts sales upon delivery to the customer and title transfer. We
recognized revenues on the license fees upon collection of the license fees and
reporting by the licensee of units sold under each license
agreement.





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





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




8




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




During
the prior quarter ended March 31, 2009 the Company’s DeWind segment entered into
a settlement agreement with one of its licensees.  In exchange for
3,000,000 Euros ($3,992,000 at March 31, 2009 exchange rates), which was
received in April and May, 2009 and forgiveness of all past and present claims,
the licensee received a perpetual royalty free non-exclusive paid up license to
produce 1.25 Megawatt D6 turbines in China.




WARRANTY,
RETROFIT, AND AVAILABILITY PROVISIONS





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





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




Warranties
related to our ACCC products relate to conductor and hardware sold directly by
us to the end-user customer. We mitigate our loss exposure through the use of
third party warranty insurance. Warranty related liabilities for time periods in
excess of one year are classified as non-current liabilities.





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





(1)
            Warranty
      provisions represent the estimated costs to perform expected future
      repairs of wind turbines, which are covered under a warranty. We estimate
      warranty provisions based on the historical cost to provide the services
      under warranty including monitoring, repairs, parts, and insurance and
      based on the age of the turbine under warranty. We also include as
      warranty provisions the estimated losses on “full service” contracts where
      we provide full service in exchange for a revenue share of the wind power
      produced. For the three months ended June 30, 2009, our estimated warranty
      costs averaged approximately $1,200 per turbine per month under warranty
      and as of June 30, 2009 we had approximately 190 turbine – months
      remaining under warranty. We amortize the estimated warranties ratably
      over the remaining warranty period against the actual expenses incurred
      and we amortize the projected loss provisions against the expected future
      periods of full service losses.(2)
            Retrofit
      provisions represent the estimated future cost to perform significant
      repairs for known defects in turbines that are expected to be incurred
      during the warranty period or were obligated to be repaired while a
      turbine was under warranty. Retrofit costs are estimated based on
      management’s projection of the costs to repair the known defects on a
      parts and labor basis. When completed, retrofit provisions are amortized
      against the actual expenses incurred. All retrofit accruals are recorded
      as current liabilities.(3)
            Availability
      penalties represent a combination of i) the calculated revenue guarantees
      under the turbine supply agreement and ii) the estimate of future payments
      for revenue guarantees. Actual penalties are calculated under the terms of
      each individual contract and represent the guaranteed value of the wind
      power generated under the term of the contract. If the turbine delivers
      less than the rated power determined under the contract, subject to
      minimum wind conditions, DeWind is obligated under some contracts to
      reimburse the wind turbine purchaser for the shortfall subject to contract
      or turbine maximums, as applicable. Actual availability penalties are
      recorded as current liabilities although such penalties are often disputed
      as to the amounts due and then subsequently mediated or negotiated and
      which often results in payments made in excess of one year. Estimated
      penalties are determined by past availability histories and management
      estimates of the required revenue reimbursement on a per turbine basis and
      calculated using the expected availability rate multiplied by the number
      of months remaining under warranty. Estimated availability penalties are
      amortized against actual availability penalties incurred ratably over the
      remaining warranty period. As of June 30, 2009, we have estimated
      availability penalties accrued of approximately $2,800 per turbine per
      month remaining under warranty. For warranty periods in excess of one
      year, the estimated availability penalty is recorded as a long term
      liability.





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





PROVISION
FOR LOSS ON TURBINE CONTRACTS AND TURBINE CONTRACT INVENTORY





Provision
for loss on turbine contracts represents incurred and estimated costs in excess
of contracted and expected billings on turbine supply contracts. Management
reviews all turbine supply contracts and evaluates each contract on an
individual basis to determine if estimated costs to complete exceed projected
billings. For contracts projected to be at a loss, a provision for contract loss
is accrued and expensed to turbine cost of sales. After the related inventory is
purchased, the provision is reclassified to inventory reserves to reduce the
value of the inventory to the net realizable value based on the sales price
under the contract.




9




Total
unaudited contract provisions as of June 30, 2009 were $9,295,000, all of which
were included in inventory reserves. Total restated contract provisions as of
September 30, 2008 were $9,371,000 of which $1,774,000 were included in
inventory reserves and $7,597,000 were included in Provision for Loss on Turbine
Contracts.





Estimates





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




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





-
            The
      estimates pertaining to the likelihood of our accounts receivable
      collectability. These estimates primarily rely upon past payment history
      by customer and management judgment on the likelihood of future payments
      based on the current business condition of each customer and the general
      business environment.-
            The
      estimates pertaining to the valuation of our inventories. These estimates
      primarily rely upon the current order book for each product in inventory
      along with management’s expectations and visibility into future sales of
      each product in inventory.-
            The
      assumptions used to calculate fair value of our stock based compensation,
      primarily the volatility component of the Black-Scholes-Merton option
      pricing model used to value our warrants and our employee and non-employee
      options. This estimate relies upon the past volatility of our share price
      over time.-
            The
      warranty, retrofit and availability provisions for our wind turbines.
      These estimates rely primarily on the past history of repairs and
      maintenance, turbine downtime and incurred availability charges as
      calculated under the terms of each contract, and management judgment on:
      i) the likelihood of customer claims for availability based on past
      history, ii) the likelihood of proactively solving or preventing similar
      repair, warranty, or availability expenses in the future, and iii) the
      projected recovery of sub-warranty claims, insurance claims, and other
      mitigating reimbursements.-
            The
      estimates pertaining to the completion of our wind farm.  These
      estimates primarily rely upon management’s expectations to reasonably
      estimate the costs to complete.-
            Goodwill
      and intangible valuation. These estimates rely primarily on financial
      models reviewed by senior management which incorporate business
      assumptions made by management on the underlying products and technologies
      acquired in the DeWind acquisition and the likelihood that the values
      assigned during the initial valuations will be recoverable over time
      through increased revenues, profits, and enterprise
  value.





Except as
noted in this document, the methodology and assumptions used for the estimates
pertaining to the activity during the three and nine months ended June 30, 2009
are consistent with those used for the estimates included in our Form 10-K/A for
the year ended September 30, 2008 filed on March 9, 2009.





Reclassifications





Certain
balances were reclassified to conform with current period
presentation.




DERIVATIVE
FINANCIAL INSTRUMENTS




The
Company issues financial instruments in the form of stock options, stock
warrants, and debt conversion features as part of its convertible debt
issuances. The Company has not issued any derivative instruments for hedging
purposes since inception. The Company uses the guidance of and has adopted the
disclosure requirements of the Financial Accounting Standards Board (FASB)
Statements of Financial Accounting Standards (SFAS) 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 a liability. The Company has accounted for all derivative
instruments indexed to the Company’s stock as equity.




10




The
values of the financial instruments are estimated using the Black-Scholes-Merton
(Black-Scholes) option-pricing model. Key assumptions used during the nine
months ended June 30, 2009 and 2008 to value options and warrants granted or
re-priced are as follows:




Nine
      Months EndedJune
      30,2009
              
              
              2008Risk
      Free Rate of Return
              
              
              0.50-2.54
              %
              
              
              1.79-4.29
              %Volatility
              
              
              75-96
              %
              
              
              66-88
              %Dividend
      yield
              
              
              0
              %
              
              
              0
              %Expected
      life
              
              0-5
      yrs
              
              
              0-4
      yrs





Stock-Based
Compensation




In
December 2004, the FASB issued SFAS No. 123R Share-Based Payments (SFAS
123R) 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 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 was 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 123R resulted in no cumulative change in accounting as of the date of
adoption.





On
September 27, 2001, the FASB 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,
expenses are deferred and recognized over the more appropriate of the vesting
period, or as services are provided.




In
December 2007, the SEC issued Staff Accounting Bulletin (SAB) No. 110 regarding
the use of a "simplified" method, as discussed in SAB No. 107 (SAB 107), in
developing an estimate of expected term of "plain vanilla" share options in
accordance with SFAS No. 123 (R), Share-Based Payment.  In particular,
the staff indicated in SAB 107 that it will accept a company's election to use
the simplified method, regardless of whether the company has sufficient
information to make more refined estimates of expected term. At the time SAB 107
was issued, the staff believed that more detailed external information about
employee exercise behavior (e.g., employee exercise patterns by industry and/or
other categories of companies) would, over time, become readily available to
companies. Therefore, the staff stated in SAB 107 that it would not expect a
company to use the simplified method for share option grants after December 31,
2007. The staff understands that such detailed information about employee
exercise behavior may not be widely available by December 31, 2007. Accordingly,
the staff will continue to accept, under certain circumstances, the use of the
simplified method beyond December 31, 2007. The Company currently uses the
simplified method for “plain vanilla” share options and warrants, and will
assess the impact of SAB 110 for fiscal year 2009. It is not believed that this
will have an impact on the Company’s consolidated financial position, results of
operations or cash flows.




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 00­27) and EITF 05-8 Income Tax Consequences of Issuing
Convertible Debt with Beneficial Conversion Features.  The
Company records a beneficial conversion feature (BCF) related to the issuance of
convertible debt that have conversion features at fixed or adjustable rates that
are in-the-money when issued and records the fair value of warrants issued with
those instruments. The BCF for the convertible instruments is recognized and
measured by allocating a portion of the proceeds to warrants and as a reduction
to the carrying amount of the convertible instrument equal to the intrinsic
value of the conversion features, both of which are credited to paid-in-capital.
The Company calculates the fair value of warrants issued with the convertible
instruments using the Black-Scholes valuation method, using the same assumptions
used for valuing employee options for purposes of SFAS 123R, except that the
contractual life of the warrant is used. The Company evaluated the variable
conversion features and determined that they should be accounted for as equity
and accounted for under EITF 98-5 and EITF 00-27. Under the guidelines of EITF
98-5 and EITF 00-27, the Company first allocates the value of the proceeds
received to the convertible instrument and any other detachable instruments
(such as detachable warrants) on a relative fair value basis and then determine
the amount of any beneficial conversion feature based on effective conversion
price to measure the intrinsic value, if any, of the embedded conversion option.
Using the effective yield method, the allocated fair value is recorded as a debt
discount or premium and is amortized over the expected term of the convertible
debt to interest expense. For a conversion price change of a convertible debt
issue, the additional intrinsic value of the debt conversion feature, calculated
as the number of additional shares issuable due to a conversion price change
multiplied by the previous conversion price, is recorded as additional debt
discount and amortized over the remaining life of the debt.




In
December 2006, the FASB issued FASB Staff Position (FSP) EITF 00-19-2 Accounting
for Registration Payment Arrangements (FSP 00-19-2). FSP 00-19-2
specifies that the contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether issued
as a separate agreement or included as a provision of a financial instrument or
other agreement, should be separately recognized and measured in accordance with
SFAS No. 5 Accounting
for Contingencies (SFAS 5). As of January 1, 2007, the Company adopted
FSP 00-19-2 and evaluated the effective provisions, which specifies that the
contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement should be separately
recognized and measured in accordance with SFAS 5, pursuant to which a
contingent obligation must be accrued only if it is more likely than not to
occur. In management’s estimation, the contingent payments related to the
registration payment arrangement are not likely to occur, and thus no amount
need be accrued. Accordingly, the adoption did not have an effect on our
consolidated financial statements as of the date of adoption.




11




Recent
Pronouncements




Statement
No. 141R, “Business Combinations”


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





FSP
FAS 141R-1, “Accounting for Assets Acquired and Liabilities Assumed in a
Business Combination That Arise from Contingencies”


In April
2009, the FASB issued FSP FAS 141R-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies (FSP FAS 141R-1). FSP FAS 141R-1 applies to all assets
acquired and liabilities assumed in a business combination that arise from
certain contingencies as defined in this FSP and requires (i) an acquirer
to recognize at fair value, at the acquisition date, an asset acquired or
liability assumed in a business combination that arises from a contingency if
the acquisition-date fair value of that asset or liability can be determined
during the measurement period otherwise the asset or liability should be
recognized at the acquisition date if certain defined criteria are met;
(ii) contingent consideration arrangements of an acquiree assumed by the
acquirer in a business combination be recognized initially at fair value;
(iii) subsequent measurements of assets and liabilities arising from
contingencies be based on a systematic and rational method depending on their
nature and contingent consideration arrangements be measured subsequently in
accordance with the provisions of SFAS 141(R); and (iv) disclosures of the
amounts and measurement basis of such assets and liabilities and the nature of
the contingencies. FSP FAS 141R-1 is effective for business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. We are currently
evaluating the impact that FSP FAS 141R-1 will have on our consolidated
financial statements.





FSP
FAS 142-3, “Determination of the Useful Life of Intangible Assets.”


In April
2008, the FASB issued FSP FAS 142-3, Determining the Useful Life of
Intangible Assets (FSP FAS 142-3).  FSP 142-3 amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under SFAS
No. 142, Goodwill and Other
Intangible Assets. This change is intended to improve the consistency
between the useful life of a recognized intangible assets under SFAS No. 142 and
the period of expected cash flows used to measure the fair value of the asset
under SFAS No. 141R and other GAAP.  FSP 142-3 is effective for the
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years.  The requirement for
determining useful lives must be applied prospectively to intangible assets
acquired after the effective date and the disclosure requirements must be
applied prospectively to all intangible recognized as of, and subsequent to, the
effective date.  We are currently evaluating the impact that FSP FAS
142-3 will have on our consolidated financial statements.





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


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





Statement
No. 166, “Accounting for Transfers of Financial Assets—an amendment of FASB
Statement No. 140”


In June
2009, the FASB issued SFAS No. 166, Accounting for Transfers of
Financial Assets—an amendment of FASB Statement No. 140 (SFAS 166).
SFAS 166 amends various provisions of SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities—a replacement
of FASB Statement No. 125, by removing the concept of a qualifying
special-purpose entity and removes the exception from applying FIN 46R to
variable interest entities that are qualifying special-purpose entities; limits
the circumstances in which a transferor derecognizes a portion or component of a
financial asset; defines a participating interest; requires a transferor to
recognize and initially measure at fair value all assets obtained and
liabilities incurred as a result of a transfer accounted for as a sale; and
requires enhanced disclosure; among others. SFAS 166 becomes effective for the
Company on October 1, 2010, earlier application is prohibited. We are
currently evaluating the potential impact of SFAS 166 on the consolidated
financial statements.





Statement
No. 167, “Amendments to
FASB Interpretation No. 46(R)”


In June
2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation
No. 46(R) (SFAS 167). SFAS 167 amends FASB Interpretation
No. 46R, Consolidation of
Variable Interest Entities—an interpretation of ARB No. 51(FIN 46(R)
to require an enterprise to perform an analysis to determine whether the
enterprise’s variable interest or interests give it a controlling financial
interest in a variable interest entity (VIE); to require ongoing reassessments
of whether an enterprise is the primary beneficiary of a VIE; to eliminate the
quantitative approach previously required for determining the primary
beneficiary of a VIE; to add an additional reconsideration event for determining
whether an entity is a VIE when any changes in facts and circumstances occur
such that holders of the equity investment at risk, as a group, lose the power
from voting rights or similar rights of those investments to direct the
activities of the entity that most significantly impact the entity’s economic
performance; and to require enhanced disclosures that will provide users of
financial statements with more transparent information about an enterprise’s
involvement in a VIE. SFAS 167 becomes effective for the Company on
October 1, 2010, earlier application is prohibited. We are currently
evaluating the potential impact of SFAS 167 on the consolidated financial
statements.




12




Statement
No. 168, “The FASB Accounting
Standards CodificationTM and the
Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB
Statement No. 162”


In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
CodificationTMand the Hierarchy of Generally
Accepted Accounting Principles—a replacement of FASB Statement
No. 162 (SFAS 168). SFAS 168 replaces SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles, and establishes the FASB Accounting Standards
CodificationTM
(Codification) as the source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with GAAP. Rules and interpretive releases of
the SEC under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. The FASB will no longer issue new
standards in the form of Statements, FASB Staff Positions, or Emerging Issues
Task Force Abstracts; instead the FASB will issue Accounting Standards Updates.
Accounting Standards Updates will not be authoritative in their own right as
they will only serve to update the Codification. The issuance of SFAS 168 and
the Codification does not change GAAP. SFAS 168 becomes effective for the
Company for the fiscal year ending September 30, 2009. We have determined
that the adoption of SFAS 168 will not have an impact on our consolidated
financial statements.




EITF
Issue 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed
to an Entity’s Own Stock”


In June
2008, the FASB ratified EITF 07-5, Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock (EITF
07-5).  Paragraph 11(a) of SFAS No. 133 Accounting for Derivatives and
Hedging Activities, specifies that a contract that would otherwise meet
the definition of a derivative but is both (a) indexed to the Company’s own
stock and (b) classified in stockholders’ equity in the statement of financial
position would not be considered a derivative financial
instrument.  EITF 07-5 provides a new two-step model to be applied in
determining whether a financial instrument or an embedded feature is indexed to
an issuer’s own stock and thus able to qualify for the SFAS No. 133 paragraph
11(a) scope exception.  EITF 07-5 is effective for the first annual
reporting period beginning after December 15, 2008, and early adoption is
prohibited.  We are currently evaluating the impact that EITF 07-5
will have on our consolidated financial statements.





Significant
new accounting policies adopted or implemented during the nine months ended June
30, 2009





In
December 2008, the FASB issued FSP FAS 140-4 and FASB Interpretation No. 46R-8,
Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests in Variable
Interest Entities. This FSP amends SFAS No. 140, Accounting for Transfers of
Servicing Financial Assets and Extinguishments of Liabilities to require
public entities to provide additional disclosures about transfers of financial
assets.  It also amends FIN 46, Consolidation of Variable Interest
Entities (VIE’s) as revised to require public enterprises to provide
additional disclosures about their involvement with VIE’s.  The FSP
was effective for the Company’s quarter ended December 31, 2008.  We
are required to consolidate our DeWind joint venture, accordingly such financial
results are included in our consolidated financial statements under accounting
standards applicable to VIE’s, and the required disclosures regarding our
involvement with the joint venture are included in Note
11 to the financial statements.





In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS
157), which defines the fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements. This statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years.   The Company adopted the applicable provisions of SFAS
157 as of October 1, 2008.  Except for added disclosure, the adoption
of SFAS 157 had no impact on our consolidated financial statements.





In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial
Liabilities, Including an amendment of FASB Statement No. 115 (SFAS 159),
which permits entities to choose to measure many financial instruments and
certain other items at fair value.  The statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007;
this Statement should not be applied retrospectively to fiscal years beginning
prior to the effective date, except as permitted in paragraph 30 for early
adoption. The Company adopted the provisions of SFAS 159 as of October 1,
2008.  The adoption of SFAS 159 had no impact on our consolidated
financial statements.





In March,
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities (SFAS 161). SFAS 161 amends and
expands the disclosure requirements of SFAS No. 133 by providing additional
disclosure on the use of derivative instruments including qualitative
disclosures about fair value amounts of gains and losses on derivative
instruments, and disclosures about credit-risk-related contingent features in
derivative agreements. SFAS 161 is effective for fiscal years and interim
periods beginning after November 15, 2008. The Company adopted the provisions of
SFAS 161 as of January 1, 2009.  The adoption of SFAS 161 had no
impact on our consolidated financial statements as we do not have derivative
financial instruments.




On
June 30, 2009, the Company adopted SFAS No. 165, Subsequent Events (SFAS 165).
SFAS 165 establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. Specifically, SFAS 165 sets forth the
period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements, the circumstances under
which an entity should recognize events or transactions occurring after the
balance sheet date in its financial statements, and the disclosures that an
entity should make about events or transactions that occurred after the balance
sheet date.  Disclosures must include the effective date of
management’s evaluation of subsequent events and the basis for that date, that
is, whether that date represents the date the financial statements were issued
or were available to be issued. The adoption of SFAS 165 had no impact on the
consolidated financial statements as management already followed a similar
approach prior to the adoption of this standard (see Note
15).




13




In April
2009, the FASB issued the following three FSP’s intended to provide additional
application guidance and enhance disclosures regarding fair value measures and
impairments of securities:





·
            FSP
      FAS 115-2 and FAS 124-2, Recognition and Presentation
      of Other-Than-Temporary
Impairments;


·
            FSP
      FAS 107-1 and APB 28-1, Interim Disclosures about Fair
      Value of Financial Instruments;
and


·
            FSP
      FAS 157-4, Determining
      Fair Value When the Volume and Level of Activity for the Asset or
      Liability Have Significantly Decreased and Identifying Transactions That
      Are Not Orderly





These
FSP’s are effective for interim and annual reporting periods ending after June
15, 2009.  The adoption of these FSP’s did not have a material impact
on our consolidated financial statements or disclosures, except as noted below
in relation to FSP FAS 107-1 and APB 28-1.




In
April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments (FSP 107-1), which amends SFAS No. 107,
Fair Value Disclosures about
Financial Instruments (SFAS No. 107) to require disclosure about
fair value of financial instruments, including those not recognized on the
statement of financial position at fair value, for interim reporting periods as
well as in annual financial statements. The FSP is effective for interim and
annual reporting periods ending after June 15, 2009. The Company's
financial instruments include cash and cash equivalents and accounts payable -
trade, accounts receivable, notes and convertible notes. The carrying amounts
for these financial instruments approximate fair value due to their short
maturities.




NOTE
2 - GOING CONCERN





The
Company has received a report from its independent auditors for the year ended
September 30, 2008 that includes an explanatory paragraph describing the
uncertainty as to the Company's ability to continue as a going concern. These
consolidated financial statements contemplate the ability to continue as such
and do not include any adjustments that might result from this
uncertainty.





During
the year ended September 30, 2008, the Company incurred a net loss of
$53,513,000 and negative cash flows from operations of $51,360,000. In addition,
the Company had an accumulated deficit of $193,123,000 at September 30, 2008.
The Company's ability to continue as a going concern is dependent upon its
ability to generate profitable operations in the future and/or to obtain the
necessary financing to meet its obligations and repay its liabilities arising
from normal business operations when they come due. The outcome of these matters
cannot be predicted with any certainty at this time.





Our
principal sources of working capital have been private debt and equity issuances
and historically, the Company has issued 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: To date, since inception for our Cable products and since the
acquisition of DeWind, we have received orders including revenues recognized and
unfilled orders for approximately $75
million in ACCC conductor products and $253
million of Wind turbines. We will require a significant increase in customer
orders at sufficient profit margin levels to cover our expenses and generate
sufficient cash from operations.





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





We
believe our cash position, as of June 30, 2009, of $6.7 million and expected
cash flows from revenue orders may not be sufficient to fund operations for the
next four calendar quarters for both of our business segments. The Company is in
the process of selling significantly all of the DeWind business segment assets
and liabilities for cash.  If the proposed transaction closes as
scheduled, the transaction will provide a significant amount of cash during the
fiscal year ended September 30, 2009, which would then provide sufficient
capital to meet the Company’s capital requirements and to fund the operations of
the remaining portions of the Company for the next year.





Should
this transaction not close and a replacement buyer not appear, we anticipate
that additional cash is needed to fund operations beyond September, 2009, absent
a large cash deposit for a future order and to the extent required the Company
intends to continue the practice of issuing stock, debt or other financial
instruments for cash or for payment of services until our cash flows from the
sales of our primary products is sufficient to provide cash from operations or
if we believe such a financing event would be a sound business
strategy.





NOTE
3 – RESTATEMENT





The
financial statements included herein have been restated to correct an error in
accounting for turbine supply contract losses for costs incurred during the
prior quarter ended March 31, 2009, but which were committed during the quarter
ended September 30, 2008 and for which sufficient information was available for
management to make an estimate of the contract losses for the quarter and year
ended September 30, 2008.




During
the first fiscal quarter ended December 31, 2008, the Company’s DeWind segment
delivered 10 unit D8.2 megawatt wind turbines under two supply contracts for the
same customer in South America with an original value of $19,100,000 for the
supply of turbine nacelles, hubs, and blades. The contracts were negotiated and
signed in June 2007 at a time when turbine component costs were substantially
lower than during the quarter ended September 30, 2008. During the quarter ended
September 30, 2008 the Company agreed to a supply delay penalty of $955,000,
which reduced the value of the contract to $18,145,000. Also during the quarter
ended September 30, 2008, the Company revised purchase commitments to vendors to
supply the wind turbine nacelle components at a higher price than were
previously estimated. The revised commitments when added to the other estimated
costs to complete resulted in an estimated cost to fulfill the contract of
$25,742,000. The difference of $7,597,000 represents the estimated loss on the
turbine supply contract. An additional $363,000 of contract losses under a
separate contract was also understated for a total accrual of $7,960,000
($7,597,000 recorded as Provision for Loss on Turbine Contracts, and $363,000
recorded as reserve against inventory purchased and recorded as of September 30,
2008). The Company is recording this estimated loss into the quarter and year
ended September 30, 2008 to restate the financial statements to correct the
error.




14




The
effect to the Balance Sheet and Statement of Operations for the three months and
year ended September 30, 2008 was:





As Originally
                      
                      
                      Restatement(In Thousands except share and per share amounts)
                      
                      Reported
                      
                      
                      Adjustment
                      
                      
                      As RestatedBalance
      SheetInventory,
      net
                      
                      $
                      42,451
                      
                      
                      $
                      (363
                      )
                      
                      $
                      42,088Provision
      for Loss on Turbine Contracts
                      
                      $
                      —
                      
                      
                      $
                      7,597
                      
                      
                      $
                      7,597Accumulated
      Deficit
                      
                      $
                      (185,163
                      )
                      
                      $
                      (7,960
                      )
                      
                      $
                      (193,123
                      )Total
      Liabilities and Shareholders’ Equity
                      
                      $
                      165,440
                      
                      
                      $
                      (363
                      )
                      
                      $
                      165,077Statement of
      Operations:Cost
      of Product Sold
                      
                      $
                      62,184
                      
                      
                      $
                      7,960
                      
                      
                      $
                      70,144Net
      Loss
                      
                      $
                      (45,553
                      )
                      
                      $
                      (7,960
                      )
                      
                      $
                      (53,513
                      )Basic
      and Diluted Loss per Share
                      
                      $
                      (0.19
                      )
                      
                      $
                      (0.03
                      )
                      
                      $
                      (0.22
                      )Weighted-Average
      Common Shares Outstanding
                      
                      
                      243,369,110
                      
                      
                      
                      243,369,110
                      
                      
                      
                      243,369,110





NOTE
4 – DISCONTINUED OPERATIONS OF DEWIND SUBSIDIARIES





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





DeWind
GmbH:





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





(In Thousands)
                        
                        June
      30, 2009
                        
                        
                        September 30, 2008(unaudited)
                        
                        
                        (restated)ASSETSCash
      and Cash Equivalents
                        
                        $
                        493
                        
                        
                        $
                        491Accounts
      Receivable, net
                        
                        
                        6,987
                        
                        
                        
                        6,961Prepaid
      Expenses and Other Current Assets
                        
                        
                        550
                        
                        
                        
                        548Property
      and Equipment, net
                        
                        
                        10
                        
                        
                        
                        10TOTAL
      ASSETS
                        
                        $
                        8,040
                        
                        
                        $
                        8,010LIABILITIESAccounts
      Payable and Other Accrued Liabilities
                        
                        $
                        14,079
                        
                        
                        $
                        14,026Deferred
      Revenues and Customer Advances
                        
                        
                        1,890
                        
                        
                        
                        1,883Warranty
      Provision
                        
                        
                        11,288
                        
                        
                        
                        11,246Total
      Liabilities
                        
                        $
                        27,257
                        
                        
                        $
                        27,155Net
      Liabilities for Deconsolidated Subsidiary in Liquidation
                        
                        $
                        19,217
                        
                        
                        $
                        19,145




There has been no significant change to the Net Liabilities for
Deconsolidated Subsidiaries in Liquidation, as it relates to DeWind GmbH, during
the nine months ended June 30, 2009. The remaining assets and liabilities of
DeWind GmbH are under the control of the court-appointed receiver in Germany. In
December, 2008 a receiver status update was provided that did not result in any
changes or impacts to either the assets or liabilities of DeWind GmbH. The next
status update is expected in September, 2009.




15




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




(In Thousands)
            
            Three months ended
            
            
            Nine months endedJune
      30, 2009
            
            
            June
      30, 2008
            
            
            June
      30, 2009
            
            
            June
      30, 2008(unaudited)
            
            
            (unaudited)
            
            
            (unaudited)
            
            
            (unaudited)Service
      Revenues
            
            $
            —
            
            
            $
            366
            
            
            $
            —
            
            
            $
            1,280Cost
      of Service Revenues
            
            
            —
            
            
            
            1,725
            
            
            
            —
            
            
            
            5,428Operating
      Expenses
            
            
            —
            
            
            
            192
            
            
            
            —
            
            
            
            1,315Other
      (Income) Expense
            
            
            —
            
            
            
            47
            
            
            
            —
            
            
            
            (178
            )Tax
      (Expense) Benefit
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            4Loss
      from discontinued operations
            
            $
            —
            
            
            $
            1,598
            
            
            $
            —
            
            
            $
            5,281





DeWind
Service/Eservice:





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





The
Company determined that the arrangement was within the scope of FASB
Interpretation 46R Consolidation of Variable Interest
Entities (revised December 2003)-an interpretation of ARB No. 51 (FIN
46R) as a Variable Interest Entity (VIE). During the fiscal quarter
beginning October 1, 2006, the Company accounted for the arrangement as a VIE
under the provisions of FIN 46R. This required the Company to consolidate the
balances and operations of E Service with the balances and operations of the
remainder of the Company.





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





On April
3, 2008 the Company and Enertrag closed the sale of the remaining 24.9%
ownership in E Services for 500,000 Euros ($790,250 at April 3, 2008 exchange
rates). The consolidated financial statements of Composite Technology
Corporation have been restated to present the E Services operations, assets and
liabilities as discontinued operations.




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





(In Thousands)
            
            Three months ended
            
            
            Nine months endedJune
      30, 2009
            
            
            June
      30, 2008
            
            
            June
      30, 2009
            
            
            June
      30, 2008(unaudited)
            
            
            (unaudited)
            
            
            (unaudited)
            
            
            (unaudited)Loss
      from unconsolidated subsidiary accounted for under the equity
      method
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            57Impairment
      of long term assets
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,421Loss
      from discontinued operations
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            1,478





DeWind Holdings Ltd.:





On
January 9, 2009 the Company placed DeWind Holdings Ltd. into insolvency. As of
June 30, 2009, DeWind Holdings owned the share capital of the now insolvent
DeWind GmbH and had other assets and liabilities consisting of $25,000 of other
current assets and $2,056,000 of accounts payable and other accrued liabilities
consolidated into the Company’s balance sheet. There were no revenues for DeWind
Holdings Ltd., and expenses totaled only $0 and $12,000 during the three and
nine months ended June 30, 2009, respectively. During the three and nine months
ended June 30, 2008, DeWind Holdings recorded $34,000 and $315,000,
respectively, which was primarily comprised of $281,000 of General and
Administrative expenses related to receivable reserves.




16




NOTE
5 – FAIR VALUE MEASUREMENTS





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





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





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


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


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





As of
June 30, 2009, the Company held certain assets and liabilities that are required
to be measured at fair value on a recurring basis, including its cash and cash
equivalents. The fair value of these assets and liabilities was determined
using the following inputs in accordance with SFAS 157 at June 30,
2009:




Fair Value Measurement as of June
      30, 2009(In Thousands)
            
            Total
            
            
            Level 1
            
            
            Level 2
            
            
            Level 3Description
            
            $
            
            
            $
            
            
            $
            
            
            $Cash
      and cash equivalents (1)
            
            $
            6,653
            
            
            $
            6,653
            
            
            $
            —
            
            
            $
            —




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





NOTE
6 – BALANCE SHEET DETAILS





Accounts
Receivable




Accounts
Receivable consisted of the following at June 30, 2009 and September 30,
2008:




(In Thousands)
              
              June
      30,
                2009
              
              
              September 30,
                2008(unaudited)
              
              
              (restated)Turbine
      products and service receivables
              
              $
              3,994
              
              
              $
              6,480Unbilled
      receivables
              
              
              17
              
              
              
              1,744Cable
      products receivables
              
              
              3,030
              
              
              
              4,484Gross
      Receivables
              
              $
              7,041
              
              
              $
              12,708Reserves
              
              
              (714
              )
              
              
              (687
              )Net
      receivables
              
              $
              6,327
              
              
              $
              12,021Portion
      relating to greater than one year, net of reserves of $588 and
      $0
              
              
              304
              
              
              
              248$
              6,023
              
              
              $
              11,773




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






17





Inventories
and Advanced Payments for Turbine Inventory




Inventories
and advanced payments for turbine inventory consisted of the following at June
30, 2009 and September 30, 2008:




(In Thousands)
              
              June
      30,
                2009
              
              
              September 30,
                2008(unaudited)
              
              
              (restated)Raw
      Materials and Turbine Parts
              
              $
              31,136
              
              
              $
              36,704Work
      in Progress
              
              
              40,721
              
              
              
              4,457Finished
      Goods
              
              
              4,058
              
              
              
              3,123Gross
      Inventory
              
              $
              75,915
              
              
              $
              44,284Reserves
              
              
              (16,396
              )
              
              
              (2,196
              )Net
      Inventory
              
              $
              59,519
              
              
              $
              42,088Advanced
      Payments for Turbine Inventory
              
              $
              7,735
              
              
              $
              31,245




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





Property
and Equipment




Property
and equipment consisted of the following:




(In Thousands)
                Estimated
                  Useful Lives
                
                
                June
      30,
                  2009
                
                
                September 30,
                  2008(unaudited)
                
                
                (restated)Office
      furniture and equipment
                3-10 yrs
                
                
                $
                1,876
                
                
                $
                1,584Production
      equipment
                3-10 yrs
                
                
                
                8,170
                
                
                
                6,390Wind
      turbines in production
                3-10 yrs
                
                
                
                3,308
                
                
                
                3,296Wind
      farm construction in progress
                3-10 yrs
                
                
                
                4,279
                
                
                
                —Automobiles
                3-5 yrs
                
                
                
                36
                
                
                
                36Leasehold
      improvements
                7 yrs
                
                
                
                743
                
                
                
                2,075Total
      Property and Equipment
                
                
                
                $
                18,412
                
                
                $
                13,381Accumulated
      depreciation
                
                
                
                
                (6,896
                )
                
                
                (5,426
                )Property
      and Equipmnet, net
                
                
                
                $
                11,516
                
                
                $
                7,955





Wind farm
construction in progress represents prepaid wind farm construction costs related
to wind farm infrastructure costs incurred towards the development of a wind
farm under development by DeWind SWI Wind Farms, LLC. DeWind
SWI Wind Farms, LLC is a controlled joint venture of DeWind Inc., a wholly owned
subsidiary of the Company.  The joint venture development agreement
terms provided for an initial profit sharing of 50% for each party with
management control for the party that has provided the greater amount of
contributed capital into the joint venture.  All contributed capital
has a priority repayment to the contributing party from cash flows generated by
the joint venture prior to any profit sharing payments. As of June 30, 2009,
DeWind Inc. has contributed the majority of capital into entity and has
management control of the joint venture.  Accordingly, the joint
venture is accounted for as a Variable Interest Entity (see Note
11).




Assets and Liabilities Held and
Used





Subsequent
to June 30, 2009, the Company determined that it was probable that a transaction
comprising a substantial portion of the operating assets and liabilities of the
DeWind segment would be sold.  The Company evaluated the expected
transaction under SFAS No. 144 Accounting
for the Impairment or Disposal of Long-Lived Assets (SFAS 144) and
determined that the assets and liabilities to be sold should be reclassified as
assets and liabilities held for sale subsequent to the June 30, 2009 balance
sheet date.  Accordingly, the assets and liabilities are incorporated
into the June 30, 2009 balance sheet and the operations for the DeWind
segment are included in the three and nine months ended June 30,
2009.  In connection with the expected sale we have evaluated the
related goodwill and intangible asset fair values and determined certain
goodwill was impaired as of the period ended June 30, 2009.  See
“Goodwill
and Intangible Assets” below for discussion of the impairment
loss.  The transaction is expected to close during the year ending
September 30, 2009.




In
accordance with SFAS 144, a long-lived asset (and other assets and associated
liabilities, collectively referred to as a “disposal group”) to be sold shall be
classified as held for sale in the period in which all of the following criteria
are met:





a.
Management, having the authority to approve the action, commits to a plan to
sell the asset (disposal group).





b. The
asset (disposal group) is available for immediate sale in its present condition
subject only to terms that are usual and customary for sales of such assets
(disposal groups).





c. An
active program to locate a buyer and other actions required to complete the plan
to sell the asset (disposal group) have been initiated.





d. The
sale of the asset (disposal group) is probable, and transfer of the asset
(disposal group) is expected to qualify for recognition as a completed sale,
within one year, except as permitted.





e. The
asset (disposal group) is being actively marketed for sale at a price that is
reasonable in relation to its current fair value.





f.
Actions required to complete the plan indicate that it is unlikely that
significant changes to the plan will be made or that the plan will be
withdrawn.  If at any time the criteria in this paragraph are no
longer met (except as permitted), a long-lived asset (disposal group) classified
as held for sale shall be reclassified as held and used, as directed in SFAS
144.




18




If the
criteria above are met after the balance sheet date but before issuance of the
financial statements, a long-lived asset shall continue to be classified as held
and used in those financial statements when issued. The applicable information
required by SFAS 144 shall be disclosed in the notes to the financial
statements. If the asset (or asset group) is tested for recoverability (on a
held-and-used basis) as of the balance sheet date, the estimates of future cash
flows used in that test shall consider the likelihood of possible outcomes that
existed at the balance sheet date, including the assessment of the likelihood of
the future sale of the asset. That assessment made as of the balance sheet date
shall not be revised for a decision to sell the asset after the balance sheet
date. An impairment loss, if any, to be recognized shall be measured as the
amount by which the carrying amount of the asset (or asset group) exceeds its
fair value at the balance sheet date.




Management
has determined that all conditions above have been met after the balance sheet
date, but before the issuance of our financial statements, and thus the DeWind
net assets included in the expected transaction should be classified as assets
and liabilities held and used as of the period ended June 30,
2009.




The
following is a summary of the net assets held and used, in connection with the
probable sale discussed above, and which are included within the related
corresponding amounts on the consolidated balance sheet at June 30,
2009:





(In Thousands)
              
              June
      30, 2009(unaudited)ASSETSAccounts
      Receivable, net
              
              $
              824Inventory,
      net
              
              
              46,714Advanced
      Payments for Turbine Inventory
              
              
              5,716Prepaid
      Expenses and Other Current Assets
              
              
              566Property
      and Equipment, net
              
              
              8,095Intangible
      Assets, net
              
              
              18,601Other
      Assets
              
              
              94TOTAL
      ASSETS
              
              $
              80,610LIABILITIESAccounts
      Payable and Other Accrued Liabilities
              
              $
              14,189Deferred
      Revenues and Customer Advances
              
              
              25,347Warranty
      Provision
              
              
              183Total
      Liabilities
              
              $
              39,719Net
      Assets Held and Used
              
              $
              40,891





In
accordance with SFAS 144, upon a sale transaction, the related DeWind results of
operations will be presented as a Loss from Discontinued Operations, and the
assets and liabilities will be separately classified as relating to discontinued
operations beginning in period of such sale transaction, expected in the Annual
Report on Form 10-K for the year ended September 30, 2009.





Goodwill
and Intangible Assets





The
Company adopted SFAS No. 142 Goodwill and Other Intangible
Assets (SFAS 142) effective January 1, 2002.  In accordance
with SFAS 142, the Company does not amortize goodwill. The Company’s remaining
goodwill of $5,914,000 at June 30, 2009 is related to the acquisition of EU
Energy on July 3, 2006 and is currently attributable entirely to the DeWind
segment. In accordance with SFAS 142, the Company evaluates goodwill impairment
annually at year-end and between annual tests if situations arise that may
require re-evaluation.  In connection with the assets and liabilities
held and used discussed in “Assets and Liabilities Held and
Used” above, which is entirely related to our DeWind segment, we
determined that as of June 30, 2009, a re-evaluation of goodwill impairment was
required.  Accordingly, under the guidance of SFAS 142 and SFAS 144
(in connection with the assets and liabilities held and used for a significant
portion of the DeWind segment), we recorded a goodwill impairment charge of
$18,305,000 during the three and nine months ended June 30, 2009, which
represents the amount of goodwill in excess of the implied fair value of net
assets expected to be sold.




19




The
following table reconciles the current year changes made to goodwill for the
nine months ended June 30, 2009:





June 30, 2009(In Thousands)
                  
                  (unaudited)Balance
      as of September 30, 2008
                  
                  $
                  24,218Impairment
      of goodwill in connection with assets and liabilities held and
      used
                  
                  
                  (18,305
                  )Total
                  
                  $
                  5,913




As of
June 30, 2009, the Company had the following amounts related to other intangible
assets, all related to the acquisition of EU Energy on July 3, 2006 and
therefore the Turbine segment:





(In Thousands)
            Gross Carrying
              Amount
            
            Accumulated Amortization
            
            Net Carrying
              AmountSeptember 30,
            
            Sept 30,
            
            
            
            June
      30,
            
            June
      30,2008
            
            2008
            
            Amortized
            
            2009
            
            2009(restated)
            
            (restated)
            
            (unaudited)
            
            (unaudited)
            
            (unaudited)Supply
      Agreements
            
            $
            12,347
            
            
            $
            (165
            )
            
            $
            —
            
            
            $
            (165
            )
            
            $
            12,182Tech
      Transfer Agreements
            
            
            3,131
            
            
            
            (467
            )
            
            
            (1,436
            )
            
            
            (1,903
            )
            
            
            1,228Tradename
            
            
            7,553
            
            
            
            (850
            )
            
            
            (284
            )
            
            
            (1,134
            )
            
            
            6,419Service
      Contracts
            
            
            1,442
            
            
            
            (1,442
            )
            
            
            —
            
            
            
            (1,442
            )
            
            
            —Intangible
      Assets
            
            $
            24,473
            
            
            $
            (2,924
            )
            
            $
            (1,720
            )
            
            $
            (4,644
            )
            
            $
            19,829




Aggregate
amortization expense associated with continuing operations of the intangible
assets with determinable lives was $1,720,000 and $915,000 for the nine months
ended June 30, 2009 and 2008, respectively.




The
supply agreements are related to supplier agreements related to our DeWind D8.2
model. We will record amortization on this agreement over the life of the
agreement beginning with the first commercial shipments of our D8.2, two units
of which shipped in fiscal year 2008, and based on the expected units purchased
under this agreement. Our technology transfer agreements are related to our
China licensing arrangements. We will record amortization on these agreements as
we recognize revenues under these agreements which are based on the turbines
produced under these arrangements over three to five years. During the quarter
ended March 31, 2009, one of our China licensing arrangements was fully settled,
and as such, fully amortized in the second quarter, representing $1.2 million of
the $1.6 million aggregate amortization expense for the nine months ending June
30, 2009. We have determined that our trade name, DeWind, has a life of twenty
years and we will amortize this balance on a straight-line basis. Our service
contracts include service and maintenance contracts. We fully amortized the
service contracts as of September 30, 2007. All intangible assets listed are
considered to have no residual value.




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





(In Thousands)
              
              Estimated
                Amortization
                Expense(unaudited)Remainder
      of 2009
              
              $
              2472010
              
              
              3,2062011
              
              
              3,8912012
              
              
              3,6922013
              
              
              3,980Thereafter
              
              
              4,813Total
              
              $
              19,829





Accounts
Payable and Accrued Liabilities




Accounts
payable and accrued liabilities consisted of the following:




(In Thousands)
              
              June
      30,
                2009
              
              
              September 30,
                2008(unaudited)
              
              
              (restated)Trade
      Payables
              
              $
              24,603
              
              
              $
              31,051Accrued
      Acquisition Costs
              
              
              250
              
              
              
              250Accrued
      Payroll
              
              
              996
              
              
              
              1,058Deferred
      Rents
              
              
              151
              
              
              
              199Total
      Accounts Payable and Accrued Liabilities
              
              $
              26,000
              
              
              $
              32,558




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




20




Deferred
Revenues and Customer Advances




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




(In Thousands)
              
              June
      30,
                2009
              
              
              September 30,
                2008(unaudited)
              
              
              (restated)Customer
      advances on turbines and turbine parts sales
              
              $
              34,678
              
              
              $
              26,846Deferred
      revenues – Other turbine related
              
              
              2,890
              
              
              
              5,589Deferred
      revenues – Cable Sales
              
              
              1,651
              
              
              
              1,817Total,
      Deferred revenues & customer advances
              
              $
              39,219
              
              
              $
              34,252Balance
      included in current liabilities
              
              
              38,837
              
              
              
              33,525Long
      Term Deferred Revenues
              
              $
              382
              
              
              $
              727




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




Warranty
Reserve




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





Warranty
obligations reflect expected minor repairs during the period of warranty of the
turbine, between 2 and 5 years following installation (Warranty), and more major
repairs which may affect particular types of units (Retrofit). Provisions for
the former are based on historical experience of repair frequency and cost and
for the latter are based on engineering estimates of the likely incidence and
cost. In addition, turbines sold that remain under warranty carry guarantees of
availability (Availability) to produce electric power at certain levels. If a
turbine under warranty does not meet these availability thresholds due to
turbine failure covered by the warranty or servicing contract and the customer’s
turbine produces less power and therefore less revenue, the company reimburses
the customer for the lost value of the power shortfall. Availability provisions
are based on data obtained from the Company’s turbine monitoring system, actual
performance being compared to contractual obligation, with provisions made for
any potential contractual liability and estimates of future availability
penalties based on this historical performance. Warranties related to our ACCC
TM
products relate to conductor and hardware sold directly by us to the end-user
customer. We mitigate our loss exposure through the use of third party
warranty insurance. We have classified all warranty and product guarantee
reserves considered to be payable within one year as current liabilities and all
warranty and product guarantee reserves considered to be payable greater than
one year as non-current liabilities.





June
      30,
                2009
              
              
              September 30,
                2008(In
      Thousands)
              
              (unaudited)
              
              
              (restated)Turbine
      warranty reserves
              
              $
              297
              
              
              $
              684Cable
      warranty reserves
              
              
              365
              
              
              
              220Reserve
      for turbine availability
              
              
              1,206
              
              
              
              1,054Total
      Warranty and Product Guarantee reserves
              
              
              1,868
              
              
              
              1,958Less
      Amount classified as current liabilities
              
              
              1,617
              
              
              
              1,462Long
      Term Warranty Liability
              
              $
              251
              
              
              $
              496




June
      30, 2009(In
      Thousands)
                      
                      (unaudited)Beginning
      balance
                      
                      $
                      1,958Additional
      reserves recorded to expense
                      
                      
                      1,588Reserves
      utilized
                      
                      
                      (1,678
                      )Ending
      balance
                      
                      $
                      1,868




21





NOTE 7 – OPERATING SEGMENTS




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




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




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




ACCC TM
Cable
Division


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





DeWind Turbine
Division


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




Segment
information for the three months and nine months ended June 30, 2009 and 2008 is
as follows:





(In
      Thousands)
            Corporate
            
            Cable
            
            Turbine
            
            TotalThree Months
      Ended:
            (unaudited)
            
            (unaudited)
            
            (unaudited)
            
            (unaudited)June 30,
      2009Revenues
            
            $
            —
            
            
            $
            3,562
            
            
            $
            431
            
            
            $
            3,993Operating
      (loss)
            
            
            (1,869
            )
            
            
            (2,134
            )
            
            
            (22,487
            )
            
            
            (26,490
            )Total
      assets
            
            
            6,086
            
            
            
            13,000
            
            
            
            101,804
            
            
            
            120,890Goodwill
            
            
            —
            
            
            
            —
            
            
            
            5,913
            
            
            
            5,913Capital
      expenditures (nine months ended)
            
            
            —
            
            
            
            710
            
            
            
            806
            
            
            
            1,516Depreciation
      & amortization
            
            
            —
            
            
            
            257
            
            
            
            319
            
            
            
            576June 30,
      2008Revenues
            
            $
            —
            
            
            $
            6,651
            
            
            $
            13,850
            
            
            $
            20,501Operating
      income (loss)
            
            
            (2,445
            )
            
            
            73
            
            
            
            (6,776
            )
            
            
            (9,148
            )Total
      assets
            
            
            41,035
            
            
            
            13,334
            
            
            
            115,945
            
            
            
            170,314Goodwill
            
            
            —
            
            
            
            —
            
            
            
            24,218
            
            
            
            24,218Capital
      expenditures (nine months ended)
            
            
            —
            
            
            
            1,486
            
            
            
            1,536
            
            
            
            3,022Depreciation
      & amortization
            
            
            —
            
            
            
            197
            
            
            
            715
            
            
            
            912Nine Months
      Ended:June 30,
      2009Revenues
            
            $
            —
            
            
            $
            14,124
            
            
            $
            16,362
            
            
            $
            30,486Operating
      (loss)
            
            
            (6,752
            )
            
            
            (4,383
            )
            
            
            (33,475
            )
            
            
            (44,610
            )Depreciation
      & amortization
            
            
            —
            
            
            
            722
            
            
            
            2,440
            
            
            
            3,162June 30,
      2008Revenues
            
            $
            —
            
            
            $
            28,137
            
            
            $
            31,116
            
            
            $
            59,253Operating
      income (loss)
            
            
            (5,271
            )
            
            
            2,303
            
            
            
            (18,002
            )
            
            
            (20,970
            )Depreciation
      & amortization
            
            
            —
            
            
            
            607
            
            
            
            1,747
            
            
            
            2,354




22





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




Three Months EndedJune
      30, 2009
              
              June
      30, 2008(unaudited)
              
              (unaudited)Revenue
      allocation by geographic region based on location of
    customer:
              
              Cable
              
              
              Turbine
              
              
              Consolidated
              
              
              Cable
              
              
              Turbine
              
              
              ConsolidatedEurope
              
              $
              118
              
              
              $
              166
              
              
              $
              284
              
              
              $
              334
              
              
              $
              7,464
              
              
              $
              7,798China
      / Asia
              
              
              2,765
              
              
              
              265
              
              
              
              3,030
              
              
              
              6,180
              
              
              
              6,386
              
              
              
              12,566South
      America
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Central
      America
              
              
              409
              
              
              
              —
              
              
              
              409
              
              
              
              —
              
              
              
              —
              
              
              
              —North
      America
              
              
              270
              
              
              
              —
              
              
              
              270
              
              
              
              137
              
              
              
              —
              
              
              
              137Total
      Revenue
              
              $
              3,562
              
              
              $
              431
              
              
              $
              3,993
              
              
              $
              6,651
              
              
              $
              13,850
              
              
              $
              20,501Nine Months EndedJune
      30, 2009
              
              June
      30, 2008(unaudited)
              
              (unaudited)Revenue
      allocation by geographic region based on location of
    customer:
              
              Cable
              
              
              Turbine
              
              
              Consolidated
              
              
              Cable
              
              
              Turbine
              
              
              ConsolidatedEurope
              
              $
              759
              
              
              $
              918
              
              
              $
              1,677
              
              
              $
              6,526
              
              
              $
              18,485
              
              
              $
              25,011China
      / Asia
              
              
              10,327
              
              
              
              13,455
              
              
              
              23,782
              
              
              
              21,356
              
              
              
              12,631
              
              
              
              33,987South
      America
              
              
              1
              
              
              
              —
              
              
              
              1
              
              
              
              68
              
              
              
              —
              
              
              
              68Central
      America
              
              
              938
              
              
              
              —
              
              
              
              938
              
              
              
              —
              
              
              
              —
              
              
              
              —North
      America
              
              
              2,099
              
              
              
              1,989
              
              
              
              4,088
              
              
              
              187
              
              
              
              —
              
              
              
              187Total
      Revenue
              
              $
              14,124
              
              
              $
              16,362
              
              
              $
              30,486
              
              
              $
              28,137
              
              
              $
              31,116
              
              
              $
              59,253




June
      30, 2009
              
              
              September 30, 2008(unaudited)
              
              
              (restated)Long-lived
      assets (including goodwill and intangible assets) by geographic region
      based on location of operations:
              
              Cable
              
              
              Turbine
              
              
              Consolidated
              
              
              Cable
              
              
              Turbine
              
              
              ConsolidatedEurope
              
              $
              —
              
              
              $
              29,392
              
              
              $
              29,392
              
              
              $
              —
              
              
              $
              50,292
              
              
              $
              50,292North
      America
              
              
              3,418
              
              
              
              4,448
              
              
              
              7,866
              
              
              
              3,430
              
              
              
              —
              
              
              
              3,430Total
      long-lived assets (including goodwill and intangible
    assets)
              
              $
              3,418
              
              
              $
              33,840
              
              
              $
              37,258
              
              
              $
              3,430
              
              
              $
              50,292
              
              
              $
              53,722





During
the quarter ended June 30, 2009, three customers in China/Asia represented 75.9%
of revenues (two customers from our Cable segment and one customer from our
DeWind segment at 69.3% and 6.6%, respectively), one customer in North America
from our Cable segment represented 5.6% of revenues, and one customer in Central
America from our Cable segment represented 10.2% of revenues. For the current
nine months ended June 30, 2009, three customers in China /Asia represented
76.6% of revenues (two customers from our DeWind segment and one customer from
our Cable segment at 44.1% and 32.5%, respectively), one customer in North
America from our DeWind segment represented 6.5% of revenues.  No
other customer represented greater than 5% of consolidated
revenues.





NOTE
8 – EQUITY BASED COMPENSATION





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





The
values of the financial instruments are estimated using the Black-Scholes
option-pricing model. Key assumptions used during the nine months ended June 30,
2009 and 2008 to value options and warrants granted or repriced are as
follows:





Nine Months EndedJune
      30,2009
              
              
              2008Risk
      Free Rate of Return
              
              
              0.50-2.54
              %
              
              
              1.79-4.29
              %Volatility
              
              
              75-96
              %
              
              
              66-88
              %Dividend
      yield
              
              
              0
              %
              
              
              0
              %Expected
      life
              
              0-5
      yrs
              
              
              0-4
      yrs




23




Our
computation of expected volatility for the nine months ended June 30, 2009 and
2008 is based on historical and volatility over the expected life of the options
granted. Our computation of expected life is based on historical exercise
patterns. The interest rate for periods within the contractual life of the award
is based on the U.S. Treasury yield curve in effect at the time of
grant.




On March
29, 2006, the Securities and Exchange Commission published Staff Accounting
Bulletin No. 107 (SAB 107), which provides the Staff’s views on a variety of
matters relating to stock-based payments. On December 21, 2007, the Securities
and Exchange Commission published Staff Accounting Bulletin No. 110 (SAB 110),
which provides the Staff’s views on matter relating to share-based
payments.  In particular, SAB 110 allows for an extension past
December 31, 2007 for the use of a simplified method in developing an estimate
of the expected term of “plain vanilla” share options in accordance with SFAS
123R.  SAB 107 and SAB 110 require stock-based compensation to be
classified in the same expense line items as cash compensation. Information
about stock-based compensation included in the results of operations for the
three and nine months ended June 30, 2009 and 2008 is as follows:







(Unaudited,
      In Thousands)
            
            Three Months
              Ended
            
            
            Three Months
              Ended
            
            
            Nine Months
              Ended
            
            
            Nine Months
              EndedJune
      30,
            
            
            June
      30,
            
            
            June
      30,
            
            
            June
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008Cost
      of Product Sold
            
            $
            18
            
            
            $
            18
            
            
            $
            63
            
            
            $
            47Officer
      Compensation
            
            
            528
            
            
            
            614
            
            
            
            1,788
            
            
            
            724General
      and administrative
            
            
            219
            
            
            
            329
            
            
            
            868
            
            
            
            569Research
      and development
            
            
            255
            
            
            
            229
            
            
            
            1,141
            
            
            
            518Selling
      and marketing
            
            
            94
            
            
            
            107
            
            
            
            725
            
            
            
            317Totals
            
            $
            1,114
            
            
            $
            1,297
            
            
            $
            4,585
            
            
            $
            2,175





As of June 30, 2009, there was $6.8 million of
total unrecognized compensation cost related to non-vested share-based
compensation arrangements related to stock options. The costs are expected to be
recognized over a weighted-average period of 2.5 years.  For options
that vest on a quarterly basis, the actual vesting is used to calculate the
compensation expense.  For options vesting on other than a quarterly
basis, an estimate of the forfeiture rate, between 0% and 15%, is used to
calculate the expense, which is then trued up on each vesting
occurrence.  On January 20, 2009 the Company’s Board of Directors
voted to approve a re-pricing of all individuals continuing to provide ongoing
services to the Company including substantially all employee, director, and
consultant stock options.  The Company has treated the re-pricing as a
modification of terms of the options outstanding.  The Company
expensed the incremental fair value for all vested and re-priced options during
the quarter ended March 31, 2009.  The Company will expense the
incremental fair value for all unvested and re-priced options as these options
are vested.  The fair value of the modification was determined as the
difference in the fair value of each option immediately before and after the
re-pricing using the Black-Scholes option pricing model with a dividend rate of
0%, a risk free rate of 1.48%, a volatility of 96%, a life of 4 years, and a
market price of $0.30 per share.   As a result of this
re-pricing, the Company incurred expenses of $554,000 in the March 31, 2009
quarter, which are included in the table above, for options which had vested
prior to the re-pricing and will recognize an additional $965,000 as yet
unrecognized compensation cost related to non-vested options that were
re-priced.  The additional share-based compensation is expected to be
recorded to expense over the next 2.2 years.





Significantly
all of our existing options are subject to time of service vesting. Our stock
options vest either on an annual or a quarterly basis for options subject to
time of service vesting or for specific performance for option vesting tied to
performance criteria. For the remainder of fiscal 2009, we expect stock based
compensation expense related to employee stock options, including the expense
related to the option re-pricing of approximately $1,053,000 before income
taxes. Such amounts may change as a result of additional grants, forfeitures,
modifications in assumptions and other factors.





Certain
options granted under the 2008 Plan may be exercised at any time for restricted
stock of the Company if not otherwise prohibited by the Company’s Board of
Directors.  Any 2008 Plan option exercises for unvested options would
have restricted stock issued which is earned according to the terms of the
option agreement that gave rise to the restricted stock issuance.  The
Company has the right, but not the obligation, to repurchase any restricted
stock that is unearned as of the date of any optionee’s
termination.  As of June 30, 2009 all of the 2008 Plan option grants
were exercisable. To date, no restricted stock has been issued under the 2008
Plan.  Of the 2008 plan options exercisable, 243,219 options were
vested and exercisable into unrestricted stock.





The
following table summarizes the Stock Plan stock option activity as of June 30,
2009:





(Unaudited)
            
            2002 Plan
              Number of
              Options
            
            
            2008 Plan
              Number of
              Options
            
            
            Total Number of
              Options
            
            
            Average
              Exercise
              PriceOutstanding,
      September 30, 2008
            
            
            17,899,521
            
            
            
            7,231,000
            
            
            
            25,130,521
            
            
            $
            1.14Granted
            
            
            —
            
            
            
            2,860,000
            
            
            
            2,860,000
            
            
            
            0.35Exercised
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Cancelled
            
            
            (1,210,688
            )
            
            
            (168,334
            )
            
            
            (1,379,022
            )
            
            
            1.21Outstanding,
      June 30, 2009
            
            
            16,688,833
            
            
            
            9,922,666
            
            
            
            26,611,499
            
            
            $
            0.27Exercisable
      , June 30, 2009
            
            
            12,129,775
            
            
            
            9,922,666
            
            
            
            22,052,441
            
            
            $
            0.35




24




On
October 15, 2008 the Company’s Board of Directors extended the termination date
of the 2002 Option Plan from December 31, 2011 to December 31,
2016.  The weighted-average remaining contractual life of the options
outstanding at June 30, 2009 was 8.0 years. The exercise prices of the options
outstanding at June 30, 2009 ranged from $0.25 to $1.00, and information
relating to these options is as follows:




(Unaudited)
              
              Range of
              Exercise
              Prices
            
            
            Stock Options
              Outstanding
            
            
            Stock
              Options
              Exercisable
            
            
            Weighted
              Average
              Remaining
              Contractual
              Life in years
            
            
            Weighted
              Average
              Exercise Price
              of Options
              Outstanding
            
            
            Weighted Average
              Exercise Price 
      of
              Options
              Exercisable$
            0.25-$0.34
            
            
            
            728,000
            
            
            
            728,000
            
            
            
            7.5
            
            
            $
            0.25
            
            
            $
            0.25$
            0.35-$0.49
            
            
            
            25,854,099
            
            
            
            21,295,041
            
            
            
            8.1
            
            
            $
            0.35
            
            
            $
            0.35$
            0.50-$1.00
            
            
            
            29,400
            
            
            
            29,400
            
            
            
            1.7
            
            
            $
            1.00
            
            
            $
            1.00Total
            
            
            
            26,611,499
            
            
            
            22,052,441





NOTE 9 – EQUITY




COMMON
STOCK





The
Company issued no common stock during the nine months ended June 30,
2009.





WARRANTS





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





The
following table summarizes the warrant activity for the nine months ended June
30, 2009:




(Unaudited)
                
                Number
                  of Warrants
                
                
                Weighted-Average
                  Exercise
      PriceOutstanding,
      September 30, 2008
                
                
                26,150,817
                
                
                $
                1.20Granted
                
                
                4,150,000
                
                
                $
                0.28Exercised
                
                
                —
                
                
                $
                —Cancelled
                
                
                7,366,168
                
                
                $
                1.37OUTSTANDING,
      June 30, 2009
                
                
                22,934,649
                
                
                $
                0.95EXERCISABLE,
      June 30, 2009
                
                
                22,934,649
                
                
                $
                0.95





The following table summarizes the warrants issued, outstanding,
and exercisable as of June 30, 2009:




(Unaudited)
              
              Warrant Series
            
            Grant Date
            
            Strike
              Price
            
            Expiration Date
            
            Warrants
              remaining
            
            
            Proceeds if
              Exercised (in
              $000s)
            
            Call
              feature2006
      Series C
            
            May,
      2006
            
            $
            0.75
            (A)
            December,
      2010
            
            
            200,000
            
            
            $
            150
            
            None2006
      Series D
            
            May,
      2006
            
            $
            0.75
            (B)
            December,
      2010
            
            
            200,000
            
            
            
            150
            
            None2006
      Series E
            
            May,
      2006
            
            $
            0.75
            (C)
            December,
      2010
            
            
            200,000
            
            
            
            150
            
            None2007
      Series F
            
            Nov,
      2006
            
            $
            1.10
            
            November,
      2009
            
            
            220,000
            
            
            
            242
            
            None2007
      Convertible Debt
            
            Feb,
      2007
            
            $
            1.04
            (D)
            February,
      2010
            
            
            7,367,815
            
            
            
            7,663
            
            None2007
      Convertible Debt Fees
            
            Mar,
      2007
            
            $
            0.99
            (E)
            February,
      2010
            
            
            1,291,833
            
            
            
            1,279
            
            NoneJune
      PIPE Series 1
            
            Jun,
      2007
            
            $
            1.26
            (E)
            June,
      2010
            
            
            5,490,100
            
            
            
            6,918
            
            NoneJune
      PIPE Series 2
            
            Jun,
      2007
            
            $
            1.27
            (E)
            June,
      2010
            
            
            1,564,901
            
            
            
            1,987
            
            None2008
      Debt Series 1
            
            May,
      2008
            
            $
            0.95
            (E)
            May,
      2011
            
            
            1,125,000
            
            
            
            1,069
            
            None2008
      Debt Amendment
            
            May,
      2008
            
            $
            0.98
            (E)
            May,
      2011
            
            
            1,125,000
            
            
            
            1,103
            
            None2008
      Debt Services
            
            October,
      2008
            
            $
            0.95
            (E)
            May,
      2011
            
            
            150,000
            
            
            
            143
            
            None2009
      Bridge Note Warrants
            
            June,
      2009
            
            $
            0.25
            (F)
            June,
      2012
            
            
            4,000,000
            
            
            
            1,000
            
            NoneTotal
            
            
            
            
            
            
            
            
            
            22,934,649
            
            
            $
            21,854




25




(A)  Warrants
were re-priced on December 23, 2008 from $1.25 to $0.75 per
warrant.





(B)  Warrants
were re-priced on December 23, 2008 from $1.50 to $0.75 per
warrant.





(C)  Warrants
were re-priced on December 23, 2008 from $1.75 to $0.75 per
warrant.





(D)  Subject
to anti-dilution provisions. Certain future equity or equity equivalent
issuances below the current exercise price per warrant may result in a weighted
average price reset of the exercise price.  Warrant strike price was
reset by $0.02 per warrant as a result of the issuance of the 4,000,000 warrants
related to the 2009 Bridge Note.





(E)  Subject
to anti-dilution provisions. Certain future equity or equity equivalent
issuances below the current exercise price per warrant may result in a weighted
average price reset of the exercise price.  Warrant strike price was
reset by $0.01 per warrant as a result of the issuance of the 4,000,000 warrants
related to the 2009 Bridge Note.





(F)  Subject
to anti-dilution provisions. Certain future equity or equity equivalent
issuances below the current exercise price per warrant may result in a weighted
average price reset of the exercise price.





On October 15, 2008 we issued 150,000 warrants
with a strike price of $0.96 per warrant in settlement of a disputed fee related
to placement services for the May, 2008 Archer debt issuance.  The
expense for these warrants was accrued for as of September 30,
2008.  On December 23, 2008 we agreed to modify the exercise price of
three series of warrants originally issued in May, 2006.  A total of
600,000 warrants were re-priced to $0.75 per warrant including 200,000 warrants
previously priced at $1.75 per warrant; 200,000 warrants previously priced at
$1.50 per warrant; and 200,000 warrant previously priced at $1.25 per
warrant.





On June
30, 2009 we issued 4,000,000 three-year warrants with a strike price of $0.25
per warrant in as part of the bridge note financing.  The issuance of
the warrants triggered anti-dilution protection which reset the strike price of
warrants associated with past financings by between $0.01 and $0.02 per warrant
as described above.  We valued the price changes and additional
warrants issued using the Black-Scholes option-pricing model.  We
recorded additional debt discount for modification of warrants associated with
our remaining convertible debt and additional expense for modification of
non-debt warrants, both of which were calculated as the difference between the
fair value of the warrants prior to the exercise price reset and after the
exercise price reset.  The total expense related to warrant
modifications and issuances during the nine months ended June 30, 2009 was
$29,000 recorded to general and administrative expense and an additional $30,000
was recorded to debt discount which will be amortized to interest over the
remaining life of the convertible debt.  The value assigned for the
warrants issued in conjunction with the bridge note was $726,000, which will be
amortized over the six month life of the bridge note.





The
following assumptions were used to value the warrant issuances and modifications
during the nine months ended June 30, 2009:





Dividend
rate = 0%


Risk free
return between 0.56% and 1.89%


Volatility
of between 75% and 116%


Market
price for October 15, 2008 issuance:  $0.40


Market
price for December 23, 2008 modification: $0.30


Market
price for June 30, 2009 issuance and modification: $0.30





Time to
maturity was the remaining life of the warrant series in question of between 2
and 3 years.





Management
has reviewed and assessed the warrants issued during the nine months ended June
30, 2009 and determined that they do not qualify for treatment as derivatives
under SFAS 133.





LOSS
PER SHARE





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




26




The
following common stock equivalents were excluded from the calculation of diluted
loss per share for the three and nine months ended June 30, 2009 and 2008 since
their effect would have been anti-dilutive:





(Unaudited)
              
              June
      30,2009
              
              
              2008Options
      for common stock
              
              
              26,611,499
              
              
              
              18,928,270Warrants
              
              
              22,934,649
              
              
              
              32,079,956Convertible
      Debentures, if converted
              
              
              9,037,280
              
              
              
              10,037,28058,583,428
              
              
              
              61,045,506





NOTE
10 – DEBT AND NOTES PAYABLE





On June
30, 2009, the Company entered into a bridge note financing structured as a
Senior Secured Promissory Note transaction with an aggregate principal value of
$5,000,000, plus interest on the unpaid principal balance at a rate of 10% per
annum to be repaid no later than December 30, 2009. Pursuant to the note
agreement, the Company paid $200,000 in closing fees, along with $95,000 in
other legal and financing costs, which we recorded as deferred financing costs
to be amortized over the six month life of the bridge note.





In
connection with the Senior Secured Promissory Note transaction, the Company
granted and issued 4,000,000 warrants with an exercise price of $0.25 in
conjunction with this transaction and valued the warrants at $0.1814 per warrant
or $726,000 using the Black-Scholes option pricing model to value the fair value
of the warrants issued using the following assumptions: the market price was
$0.30, the volatility was estimated at 88%, the life of the warrants was 3
years, the risk free rate was 1.64% and the dividend yield of 0%. The value
assigned for the warrants issued in conjunction with the bridge note was
recorded as debt discount and will be amortized over the six month life of the
bridge note.





The
issuance of the warrants triggered anti-dilution protection in several series of
previously issued warrants and in the conversion price of the remaining
$9,037,280 of Convertible Notes due January 30, 2010. The conversion price of
the Convertible Notes was reduced from $1.00 to $0.99, which would result in an
additional 91,289 shares issuable upon full conversion of the remaining Notes.
The intrinsic value of the additional shares issuable upon full conversion is
$27,000, which will be amortized to interest expense over the expected remaining
life of the Convertible Notes. Previously outstanding warrants with exercise
prices between $0.96 and $1.28 and which expire between February, 2010 and May,
2011 were reset by between $0.01 and $0.02 per warrant and which resulted in
$7,000 of additional expense, calculated as the difference in fair value of the
warrants immediately before and after the change in exercise
prices.





The
following table summarizes the Company’s debt structure as of June 30, 2009 and
September 30, 2008:




(In Thousands)
              June
      30, 2009
              
              September 30, 2008(unaudited)
              
              (restated)Senior
      Convertible 8% Notes due January, 2010 net of discount of $551 and
      $1,199
              
              $
              8,487
              
              
              $
              7,838Senior
      Secured 10% Note due December 30, 2009 net of discount of $726 and
      $0
              
              
              4,274
              
              
              
              —Total
      Debt
              
              
              12,761
              
              
              
              7,838Balance
      included in current liabilities
              
              
              12,761
              
              
              
              —Long
      Term Debt
              
              $
              —
              
              
              $
              7,838




NOTE 11 – VARIABLE INTEREST ENTITY




On
October 6, 2008 the Company’s wholly owned subsidiary, DeWind Inc. entered into
a joint venture development agreement with Higher Perpetual Energy to create
DeWind SWI Wind Farms, LLC to jointly develop up to 620 Megawatts of wind farm
properties using leases obtained by Higher Perpetual and DeWind wind turbines.
The terms of the development agreement provide for an initial profit sharing of
50% for each party with management control for the party that has provided the
greater amount of contributed capital into the joint venture. All contributed
capital has a priority repayment to the contributing party from cash flows
generated by the joint venture prior to any profit sharing payments. As of June
30, 2009, DeWind Inc. has contributed the majority of capital into entity and
has management control of the joint venture.





The
Company has accounted for the entity as a Variable Interest Entity and has
consolidated the assets of the joint venture into the balance sheet. To date,
the venture has recorded $408,000 in gross startup costs recorded to general and
administrative expenses for the nine months ended June 30, 2009 in the DeWind
segment, of which $88,000 in costs were allocated to minority interest in
consolidated subsidiary, which represents Higher Perpetual Energy’s total
capital contribution to the joint venture as of December 31, 2008. The Company
has funded $1,035,000 into the venture as partial payments and accrued
$3,511,000 in development, which represents the unpaid balance of plant for the
first 10 megawatt wind farm that was completed as of December 31,
2008.  Since that date, no further construction has been completed and
no additional costs accrued as of the quarter ended June 30, 2009. A total of
$4,279,000 is included on the consolidated balance sheet within fixed assets and
further disclosed as wind farm construction in progress, and which reflects the
initial capitalized development and work in progress paid and accrued as of June
30, 2009 as reduced by the expensed gross startup costs. See Note
6.





NOTE
12 – COMMITMENT AND CONTINGENCIES





Please
refer to the Commitment and Contingencies Note on page 94 of our Form 10-K filed
on December 23, 2008 as amended on Form 10-K/A filed on March 9, 2009 with the
Securities and Exchange Commission for a detailed listing of our commitments and
contingencies.  There were no material changes other than in the
ordinary course of business and as updated in the Off Balance Sheet disclosure
in Item 2 below.




27




PROFESSIONAL
SERVICES AGREEMENTS


The
Company and its DeWind, Inc and CTC Cable Corporation subsidiaries currently
have one consulting agreement and two legal services agreements for professional
services with entities affiliated with its director Michael McIntosh as
follows:





The
Company had contracts with two companies owned by its director, Michael
McIntosh: a legal services agreement with The McIntosh Group (TMG) for legal and
intellectual property services and a consulting agreement with Technology
Management Advisors, LLC (TMA) for strategic business advisory services related
to technology and international patent and intellectual property filings. The
initial agreements were executed on March 1, 2002 for terms 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.





On July
3, 2006 these agreements were cancelled and replaced with three agreements as
follows:





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





Each of
these agreements is for $250,000 per year, payable in equal installments at the
beginning of each calendar month. Each agreement was scheduled to terminate on
July 3, 2009, provided that it may be terminated at the end of each anniversary
of its effective date upon 90 days prior written notice to the other
party.  As of August 4, 2009, no notice of termination has been given
and the agreements continue on a rolling 90 day basis.





NOTE
13 – LITIGATION





FKI
Engineering Ltd., FKI plc, and Brush Electrical Machines Ltd (collectively
“FKI”) v. the Company and certain of its wind segment subsidiaries (here
referred to as “DeWind”); DeWind v. FKI.





In
September, 2008, DeWind GmbH filed for insolvency proceedings in part due to the
impending costs of litigation against FKI and in part due to the negative
operational cash flows and cash position of the subsidiary.  Effective
in October, 2008 the appointed receiver for DeWind GmbH is now responsible for
pursuing the DeWind GmbH claim against FKI for its capital accounts
litigation.   In November, 2008 a winding up petition was filed
by FKI for DeWind Holdings, Ltd due to non-payment of a statutory demand for
1,540,000 Euros ($2,152,000 at September 30, 2008 exchange rates) filed in
January, 2008 and included in the amounts listed above that were adjudicated in
December, 2007.  On November, 21 2008 FKI filed for and received
approval to dismiss the DeWind GmbH capital accounts claim on December 10, 2008
unless a total of 110,000 Euros ($140,000 at November 30, 2008 exchange rates)
of court and legal costs are paid for by DeWind Holdings or guaranteed by
another entity.  Composite Technology Corporation is no longer
involved in the court proceedings between DeWind GmbH and the FKI
parties.  In December, 2008 the receiver filed a preliminary report
and set a date for a more comprehensive receiver report in September,
2009.  Upon filing for insolvency, the DeWind GmbH receiver, at their
sole direction, is responsible for the legal activity surrounding the capital
accounts claim.





FKI has
attempted to enforce collection of the funds due to FKI from two of the
Company’s subsidiaries for their adjudicated debts due from DeWind GmbH (now
insolvent) and its holding company, DeWind Holdings. DeWind Holdings’ only asset
is the share capital of DeWind GmbH.  DeWind Holdings is in turn a
wholly owned subsidiary of DeWind Turbines, Ltd. which is in turn a wholly owned
subsidiary of Composite Technology Corporation.  There are no parent
company guarantees provided by DeWind Turbines, Ltd. or Composite Technology
Corporation for either DeWind Holdings or DeWind GmbH.   Prior to
insolvency proceedings, DeWind GmbH operated substantially for the purpose of
servicing and managing the warranty liabilities related to wind turbines sold up
to June, 2005 while DeWind was under FKI control. We believe that the DeWind
GmbH insolvency will have a minimal impact on the expected future operations of
our wind segment.





On
January 9, 2009 the Directors of DeWind Holdings, Ltd. filed for insolvency
proceedings in the Queen’s Bench Court.  On January 12, 2009, the
court dismissed the winding up petition filed by FKI as a result of DeWind
Holdings, Ltd. filing for insolvency proceedings.




28


Composite
Technology Corporation and CTC Cable Corporation v. Mercury Cable & Energy,
LLC, Ronald Morris, Edward Skonezny, Wang Chen, and "Doe" Defendants 1-100
("Mercury Parties")
  On August
15, 2008 the Company filed suit in the Superior Court of the State of
California, County of Orange, Central Justice Center (Case No. 30-2008-00110633)
against the Mercury Parties (including multiple unknown "Doe" defendants
expected to be named in discovery proceedings) claiming breach of contract,
breach of the covenant of good faith and fair dealing, unfair competition,
fraud, and intentional interference with contract.  Several of the
Mercury parties had filed a claim in the Company's Chapter 11 bankruptcy
proceedings which was settled during the bankruptcy and which provided for
certain payments for sales made to China. The settlement agreement included
non-compete agreements and stipulated the need to maintain confidentiality for
the Company’s technology, processes, and business practices. The Company claims
that the Mercury Parties have taken actions which violate the settlement
agreement, including the development of and attempt to market similar conductor
products and through misuse of confidential information and the Company further
claims that the settlement agreement was entered into with fraudulent intent.
The Company claims that the Mercury Parties engaged in unlawful, unfair, and
deceptive conduct and that these actions were performed with malice and with
intent to cause injury to the Company. The Company is asking for actual damages,
punitive damages, attorney fees and injunctive relief.  No estimate of
such damages can be made at this time and no accrual for such fees is included
in the Company's consolidated financial statements at June 30,
2009.
  On
December 5, 2008, Defendants filed a cross-complaint against the Company and
some of the Company's officers. Defendants served the cross-complaint only
on the Company (i.e., to the best of the company’s knowledge, none of the
individual cross-defendants have been served).  The Company filed
several motions aimed at dismissing certain of the cross-claims, which resulted
in the Defendants filing several amended pleadings.  On May 12, 2009,
the Court granted the Company’s motion directed to the sixth cause of action
contained in the second amended cross-complaint, and dismissed that claim with
prejudice.  The Defendants’ cross-complaint asserts claims for fraud in
inducing the settlement agreement, rescission of the settlement agreement,
breach of the settlement agreement, accounting, and declaratory
relief.
  On March
2, 2009, the Company’s subsidiary, CTC Cable Corporation ("CTC Cable"), filed a
lawsuit against Mercury Cable & Energy, LLC ("Mercury") in the United States
District Court for the Central District of California, Southern Division (Case
No. SA CV 09-261 DOC (MLGx)), seeking damages for infringement of CTC Cable's
United States Patent No. 7,368,162 (’162) and United States Patent No. 7,211,319
(‘319), and for infringement of a CTC Cable copyright
registration.  The Company is asking for actual damages, treble
damages, attorneys fees, interest, costs and injunctive relief.  No
estimate of such damages can be made at this time and no accrual for the
Company’s fees is included in the Company's financial statements at June 30,
2009.
  In
response to this lawsuit, Mercury has requested the United States Patent Office
to reexamine the '162 and '319 patents and requested the Court to stay the
patent and copyright lawsuit pending the Patent Office's reexamination of CTC's
patents.  The Court granted Mercury's request to stay the lawsuit
pending the Patent Office’s decisions. CTC's copyright infringement claim is
also stayed pending the Patent Office’s decisions.
  Brad
Thomas v. Benton Wilcoxon, Michael Porter, Domonic Carney, Michael McIntosh,
Stephen Bircher, Rayna Limited, Keeley Services Limited, Ellsford Management
Limited, Laikadog Holdings Limited, James Carkulis and Does 1 through 1000, and
Composite Technology Corporation as Nominal Defendant
 
 The
Company has become aware that on June 26, 2009 Mr. Brad Thomas, alleged to be a
shareholder of the Company, filed a shareholder derivative complaint in the
Superior Court of the State of California, County of Orange (Case No.
30-2009-00125211) for damages and equitable relief.  The complaint
apparently asserts claims for negligence, gross negligence, breach of fiduciary
duty, waste, mismanagement, gross mismanagement, abuse of control, negligent
misrepresentation, intentional misrepresentation, fraudulent promise,
constructive fraud, and violations of the California Corporations Code, and
seeks an accounting, rescission and/or reformation.  The facts focus
on the Company’s acquisition of its DeWind subsidiary and also related
self-interested transactions, accounting deficiencies and
misstatements.  Certain of the defendants are current directors and/or
officers or past officers of the Company.   To date, the Company
believes that none of the defendants named in the complaint have been formally
served.  The Company has not accrued any costs related to this matter
as of June 30, 2009.
  Insolvency
of DeWind GmbH
 
 On August
29, 2008 in Lubeck Local Court – Bankruptcy Court, Lubeck, Germany, the
Company’s DeWind GmbH subsidiary filed for voluntary insolvency in lieu of a
required recapitalization under German law of approximately 5,000,000 Euros
($7,040,000 at September 30, 2008 exchange rates).  The DeWind GmbH
subsidiary had limited operational function for the DeWind segment, functioning
solely to provide services on wind turbines that remained under warranty and
which warranties were entered into prior to June, 2005 and in pursuit of the FKI
capital claim described above.  All wind turbines sold and installed
since July, 2005 are serviced under separate and continuing DeWind
subsidiaries.  At the time of the insolvency, DeWind GmbH was saddled
with contracts which were negotiated while DeWind GmbH was owned by FKI and that
required DeWind GmbH to provide warranty services including “no limit” wind
power generation revenue guarantees (availability penalties) often without
requiring the wind farm customer to properly maintain or service the
turbines.  This subsidiary had incurred losses of $11.9 million and
$8.7 million for fiscal 2007 and 2008 respectively despite a significant
reduction in the number of turbines under warranty.   Concurrent
with the filing of the insolvency, DeWind effectively relinquished its right to
pursue the capital claim to the control of the insolvency
administrator.
 
 On
September 18, 2008 an insolvency administrator was appointed and set an initial
reporting date of December 11, 2008.  On December 1, 2008 the initial
report of the liquidator was published which referred primarily to procedural
issues and did not address the assets or liabilities of DeWind GmbH in
detail.  The December 1, 2008 report set the date of the follow on
report. The next status update is expected September, 2009.


29




NOTE 14 – RELATED PARTIES





The
Company has contracts with two companies owned by its director, Michael
McIntosh: a legal services agreement with The McIntosh Group (TMG) for legal and
intellectual property services and a consulting agreement with Technology
Management Advisors, LLC (TMA) for strategic business advisory services related
to technology and international patent and intellectual property filings. The
initial agreements were executed on March 1, 2002 for terms of three years and
were renewed in 2005.





On July
3, 2006 these agreements were cancelled and replaced with three agreements as
follows:





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





Each of
these agreements is for $250,000 per year, payable in equal installments at the
beginning of each calendar month. Each agreement was scheduled to terminate on
July 3, 2009, provided that it may be terminated at the end of each anniversary
of its effective date upon 90 days prior written notice to the other
party.  As of August 4, 2009, no notice of termination has been given
and the agreements continue on a rolling 90 day basis.





For the
current quarter ended June 30, 2009, we recorded fees of $125,000 and patent
filing expenses of $9,764 for TMG, and fees of $62,500 and incidental expenses
of $14,931 for TMA. For the nine months ended June 30, 2009, we recorded fees of
$375,000 and patent filing expenses of $39,029 for TMG, and fees of $187,500 and
incidental expenses of $42,627 for TMA. All of these expenses were recorded to
Research and Development expense.




As of
June 30, 2009, the Company had outstanding balances due to TMA and TMG of
$26,793 and $41,629 respectively, included in accounts payable.





NOTE
15 – SUBSEQUENT EVENTS





Management
evaluated all activity of the Company through August 10, 2009 (the issue date of
the consolidated financial statements) and concluded that no subsequent events
have occurred that would require recognition in the consolidated financial
statements or disclosure in the notes to financial statements, except
for the required footnote disclosures related to a probable sale of certain
assets and liabilities of our DeWind segment (see Note 6, “Assets
and Liabilities Heldand
Used”).





30





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





You
should read the following discussion and analysis of our financial condition and
results of operations together with our interim financial statements and the
related notes appearing at the beginning of this report. The interim financial
statements and this Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with the financial
statements and notes thereto for the year ended September 30, 2008 and the
related Management's Discussion and Analysis of Financial Condition and Results
of Operations, both of which are contained in our Annual Report on Form 10-K/A
filed with the Securities and Exchange Commission on March 9, 2009.





The
following discussion and other parts of this Form 10-Q contain forward-looking
statements that involve risks and uncertainties. Forward-looking statements can
be identified by words such as “anticipates,” “expects,” “believes,” “plans,”
and similar terms. Our actual results could differ materially from any future
performance suggested in this report as a result of factors, including those
discussed in “Factors That May Affect Future Operating Results” and elsewhere in
this report and in our Annual Report on Form 10-K/A for the fiscal year ended
September 30, 2008. All forward-looking statements are based on information
currently available to Composite Technology Corporation and we assume no
obligation to update such forward-looking statements, except as required by law.
Service marks, trademarks and trade names referred to in this Form 10-Q are the
property of their respective owners.




OVERVIEW
 
 Composite
Technology Corporation (CTC) conducts its operations in the following two
business segments: the CTC Cable division and the DeWind division. The segments
have been organized on the basis of products. Each segment’s product revenues
relate to external customers.
 The three
and nine months ended June 30, 2009, represented a period of significant shocks
to the world economies and worldwide financial markets, including a collapse of
project and commercial  financing as well as risk capital
financing.  This was accompanied by the failure of multiple commercial
and investment banking institutions.   These events were
countered by legislation and other government economic stimulus packages and
incentives, including significant incentives for investment in electrical
infrastructure and renewable energy in the U.S. under the American Recovery and
Reinvestment Act of 2009 (ARRA). The combination of these factors has been seen
in the press through significantly lowered economic forecasts and expectations
in the short term, with expectations of economic recovery after these incentive
measures are implemented.  The turmoil of these external forces has
caused negative impacts on both businesses of CTC in the short term, but has
improved the long-term outlook for both businesses, each of which is well
positioned to take advantage of the economic stimulus incentives of ARRA and
similar initiatives elsewhere in the world.
 
 The CTC
Cable business growth was slowed as the economic downturn resulted in delays
with several anticipated sales, that had specified ACCCTM conductor, in new
international markets and the U.S.. China continued to recover  from
the negative impact of delays in sales orders caused by the Beijing Olympics in
previous quarters.  The impact of these delays and the economic
downturn felt by Chinese manufacturing has resulted in three consecutive
quarters of declining electricity consumption in China.  This
temporary lower consumption has eased the urgent need for capacity expansion in
certain areas.   These delays affected revenues for the
September, 2008 and December, 2008 quarters resulting in deliveries of only 562
km of ACCCTM products in the December 2008 quarter. We saw a brief resurgence of
orders from China at the end of the December 2008 quarter only to have orders in
China decline in the summer months of 2009.
 
 A more
significant impact occurred to the DeWind business segment through product order
delays and most importantly through a significant restriction in available
financing for wind farm projects of customers.   As a result of the
economic downturn, the Company decided to find a strategic investor or buyer for
all or part of  the DeWind manufacturing business as described
below.
 
 DeWind Asset
Sale:
 
 On August
10, 2009 the Company signed an agreement to sell substantially all of its DeWind
turbine manufacturing business assets and liabilities including all intellectual
property and its rights in the current Texas wind farm developments to Daewoo
Shipbuilding & Marine Engineering Co., Ltd. (DSME) of Korea. The Company
would retain certain assets and liabilities related to certain turbines
installed in Europe and a license agreement for one manufacturer in
China.  The transaction consideration is $49.5 million in cash, less
fees and costs estimated at $2.3 million. Of the purchase price, $11.0 million
will be placed into escrow for release to the Company upon the satisfaction of
certain deliverables and conditions that are expected to be satisfied between 90
days and two years subsequent to closing.  The purchase price is
further subject to adjustment based on delivery of the value of the assets
transferred net of liabilities assumed and any
indemnification claims.  The transaction is expected to close
within 45 days of signature of the agreement dated August 10, 2009.
 
 As part
of the agreement, the Company agreed to not compete in the development, sale, or
manufacture of wind turbines or wind turbine component supply for a period of
five years after closing.   The Company has retained the right to
participate in or develop wind farm and other renewable energy
projects.
  31
  Economic Stimulus
Initiatives:
 
 The
February, 2009 American Recovery and Reinvestment Act of 2009 (ARRA) had over
$61 billion designated for energy related projects including:
 
 ·
              $11 billion funding for an
      electric smart grid
 ·
              $6.3 billion for state and local
      governments to make investments in energy
  efficiency
 ·
              $6 billion for renewable energy
      and electric transmission technologies loan
    guarantees
 ·
              $4.5 billion for the Office of
      Electricity and Energy Reliability to modernize the nation's electrical
      grid and smart grid
 ·
              $3.25 billion for the Western
      Area Power Administration for power transmission system
      upgrades
 ·
              $3.25 billion for the Bonneville
      Power Authority for power transmission system
    upgrades
 ·
              $2.5 billion for energy
      efficiency research
 ·
              $3.2 billion toward Energy
      Efficiency and Conservation Block
Grants
 
 CTC Cable
has been working diligently with various Federal and State agencies and power
companies to include its ACCCTM products in the planning stages for projects set
to receive stimulus spending.
 
 Other
countries, such as China, have also implemented economic stimulus initiatives to
provide for electrical generation and infrastructure spending.  To
date, neither CTC Cable nor DeWind has benefited from any of the economic
stimulus initiatives.  In the U.S. market, a very limited amount of
funds has been released as yet and for nearly all worldwide incentives,
including the U.S., these projects have extended lead times before ACCCTM
products and wind turbines would be sold as these products are ordered and
installed in later stages of  most transmission and renewable energy
projects.
 
 The ARRA
also had significant incentives for wind power.  In addition to the
loan guarantees listed above, the ARRA extended the production tax credit,
formerly set to expire at the end of 2009, to expire at the end of
2012.  Further, to address the loss of a substantial wind farm finance
source known as  a “tax equity partner”,  wind farm
developers can now opt to take the production tax credit as an investment tax
credit (ITC) with a further possible option to take the ITC as a grant,
representing 30% of the physical plant of a wind farm.
 
 Consolidated Revenues, Gross
Margins, and EBITDAS
 
 On a
consolidated basis, revenues from continuing operations for the three months
ended June 30 decreased by $16.5 million or 80.5% from $20.5 million in 2008 to
$4.0 million in 2009. The decrease was due to a $3.1 million decrease in CTC
Cable sales and a decrease of $13.4 million of turbine product sales. Revenues
from continuing operations for the nine months ending June 30, 2009 decreased by
$28.8 million or 48.6% from $59.3 million in 2008 to $30.5 million in 2009. The
decrease was due to a $14.0 million decrease in CTC Cable sales, a decrease of
$14.2 million of turbine product sales and a decrease of $0.6 million of turbine
service sales. The June 2009 quarter decrease can be attributed to the current
global economic crisis, which has caused significant delays in project financing
for our customers in both our Cable and DeWind segments and a significant
decrease in Cable revenues from 2008 due to the buildup in China in 2008 related
to the Beijing Olympics.  While the Cable decrease was partially
offset by non-China revenues, the fluctuation resulted in significantly lower
revenues and resultant gross margins for the current quarter and current nine
months ending June 30, 2009.
 
 Consolidated
gross margins decreased by $0.4 million or 0.1% of revenues from $0.5 million
for the three months ended June 30, 2008 to $0.1 million for the three months
ended June 30, 2009. The margin decrease is due to reduced CTC Cable margins of
$2.1 million primarily due to a combination of lower revenue levels and
strategic discounts given to a major Cable customer in China, offset by a $1.7
million increase in DeWind from lower current quarter negative margins of $0.4
million compared to 2009 negative margins of $2.2 million.
 
 The
Company has provided non- GAAP measures such as EBITDAS at the segment and
consolidated level in the following management discussion and analysis. The
Company uses the non-GAAP information internally as one of several measures used
to evaluate its operating performance and believes these non-GAAP measures are
useful to and have been requested by, investors as they provide additional
insight into the underlying operating results viewed in conjunction with GAAP
operating results.  For the non-GAAP EBITDAS measure, a significant
portion of non-cash expenses is excluded, primarily for amortization of acquired
DeWind related intangibles that occur ratably over time and stock based
compensation charges that are valued based on the share price and volatility at
the date of grant and then expensed as earned, typically upon vesting of service
over time.  Management believes that an alternate view of operating
results that exclude DeWind amortization and stock based charges is useful in
evaluating current period operations.  The material limitation of
non-GAAP EBITDAS compared with Net Income is that significant non-cash expenses
are excluded.  Management compensates for such limitation by utilizing
EBITDAS only for particular purposes and that it evaluates EBITDAS in the
context of other metrics such as Net Income when evaluating the Company’s
performance and financial condition. Non-GAAP measures are not stated in
accordance with, should not be considered in isolation from, and are not a
substitute for, GAAP measures. A reconciliation of GAAP to non-GAAP results has
been provided in the relevant financial tables below.




The following table is a reconciliation of the Company’s
“non-GAAP” EBITDAS discussed above for the three and nine months ended June 30,
2009 and 2008.





(Unaudited,
      In Thousands)
              
              Three months ended June
      30,Consolidated
              
              2009
              
              
              2008Net
      loss from continuing operations
              
              $
              (26,925)
              
              
              $
              (11,560
              )Interest,
      taxes, depreciation, amortization and stock-based compensation
      (ITDAS):Interest
              
              
              426
              
              
              
              1,908Taxes
              
              
              —
              
              
              
              7Depreciation
      and amortization
              
              
              576
              
              
              
              912Stock-based
      compensation and warrant modification
              
              
              1,121
              
              
              
              1,850Total
      ITDAS
              
              $
              2,123
              
              
              $
              4,677“Non-GAAP”
      EBITDAS
              
              $
              (24,802)
              
              
              $
              (6,883
              )




32




(Unaudited,
      In Thousands)
              
              Nine months ended June
      30,Consolidated
              
              2009
              
              
              2008Net
      loss from continuing operations
              
              $
              (45,903
              )
              
              $
              (24,822
              )Interest,
      taxes, depreciation, amortization and stock-based compensation
      (ITDAS):Interest
              
              
              1,375
              
              
              
              3,414Taxes
              
              
              (4
              )
              
              
              17Depreciation
      and amortization
              
              
              3,162
              
              
              
              2,354Stock-based
      compensation and warrant modification
              
              
              4,593
              
              
              
              2,728Total
      ITDAS
              
              $
              9,126
              
              
              $
              8,513“Non-GAAP”
      EBITDAS
              
              $
              (36,777
              )
              
              $
              (16,309
              )





EBITDAS
loss increased by $17.9 million for the current quarter and increased
by $20.5 million for the current nine months as compared to the same
periods in the prior year primarily due to goodwill impairment charges in the
amount of $18.3 million and the net effect of reduced margins related to lower
cable revenues and mark to market inventory reserves, offset by reduced
operating expenses.




DeWind
Division


The
DeWind segment operates under the brand name DeWind, which has designed and sold
wind turbines since 1995 from Lubeck, Germany. Currently, DeWind is operated
from the Company’s Irvine, California offices with sales operations in Irvine,
California and Lubeck, Germany along with engineering and R&D operations in
both Irvine, California and Lubeck, Germany. The DeWind segment designs,
produces, sells and services DeWind turbines in the 1.25 and 2.0 megawatt range
worldwide. We acquired DeWind during the EU Energy acquisition on July 3, 2006.
Accordingly, we have incorporated DeWind’s operations into our financial results
since that date.
  RECENT
DEVELOPMENTS
 
 On August
10, 2009 the Company signed an agreement to sell substantially all of its DeWind
turbine manufacturing business assets and liabilities including all intellectual
property and its rights in the current Texas wind farm developments to Daewoo
Shipbuilding & Marine Engineering Co., Ltd. (DSME) of Korea. The Company
would retain certain assets and liabilities related to turbines installed in
Europe and a license agreement for a manufacturing entity in
China.  The transaction consideration is $49.5 million in cash, less
fees and costs estimated at $2.3 million. Of the purchase price, $11.0 million
will be placed into escrow for release to the Company upon the satisfaction of
certain deliverables and conditions that are expected to be satisfied between 90
days and two years subsequent to closing.  The purchase price is
further subject to adjustment based on delivery of the value of the assets
transferred net of liabilities assumed.  The transaction is expected
to close within 45 days of signature of the agreement dated August 10,
2009.
 
 As part
of the agreement, the Company agreed to not compete in the development, sale, or
manufacture of wind turbines or wind turbine component supply for a period of
five years after closing.   The Company has retained the right to
participate in or develop wind farm and other renewable energy
projects.  If the proposed transaction closes, the Company expects to
reclassify the balance sheets and operations of DeWind as discontinued
operations.
 
 The
revenues of the DeWind segment for the quarter ended June 30, 2009 consisted
primarily of parts sales and license fees. DeWind also delivered 10 D8 units,
three D6 turbines and two D8.2 turbines during the nine months ended June 30,
2009. While delivered to the customer site, the 10 D8 units valued at
approximately $19 million remained deferred at the end of June, as were the
three delivered D6 turbines and two D8.2 turbines booked and shipped during the
nine months ended March 31, 2009 but awaiting commissioning. As of June 30,
2009, the total backlog of DeWind was $300 million, of which $265 million
represents orders where financing is uncertain or pending.
 
 The
Company has provided non-GAAP measures such as EBITDAS at the segment and
consolidated level in the following management discussion and analysis. The
Company uses the non-GAAP information internally as one of several measures used
to evaluate its operating performance and believes these non-GAAP measures are
useful to and have been requested by, investors as they provide additional
insight into the underlying operating results viewed in conjunction with GAAP
operating results.  For the non-GAAP EBITDAS measure, a significant
portion of non-cash expenses is excluded, primarily for amortization of acquired
DeWind related intangibles that occur ratably over time and stock based
compensation charges that are valued based on the share price and volatility at
the date of grant and then expensed as earned, typically upon vesting of service
over time.  Management believes that an alternate view of operating
results that exclude DeWind amortization and stock based charges is useful in
evaluating current period operations.  The material limitation of
non-GAAP EBITDAS compared with Net Income is that significant non-cash expenses
are excluded.  Management compensates for such limitation by utilizing
EBITDAS only for particular purposes and that it evaluates EBITDAS in the
context of other metrics such as Net Income when evaluating the Company’s
performance and financial condition. Non-GAAP measures are not stated in
accordance with, should not be considered in isolation from, and are not a
substitute for, GAAP measures. A reconciliation of GAAP to non-GAAP results has
been provided in the relevant financial tables below.


33







The
following table is a reconciliation of DeWind only “non-GAAP” EBITDAS discussed
above for the three and nine months ended June 30, 2009 and 2008.




(Unaudited,
      In Thousands)
              
              Three months ended June
      30,DeWind
      Segment Only
              
              2009
              
              
              2008Net
      loss from continuing operations
              
              $
              (22,456
              )
              
              $
              (6,908
              )Interest,
      taxes, depreciation, amortization and stock-based compensation
      (ITDAS):Interest
              
              
              (33)
              
              
              
              181Taxes
              
              
              -
              
              
              
              7Depreciation
      and amortization
              
              
              319
              
              
              
              715Stock-based
      compensation
              
              
              151
              
              
              
              204Total
      ITDAS
              
              $
              437
              
              
              $
              1,107“Non-GAAP”
      EBITDAS
              
              $
              (22,019
              )
              
              $
              (5,801
              )




(Unaudited,
      In Thousands)
              
              Nine months ended June
      30,DeWind
      Segment Only
              
              2009
              
              
              2008Net
      loss from continuing operations
              
              $
              (33,401
              )
              
              $
              (18,320
              )Interest,
      taxes, depreciation, amortization and stock-based compensation
      (ITDAS):Interest
              
              
              18
              
              
              
              358Taxes
              
              
              (7
              )
              
              
              16Depreciation
      and amortization
              
              
              2,440
              
              
              
              1,747Stock-based
      compensation
              
              
              823
              
              
              
              229Total
      ITDAS
              
              $
              3,274
              
              
              $
              2,350“Non-GAAP”
      EBITDAS
              
              $
              (30,127
              )
              
              $
              (15,970
              )





EBITDAS
loss increased by $16.2 million for the current quarter and $14.2 million for
the current nine months as compared to the same periods in prior year primarily
due to goodwill impairment charges in the amount of $18.3 million and increased
inventory reserve charges, offset by decreases in general and administrative and
research and development costs and  increased margins from license fee
revenues.




CTC Cable
Division


Located
in Irvine, California with sales operations in Irvine, California, Shanghai,
China, Europe, the Middle East, and Brazil, the CTC Cable Division produces and
sells ACCCTM conductor products and related ACCCTM hardware products. ACCCTM
conductor production is a two step process. The Irvine operations produce the
high strength, light weight, composite ACCCTM core, which is then shipped to one
of six conductor stranding licensees in Canada, Belgium, China, Indonesia or
Bahrain where the core is stranded with conductive aluminum to become ACCCTM
conductor. ACCCTM conductor and core are sold in Canada and the U.S. directly by
CTC Cable to utilities.  ACCCTM conductor and core are sold elsewhere
in the world directly to utilities as well as through license and distribution
agreements with Lamifil in Belgium, Far East Composite Cable Company in China,
and Midal in Bahrain. ACCCTM conductor has been sold commercially since 2005 and
is currently marketed worldwide to electrical utilities, transmission companies
and transmission design and engineering firms.
 
 RECENT
DEVELOPMENTS
 
 The CTC
Cable business saw continued expansion into new markets and greater traction of
our new efficiency message in our U.S. market but CTC Cable also saw delays in
several anticipated sales in new markets and was still negatively impacted from
the delay in sales orders in previous quarters caused by a slowdown in China.
For the December, 2008 quarter China deliveries consisted of 562 km of ACCCTM
products resulting from order delays caused by the Beijing
Olympics.   Order levels improved during the March, 2009 quarter
and CTC Cable shipped 1,153 km of ACCCTM products and production during the March
quarter increased to its highest level to date, in excess of 1,500
km.  However, in the June quarter, CTC Cable saw a significant decline
in sales with shipments of 664 km of ACCCTM products shipped.
 
 The Cable
division’s focus during the three and nine months ending June 30, 2009 was
sales, marketing, and operations with a goal to position CTC Cable for rapid
revenue growth and expansion beyond the volatile market in China. Our goals
include the expansion of our customer base outside of the Chinese market by
penetrating other markets including the U.S. Our sales pipeline continues to
improve and we currently are working on nearly $400 million of sales
opportunities, most of which are outside of China. We are also optimistic that
the proposed infrastructure and grid efficiency directives included in the ARRA
stimulus package will result in an increased focus by utilities in the U.S. to
acknowledge the efficiency benefits of our ACCCTM products.  We
believe, however that the impact of the U.S. and International stimulus funds
may not result in increased revenues until calendar year 2010.
 
 To this
extent, the order to Sierra Pacific Power Company, an electric utility servicing
portions of Nevada, is our largest order to a U.S. customer to date and is
important since the decision to purchase ACCCTM conductor by this customer was
primarily due to the cost savings associated with using ACCCTM conductor,
including the improved efficiency of ACCCTM conductor over existing transmission
conductor products. Prior U.S. sales were  lines that took advantage
of the reduced sag or high temperature capabilities of ACCCTM conductor. We
believe this win is significant because it represents a significant change in
the perception of the use of ACCCTM conductor with U.S. utilities away from a
“niche” product chosen when there was no other alternative available to solve a
problem, to a product with performance and economic advantages that could be
rolled out to replace a substantial amount of the transmission conductor within
a given utility’s grid. We believe that this is the first of many such
efficiency and economic benefit related sales for U.S. utility sales
opportunities.
 
 Within
our China market, we reached an important milestone by obtaining approval to
have ACCCTM conductor installed in a 500KV installation and we are working with
our Chinese licensee and the local grid to secure a trial line at 1,000KV. The
significance for this approval is that a substantial portion of the electrical
transmission infrastructure spending in China is at 500KV or higher, including
much of the projected Chinese stimulus bill spending. To reach that milestone, a
discount was granted to our customer, Far East Composite Cable Company (“Far
East”), as a strategic decision to position ACCCTM conductor at State Grid in
China for projects at 500KV and above.  New large scale transmission
projects in China are all moving to voltages at or above 500KV and we wanted to
be designed into and installed in projects at this voltage immediately. As a
result, we granted a special discount to induce State Grid to place the order
with Far East, but demanded  better cash flow from them in
return.  We were designed into the project at 500KV as planned, but the
project is on hold in China pending assignment to a new transmission
corridor.  The original line was subsequently upgraded to 1000KV and is
still in the re-design phase.
  34
  Outside
of China, our international efforts continue to expand and we are gaining
traction on our strategy to diversify away from China.  We closed a
significant order with a new customer in South Africa representing 217 km of
ACCCTM conductor.  In Europe, we have received certifications in the UK
with certifications expected shortly in Germany and
Portugal.    We continue to see significant opportunity in
the Latin American markets and have seen repeat orders for Chile and
Mexico.  We expect initial orders soon in other South American
countries.  We have certified the stranding capabilities for Midal for
one size of conductor and we plan to review several additional sizes prior to
their certification.  We expect that the certification will allow for
closing near term sales that were delayed pending certification in the Middle
East and Africa. We are also certifying two stranding sources in
Indonesia.  Progress also continues in identifying local stranding
sources in South and Latin America.
 
 The sales
and marketing initiatives begun in the latter half of fiscal 2008 were continued
with multiple areas of the sales and marketing infrastructure
completed.  These initiatives focused on developing a sales
organization necessary to penetrate and support order solicitations, bid
tenders, and to evangelize the efficiency message of the ACCCTM conductor product
line.  CTC Cable filled out complete coverage of the U.S. and Canadian
markets through its consortium of 19 sales agent representatives.  The
sales organization also completed new sales collateral and sales tools to help
automate bid and information requests including a new CTC Cable website in May,
2009.
 
 The focus
of our cable operations during the nine-month period ending June 30, 2009 has
been to increase production to manage the large influx of orders from our new
markets. We now have fourteen pultrusion machines in operation with each of the
new production machines able to produce up to 3.5 km per day per machine and
with order demand we would easily expect to have eighteen machines in operation
with a projected annual capacity in excess of 18,000 km per year, sufficient
capacity to provide in excess of $100 million in ACCCTM core revenue per
year.
 
 We
believe that we have lined up sufficient raw materials supplies for our ACCCTM
core to produce our expected ACCCTM product sales worldwide for the next twelve
months.  The recent economic downturn has resulted in a decreased
demand for aerospace grade carbon fiber, that we use to produce our composite
core, resulting in increased availability of such materials for ACCCTM
core.  We also worked very hard to decrease material costs for carbon
and other production materials.  We will continue to work to expand
our ACCCTM conductor production capacity through stranding and manufacturing
agreements with targeted manufacturers worldwide. As we open new markets and we
begin to sell ACCCTM conductor locally, we will look to sign additional
agreements with local stranding sources.  Discussions with new
stranding partners are underway at multiple locations worldwide.
 
 The
Company has provided non-GAAP measures such as EBITDAS at the segment and
consolidated level in the following management discussion and analysis. The
Company uses the non-GAAP information internally as one of several measures used
to evaluate its operating performance and believes these non-GAAP measures are
useful to and have been requested by, investors asthey provide additional
insight into the underlying operating results viewed in conjunction with GAAP
operating results.  For the non-GAAP EBITDAS measure, a significant
portion of non-cash expenses is excluded, primarily for amortization of acquired
DeWind related intangibles that occur ratably over time and stock based
compensation charges that are valued based on the share price and volatility at
the date of grant and then expensed as earned, typically upon vesting of service
over time.  Management believes that an alternate view of operating
results that exclude DeWind amortization and stock based charges is useful in
evaluating current period operations.  The material limitation of
non-GAAP EBITDAS compared with Net Income is that significant non-cash expenses
are excluded.  Management compensates for such limitation by utilizing
EBITDAS only for particular purposes and that it evaluates EBITDAS in the
context of other metrics such as Net Income when evaluating the Company’s
performance and financial condition. Non-GAAP measures are not stated in
accordance with, should not be considered in isolation from, and are not a
substitute for, GAAP measures. A reconciliation of GAAP to non-GAAP results has
been provided in the relevant financial tables below.




35




The
following table is a reconciliation of CTC Cable only “non-GAAP” EBITDAS
discussed above for the three and nine months ended June 30, 2009 and
2008.




(Unaudited,
      In Thousands)
              
              Three months ended June
      30,Cable Segment Only
              
              2009
              
              
              2008Net
      income/(loss) from continuing operations
              
              $
              (2,134
              )
              
              $
              73Interest,
      taxes, depreciation, amortization and stock-based compensation
      (ITDAS):Interest
              
              
              —
              
              
              
              —Taxes
              
              
              —
              
              
              
              —Depreciation
      and amortization
              
              
              257
              
              
              
              197Stock-based
      compensation
              
              
              275
              
              
              
              262Total
      ITDAS
              
              $
              532
              
              
              $
              459“Non-GAAP”
      EBITDAS
              
              $
              (1,602)
              
              
              $
              532




(Unaudited,
      In Thousands)
              
              Nine months ended June
      30,Cable
      Segment Only
              
              2009
              
              
              2008Net
      income/(loss) from continuing operations
              
              $
              (4,384
              )
              
              $
              2,378Interest,
      taxes, depreciation, amortization and stock-based compensation
      (ITDAS):Interest
              
              
              1
              
              
              
              —Taxes
              
              
              —
              
              
              
              —Depreciation
      and amortization
              
              
              722
              
              
              
              607Stock-based
      compensation
              
              
              1,303
              
              
              
              815Total
      ITDAS
              
              $
              2,026
              
              
              $
              1,422“Non-GAAP”
      EBITDAS
              
              $
              (2,358
              )
              
              $
              3,800





EBITDAS
decreased by 2.1 million to a loss of $1.6 million in the current quarter, and
decreased by $6.2 million to a loss of $2.4 million in the current nine months
as compared to the same periods in prior year due primarily to the lower
revenues out of China, along with corresponding margin reductions, and increases
in general and administrative and sales and marketing expenses.




RESULTS
OF OPERATIONS





Revenues,
Cost of Revenues, and Gross Margins:





During
the quarter ended June 30, 2009, the geographical allocation of consolidated
revenues was:





China/Asia
            
            
            75.9
            %Central
      America
            
            
            10.2
            %Europe
            
            
            7.1
            %North
      America
            
            
            6.8
            %







During
the quarter, three customers in China/Asia represented 75.9% of revenues (two
customers from our Cable segment and one customer from our DeWind segment at
69.3% and 6.6%, respectively), one customer in North America from our Cable
segment represented 5.6% of revenues, and one customer in Central America from
our Cable segment represented 10.2% of revenues. For the current nine months,
three customers in China /Asia represented 76.6% of revenues (two customers from
our DeWind segment and one customer from our Cable segment at 44.1% and 32.5%,
respectively), one customer in North America from our DeWind segment represented
6.5% of revenues.  No other customer represented greater than 5% of
consolidated revenues.




36





Our
revenues and gross margin analysis are listed in the table below.





Three Months Ended June
      30,(Unaudited,
      In Thousands)
            
            2009
            
            
            2008Cable Segment
            
            
            Wind Segment
            
            
            Total
            
            
            Cable Segment
            
            
            Wind Segment
            
            
            TotalProduct Sales –Cable
            
            $
            3,562
            
            
            $
            —
            
            
            $
            3,562
            
            
            $
            6,651
            
            
            $
            —
            
            
            $
            6,651Product
      Sales – Turbines
            
            
            —
            
            
            
            325
            
            
            
            325
            
            
            
            —
            
            
            
            13,743
            
            
            
            13,743Other
      Turbine Related Revenue
            
            
            —
            
            
            
            106
            
            
            
            106
            
            
            
            —
            
            
            
            107
            
            
            
            107Total
      Revenues
            
            $
            3,562
            
            
            $
            431
            
            
            $
            3,993
            
            
            $
            6,651
            
            
            $
            13,850
            
            
            $
            20,501Cost
      of Sales - Cable
            
            $
            2,931
            
            
            $
            —
            
            
            $
            2,931
            
            
            $
            3,871
            
            
            $
            —
            
            
            $
            3,871Cost
      of Sales – Turbines
            
            
            —
            
            
            
            654
            
            
            
            654
            
            
            
            —
            
            
            
            15,898
            
            
            
            15,898Cost
      of Sales – Turbine Service
            
            
            —
            
            
            
            305
            
            
            
            305
            
            
            
            —
            
            
            
            185
            
            
            
            185Total
      Cost of Sales
            
            $
            2,931
            
            
            $
            959
            
            
            $
            3,890
            
            
            $
            3,871
            
            
            $
            16,083
            
            
            $
            19,954Gross
      Margin - Cable
            
            $
            631
            
            
            $
            —
            
            
            $
            631
            
            
            $
            2,780
            
            
            $
            —
            
            
            $
            2,780Gross
      Margin % - Cable
            
            
            17.7
            %
            
            
            —
            
            
            
            17.7
            %
            
            
            41.8
            %
            
            
            —
            
            
            
            41.8
            %Gross
      Margin – Turbines
            
            
            —
            
            
            
            (329
            )
            
            
            (329
            )
            
            
            —
            
            
            
            (2,155
            )
            
            
            (2,155
            )Gross
      Margin % - Turbines
            
            
            —
            
            
            
            -101.2
            %
            
            
            -101.2
            %
            
            
            —
            
            
            
            -15.7
            %
            
            
            -15.7
            %Gross
      Margin – Turbine Service
            
            
            —
            
            
            
            (199
            )
            
            
            (199
            )
            
            
            —
            
            
            
            (78
            )
            
            
            (78
            )Gross
      Margin % - Turbine Service
            
            
            —
            
            
            
            -187.7
            %
            
            
            -187.7
            %
            
            
            —
            
            
            
            -72.9
            %
            
            
            -72.9
            %Total
      Gross Margin
            
            $
            631
            
            
            $
            (528
            )
            
            $
            103
            
            
            $
            2,780
            
            
            $
            (2,233
            )
            
            $
            547Total
      Gross Margin %
            
            
            17.7
            %
            
            
            -122.5
            %
            
            
            2.6
            %
            
            
            41.8
            %
            
            
            -16.1
            %
            
            
            2.7
            %




Nine Months Ended June
      30,(Unaudited,
      In Thousands)
            
            2009
            
            
            2008Cable Segment
            
            
            Wind Segment
            
            
            Total
            
            
            Cable Segment
            
            
            Wind Segment
            
            
            TotalProduct Sales –Cable
            
            $
            14,124
            
            
            $
            —
            
            
            $
            14,124
            
            
            $
            28,137
            
            
            $
            —
            
            
            $
            28,137Product
      Sales – Turbines
            
            
            —
            
            
            
            15,825
            
            
            
            15,825
            
            
            
            —
            
            
            
            30,054
            
            
            
            30,054Other
      Turbine Related Revenue
            
            
            —
            
            
            
            537
            
            
            
            537
            
            
            
            —
            
            
            
            1,062
            
            
            
            1,062Total
      Revenues
            
            $
            14,124
            
            
            $
            16,362
            
            
            $
            30,486
            
            
            $
            28,137
            
            
            $
            31,116
            
            
            $
            59,253Cost
      of Sales - Cable
            
            $
            10,063
            
            
            $
            —
            
            
            $
            10,063
            
            
            $
            18,478
            
            
            $
            —
            
            
            $
            18,478Cost
      of Sales – Turbines
            
            
            —
            
            
            
            16,654
            
            
            
            16,654
            
            
            
            —
            
            
            
            31,563
            
            
            
            31,563Cost
      of Sales – Turbine Service
            
            
            —
            
            
            
            2,140
            
            
            
            2,140
            
            
            
            —
            
            
            
            1,234
            
            
            
            1,234Total
      Cost of Sales
            
            $
            10,063
            
            
            $
            18,794
            
            
            $
            28,857
            
            
            $
            18,478
            
            
            $
            32,797
            
            
            $
            51,275Gross
      Margin - Cable
            
            $
            4,061
            
            
            $
            —
            
            
            $
            4,061
            
            
            $
            9,659
            
            
            $
            —
            
            
            $
            9,659Gross
      Margin % - Cable
            
            
            28.8
            %
            
            
            —
            
            
            
            28.8
            %
            
            
            34.3
            %
            
            
            —
            
            
            
            34.3
            %Gross
      Margin – Turbines
            
            
            —
            
            
            
            (829
            )
            
            
            (829
            )
            
            
            —
            
            
            
            (1,509
            )
            
            
            (1,509
            )Gross
      Margin % - Turbines
            
            
            —
            
            
            
            -5.2
            %
            
            
            -5.2
            %
            
            
            —
            
            
            
            -5.0
            %
            
            
            -5.0
            %Gross
      Margin – Turbine Service
            
            
            —
            
            
            
            (1,603
            )
            
            
            (1,603
            )
            
            
            —
            
            
            
            (172
            )
            
            
            (172
            )Gross
      Margin % - Turbine Service
            
            
            —
            
            
            
            -298.5
            %
            
            
            -298.5
            %
            
            
            —
            
            
            
            -16.2
            %
            
            
            -16.2
            %Total
      Gross Margin
            
            $
            4,061
            
            
            $
            (2,432
            )
            
            $
            1,629
            
            
            $
            9,659
            
            
            $
            (1,681
            )
            
            $
            7,978Total
      Gross Margin %
            
            
            28.8
            %
            
            
            -14.9
            %
            
            
            5.3
            %
            
            
            34.3
            %
            
            
            -5.4
            %
            
            
            13.5
            %




CABLE
REVENUES. Product revenues for the quarter ended June 30, 2009 of
$3.6 million consisted of 664 kilometers of ACCCTM core, ACCCTM conductor,
and related ACCCTM hardware products sold primarily to Jiangsu New Far East Cable
Company in China (600 km), and a new customer in Indonesia, PT Tranka (over 30
km).  Cable revenues decreased $3.1 million or 46.4% for the quarter
and decreased $14.0 or 49.8% for the nine months ended June 30, 2009, compared
to the same periods in prior year.





Cost of
Sales and resultant Gross Margin on cable revenues for the three and nine months
ended June 30, 2009 represent materials, labor, freight, and allocated overhead
costs to produce ACCCTM conductor, ACCCTM  core, and related
hardware.  Cable gross margin decreased by $5.6 million or 58% for the
nine months ended June 30, 2009. Margin percentages for the current quarter
decreased to 17.7 %, compared to the same period in prior year of 41.8% due to
strategic discounts given to Jiangsu New Far East Cable Company in
China,  a greater mix of lower margin ACCCTM   hardware
revenues, and a significantly reduced plant utilization as a result of lower
production levels which resulted in an increased cost allocation per kilometer
shipped, despite decreases in per unit materials costs.
  TURBINE
REVENUES. Turbine revenues for the quarter ended June 30, 2009 of $0.3 million
consisted of the sales of parts and license fees primarily to China. Cost of
sales for the quarter ended June 30, 2009 decreased $15.2 million to $0.7
million, which includes the cost for the parts, as well as operating and
maintenance costs for turbines installed in the current fiscal
year.





TURBINE
SERVICE REVENUES. Turbine service revenues for the quarter ended June 30, 2009
of $0.1 million consisted of amortized deferred service and maintenance revenues
and service billings related to turbines that were not transferred to the now
discontinued E Services entity, typically for turbines recently ending their
warranty periods. Turbine service revenues for the quarter ended June 30, 2008
of $0.1 million represents primarily amortization of deferred maintenance
revenues for those turbines remaining under warranty which were not transferred
to E Service. The decrease in revenues is due to decreased service billings for
customers rolling off their warranty period who purchased maintenance services
subsequent to their warranty termination.




37




Cost of
revenues for turbine service represents the labor, parts, supplies, and overhead
related to the servicing of turbines and the net effect of changes in our
turbine availability and warranty provisions. Cost of revenues for the quarter
ending June 30, 2009 increased by $0.1 million due to slightly higher charges
related to warranty and availability provisions in the current
quarter.





OPERATING
EXPENSES





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





Consolidated
operating expenses increased $16.9 million or 174.2% from $9.7 million in the
quarter ended June 30, 2008 to $26.6 million, and increased $17.3 million or
59.9% from $28.9 million in the nine months ended June 30, 2008 to $46.2 million
in the current nine month period. The current quarter increase is primarily
due to goodwill impairment charges of $18.3 million, offset by decreases in
stock compensation of $0.2 million, $0.4 million in general and administrative
expenses due to expense control efforts, $1.2 million from prior year research
and development expenses related to development of our D8.2 60 hertz US
prototype, our D8.2 cold weather package, and D9 blade and $0.3 million in
depreciation and amortization.





On a
standalone basis, for the quarter ended June 30, 2009, Corporate expenses
decreased $0.6 million or 23.6% compared to the same period in prior year, from
$2.4 million to $1.9 million. The current quarter decrease is attributed to a
decrease of $0.2 million in stock compensation charges and $0.4 million
non-recurring legal, accounting and administrative expenses related to prior
year financings and the prior year filing of our registration
statement.





For the
quarter ended June 30, 2009, CTC Cable expenses increased by $0.1 million or
2.1% compared to the same period in prior year, due to a $0.3 million increase
in cash basis sales and marketing expenses resulting from an increase in our
sales and marketing department, a $0.6 million increase in general and
administrative expenses primarily due to chargebacks for production personnel
costs related to non-production time worked during the quarter, coupled with
increased legal fees of $0.4 million related to the intellectual property
litigation, offset by a $0.9 million decrease in research and development costs
from prior year development related to redundant resin
suppliers.





For the
quarter ended June 30, 2009, DeWind expenses increased by $17.4 million or
383.4% compared to the same period in prior year, due to a goodwill
impairment charge of $18.3 million, a decrease of $0.6 million in general
and administrative as a result of cost control measures, a decrease of $0.3
million from prior year research and development expenses related to development
costs of our D8.2 60 hertz US prototype, our D8.2 cold weather package, and D9
blade, a decrease in intangible amortization of $0.3 million, and offset by an
increase of $0.3 million in sales and marketing expenses primarily due to
outside sales commissions earned for current year turbine contracts in
process.




38





The
following table provides a comparative analysis of operating
expenses.





Three Months Ended June
      30,(Unaudited,
      In Thousands)
            
            2009
            
            
            2008Corporate
            
            
            Cable
            
            
            DeWind
            
            
            Total
            
            
            Corporate
            
            
            Cable
            
            
            DeWind
            
            
            TotalOfficer
      Compensation
            
            $
            771
            
            
            $
            —
            
            
            $
            —
            
            
            $
            771
            
            
            $
            858
            
            
            $
            —
            
            
            $
            —
            
            
            $
            858General
      and Administrative
            
            
            1,098
            
            
            
            1,065
            
            
            
            1,336
            
            
            
            3,499
            
            
            
            1,587
            
            
            
            419
            
            
            
            1,923
            
            
            
            3,929Research
      and Development
            
            
            —
            
            
            
            499
            
            
            
            1,284
            
            
            
            1,783
            
            
            
            —
            
            
            
            1,390
            
            
            
            1,567
            
            
            
            2,957Sales
      and Marketing
            
            
            —
            
            
            
            1,108
            
            
            
            885
            
            
            
            1,993
            
            
            
            —
            
            
            
            806
            
            
            
            587
            
            
            
            1,393Depreciation
      and Amortization
            
            
            —
            
            
            
            93
            
            
            
            149
            
            
            
            242
            
            
            
            —
            
            
            
            92
            
            
            
            466
            
            
            
            558Impairment
      of Acquired Goodwill
            
            
            —
            
            
            
            —
            
            
            
            18,305
            
            
            
            18,305
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Total
      Operating Expenses
            
            $
            1,869
            
            
            $
            2,765
            
            
            $
            21,959
            
            
            $
            26,593
            
            
            $
            2,445
            
            
            $
            2,707
            
            
            $
            4,543
            
            
            $
            9,695





Nine Months Ended June
      30,(Unaudited,
      In Thousands)
            
            2009
            
            
            2008Corporate
            
            
            Cable
            
            
            DeWind
            
            
            Total
            
            
            Corporate
            
            
            Cable
            
            
            DeWind
            
            
            TotalOfficer
      Compensation
            
            $
            2,527
            
            
            $
            —
            
            
            $
            —
            
            
            $
            2,527
            
            
            $
            1,463
            
            
            $
            —
            
            
            $
            —
            
            
            $
            1,463General
      and Administrative
            
            
            4,225
            
            
            
            2,405
            
            
            
            4,545
            
            
            
            11,175
            
            
            
            3,808
            
            
            
            1,281
            
            
            
            4,834
            
            
            
            9,923Research
      and Development
            
            
            —
            
            
            
            1,910
            
            
            
            4,505
            
            
            
            6,415
            
            
            
            —
            
            
            
            3,350
            
            
            
            9,062
            
            
            
            12,412Sales
      and Marketing
            
            
            —
            
            
            
            3,855
            
            
            
            1,767
            
            
            
            5,622
            
            
            
            —
            
            
            
            2,474
            
            
            
            1,286
            
            
            
            3,760Depreciation
      and Amortization
            
            
            —
            
            
            
            274
            
            
            
            1,921
            
            
            
            2,195
            
            
            
            —
            
            
            
            251
            
            
            
            1,139
            
            
            
            1,390Impairment
      of Acquired Goodwill
            
            
            —
            
            
            
            —
            
            
            
            18,305
            
            
            
            18,305
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Total
      Operating Expenses
            
            $
            6,752
            
            
            $
            8,444
            
            
            $
            31,043
            
            
            $
            46,239
            
            
            $
            5,271
            
            
            $
            7,356
            
            
            $
            16,321
            
            
            $
            28,948





OFFICER
COMPENSATION. Officer compensation represents CTC corporate expenses and
consists primarily of salaries, consulting fees, and the stock-based
compensation for options issued to officers of the Company. Officer compensation
decreased $0.1 million or 10.1% in the current quarter from $0.9 million for the
quarter ended June 30, 2008, and increased $1.1 million or 72.7% in the current
nine months from $1.5 million for the nine months ended June 30, 2008, due to a
decrease in the current quarter versus an increase in the current nine months,
respectively, related to stock-based compensation.





GENERAL
AND ADMINISTRATIVE EXPENSES. General and administrative expenses consisted
primarily of salaries and employee benefits for administrative personnel,
facilities costs, stock listing fees, insurance expenses, legal, professional
and consulting expenses, and expenses related to reserves for uncollectible
receivables. G&A expense decreased $0.4 million or 10.9% in the current
quarter from $3.9 million for the quarter ended June 30, 2008, and increased
$1.3 million or 12.6% in the current nine months from $9.9 million for the nine
months ended June 30, 2008. The decrease in G&A expenses for the quarter is
due to a $0.2 million decrease in stock compensation, a decrease of $0.6 million
for the DeWind segment, a $0.5 million decrease in reduced corporate costs
related to the prior year financings, offset by an increase of $0.6 million for
the Cable segment related to chargebacks for production personnel costs related
to non-production time worked during the quarter, along with increased legal
fees.  The increase in G&A expenses for the nine months is due
primarily to a $0.6 million increase in stock compensation, $0.4 million in
additional corporate costs primarily from increased professional and public
relations fees, $1.1 million increase in Cable G&A expenses due to
litigation costs and current quarter chargebacks discussed above, offset by
a $0.3 million decrease in DeWind G&A expenses.




RESEARCH
AND DEVELOPMENT EXPENSES. Research and development expenses consisted primarily
of salaries for engineers, and expenses for consultants, recruiting, supplies,
equipment, and facilities related to engineering projects to enhance and extend
our composite materials intellectual property offerings, to complete our DeWind
D8.2 development and prototypes, and our composite materials product technology
and production processes.





Research
and development expenses decreased $1.2 million or 39.7% in the current quarter
from $3.0 million for the quarter ended June 30, 2008 and decreased $6.0 million
or 48.3% in the current nine months from $12.4 million for the nine months ended
June 30, 2008. The current quarter decrease is due primarily to costs related to
prior year US prototype costs, blade and cold weather package development costs,
with no comparable current year costs, and lower Cable research and development
costs of $0.9 million due primarily to a combination of prior year development
costs associated with additional supply sourcing efforts of composite core
resins, along with reduced material testing and corresponding outside
professional service costs.  The nine month decrease is due primarily
to the same reasons above, with an additional nine month reduction of $4.8
million over the current quarter.




39




SALES AND
MARKETING EXPENSE. Sales and marketing expense consisted primarily of salaries
and commissions for sales and marketing personnel, expenses for consultants,
equipment, travel, and printed marketing literature and sales materials. Sales
and Marketing expenses increased $0.6 million or 43.1% in the current quarter
from $1.4 million in the quarter ended June 30, 2008, and increased $1.9
million or 49.5% in the current nine months from $3.8 million in the nine months
ended June 30, 2008. The current quarter increase was primarily due to a $0.5
million sales commission earned and recorded for the delivery and installation,
currently in process, of two of our D8.2 wind turbines that shipped in the
current quarter, but not completely installed as of June 30, 2009, coupled with
an increase in Cable sales and marketing expenses caused by additional US and
International headcount related expenses and expenses related to increased
marketing efforts for our website enhancement and sales collateral
changes.  The nine month increase of $1.9 million included a $0.4
million increase in stock compensation charges and $1.4 million due to increases
in Cable sales and marketing expenses due to additional US and International
headcount related expenses and expenses related to increased marketing efforts
for our website enhancement and sales collateral changes, offset by a decrease
in DeWind sales and marketing expenses of $0.5 million.





DEPRECIATION & AMORTIZATION EXPENSE. Depreciation expense
consisted of depreciation on capitalized equipment, leasehold improvements, and
other capital assets and amortization of acquired intangibles. The depreciation
and amortization expense decreased by $0.3 million or 56.6% for the current
quarter from $0.6 million for the quarter ended June 30, 2008 and increased by
$0.8 million or 57.9% for the current nine months from $1.4 million for the nine
months ended June 30, 2008.  The decrease for the quarter and the
increase for the nine months are due primarily to lower and higher amortization
of intangibles for the quarter and nine months, respectively, related to our
technology transfer agreements.





INTEREST
EXPENSE. Interest expense consists of interest paid and payable on the Company's
capital lease obligations, the cash interest payable on the Company’s Debentures
and Notes and the amortization of the Notes discounts recorded for the value of
the warrants and conversion features issued in conjunction with the Notes and
Convertible Notes. Total interest expense decreased by $1.5 million or 77.7% in
the current quarter from $1.9 million in the quarter ended June 30, 2008 and
decreased $2.0 million or 59.7% in the current nine months from $3.4 million in
the nine months ended June 30, 2008. The decrease in the current quarter and
nine months is primarily due to lower interest on lower debt balances of the
remaining $9.0 million in principal on our February, 2007 Convertible Notes and
a reduction to zero of interest on capital lease obligations that were repaid in
May, 2008.





IMPAIRMENT
OF ACQUIRED GOODWILL.  Subsequent to June 30, 2009, the Company determined
that it was probable that a transaction comprising a substantial portion of the
operating assets and liabilities of the DeWind segment would be sold, which
triggered a re-evaluation of goodwill, in accordance with accounting guidelines,
and as a result a goodwill impairment charge of $18.3 million was recorded in
the three and nine months ended June 30, 2009.





INCOME
TAXES. We made no provision for income taxes in the three and nine months ending
June 30, 2009 due to net losses incurred except for minimum tax
liabilities.  We have determined that due to our continuing operating
losses as well as the uncertainty of the timing of profitability in future
periods, we should fully reserve our deferred tax assets. As of June 30, 2009,
our deferred tax assets continued to be fully reserved. We will continue to
evaluate, on a quarterly basis, the positive and negative evidence affecting the
realization of our deferred tax assets.





Net
Loss





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




Three Months Ended June
      30,
            
            
            Nine Months Ended June
      30,(Unaudited,
      In Thousands)
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008Corporate
            
            $
            (2,335
            )
            
            $
            (4,725
            )
            
            $
            (8,118
            )
            
            $
            (8,881
            )Cable
            
            
            (2,134
            )
            
            
            73
            
            
            
            (4,384
            )
            
            
            2,378Dewind
            
            
            (22,456
            )
            
            
            (8,540
            )
            
            
            (33,413
            )
            
            
            (25,392
            )Total
      Net Loss
            
            $
            (26,925
            )
            
            $
            (13,192
            )
            
            $
            (45,915
            )
            
            $
            (31,895
            )




Our net
loss increased $13.7 million or 104.1% in the current quarter from $13.2 million
for the quarter ended June 30, 2008, and increased $14.0 million or 44.0% in the
current nine months from $31.9 million for the nine months ended June 30, 2008.
The increase for the quarter was due primarily to goodwill impairment of $18.3
million, lower margins of $0.4 million, offset by decreases in operating
expenses of $1.4 million, described above, interest and warrant modification
expenses of $2.0 million, and a prior year $1.6 million loss in discontinued
operations.  The net loss increase for the nine months was due primarily to
the goodwill impairment of $18.3 million; $6.3 million in gross margin decreases
in the Cable operations due to a combination of strategic discounts and product
mix margins, with offsetting DeWind operations margin increases and decreases
for license fees and inventory reserves and contract loss provisions,
respectively; offset by decreases in operating expense of $1.0 million,
primarily caused by a $6.0 million decrease in research and development expense
related to decreased US prototype, blade development and cold weather package
costs, a $2.0 million decrease in interest and warrant modification expenses,
and a reduction of $7.0 million in losses related to discontinued operations of
DeWind related businesses, offset by $2.4 million in increased stock
compensation charges and $0.8 million in increased depreciation and amortization
expense.




40




LIQUIDITY
AND CAPITAL RESOURCES
 
 Since
inception, our principal sources of working capital have been private debt
issuances and equity financings.
 
 For the
nine months ended June 30, 2009, we had a net loss from continuing operations of
$45.9 million. At June 30, 2009 we had $6.7 million of cash and cash
equivalents, which represented a decrease of $15.9 million from September 30,
2008. The increase was due to cash used in operations of $19.9 million,
cash used in investing activities for the purchase of property, plant and
equipment of $1.5 million, offset by $4.7 million cash provided by financing
activities from note payable proceeds, and from the effect exchange rates on
cash providing $0.7 million.
 
 Cash
used in operations during the nine months ended June 30, 2009 of $19.9
million was the result of operating losses, offset by depreciation,
amortization, and non-cash compensation expenses and working capital
requirements, most significantly related to the purchase of turbine inventory
parts and payments on accounts payable related to those parts, offset by
additional cash receipts for deferred revenue.
 
 If we
were to retain the DeWind business, we anticipate that sales of our ACCC
conductor will not be sufficient to sustain our combined operations including
the DeWind segment without sufficient wind turbine orders with sizable customer
advance payments of cash and further anticipate that we will continue to incur
consolidated net losses due to our costs exceeding our revenues for an
indefinite period of time.   On August 10, 2009 we signed an
agreement to sell substantially all of the DeWind segment operations for
cash.  Should this transaction close, we expect to immediately receive
in excess of $30 million in cash proceeds upon any such
closing.  Should the transaction close, the cash requirements to
operate the company will decrease significantly as a result of reducing the
operating expenses and working capital requirements for the wind turbine supply
chain and we believe if the transaction closes, sufficient cash would be
available to fund operations for the next twelve months.


CAPITAL
EXPENDITURES





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





EFFECTS
OF INFLATION





We are
subject to inflation and other price risks arising from price fluctuations in
the market prices of the various raw materials that we use to produce our
products including the price of aluminum and steel.





Whenever
possible, we manage price risks through cost containment measures. For our CTC
Cable business, we anticipate passing through the risk of market fluctuations of
the price of aluminum to our customers, as is the practice in the cable
industry, and we do not believe that inflation risk or other price risks will be
material to our CTC Cable business or Corporate overhead results of operations,
financial position, or cash flows.





For our
DeWind business, during the year ended September 30, 2008 and the nine months
ended June 30, 2009, there were substantial fluctuations in the turbine
component costs driven in part by increased demand and in part due to raw
materials increases that we were unable to pass through to our customers and
which resulted in losses on several turbine supply contracts. These losses
primarily related to fixed price contracts that were signed in 2007. Our current
turbine supply contracts incorporate price escalators that allow a full or
partial pass-through of additional materials price increases to our
customers.





OFF
BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS





There are
no off balance sheet arrangements. The following table summarizes our
contractual obligations (including interest expense) and commitments as of June
30, 2009:





(Unaudited,
      In Thousands)Contractual Obligations
                
                Total
                
                
                Less than 1
                  year
                
                
                1-3 years
                
                
                More than 3
                  YearsDebt
      Obligations
                
                $
                12,761
                
                
                $
                12,761
                
                
                $
                —
                
                
                $
                —Operating
      Lease Obligations
                
                $
                2,305
                
                
                $
                1,696
                
                
                $
                609
                
                
                $
                —Purchase
      Commitments
                
                $
                12,000
                
                
                $
                12,000
                
                
                $
                —
                
                
                $
                —Capital
      Commitments
                
                $
                3,500
                
                
                $
                3,500
                
                
                $
                —
                
                
                $
                —




41




Capital
commitments of $3.5 million represent accrued and unpaid commitments to a
vendor to complete a sizable portion of the balance of the plant for the first
10 megawatt wind farm for the wind farm joint venture.





Not
included in the table above are amounts included on our balance sheet under
warranty liabilities. Our turbine warranty generally provides for payment of
services for turbine related repairs as well as provides for compensation for
availability penalties. Availability penalties are wind generating revenue
guarantees payable in cash to wind farm operators if their turbine under
warranty fails to meet minimum wind generation levels. As of June 30, 2009, we
had accrued availability penalties relating to incurred and measured wind
generating guarantees totaling $1,206,332 which are payable upon the resolution
of the underlying claims. We currently classify all such payments as less than
one year.





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, 2009, 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, 2009, we had $6.7 million in cash, cash
equivalents and short-term investments that mature in three months or less. Due
to the short duration of these financial instruments, we do not expect that a
change in interest rates would result in any material loss to our investment
portfolio.





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





ITEM
4: CONTROLS AND PROCEDURES





Based on
an evaluation under the supervision and with the participation of the Company's
management, including the Chief Executive Officer, the Chief Financial Officer
and the Chief Operating Officer, the Company's principal executive officer and
principal financial officer have concluded that the Company's disclosure
controls and procedures (as defined under the Securities Exchange Act of 1934,
as amended (Exchange Act)) were not effective as of June 30, 2009 to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.





During
management's review of our internal control structure under Sarbanes-Oxley
section 404, for the fiscal year ending September 30, 2008, we determined the
following to be material weaknesses:





Entity
level Processes and weaknesses. As of September 30, 2008, the following material
weaknesses existed related to general processes and weaknesses for the entity
taken as a whole:





·
            Proper
      segregation of duties and inadequate training did not exist as well as an
      inadequate number of accounting and finance personnel staff at fiscal year
      end.





·
            The
      Company had a two member Audit Committee, a two member Compensation
      Committee, and has had a designated financial expert on the Board of
      Directors since January of 2006. Until December, 2005 we only had a two
      person non-independent Board of Directors and from January, 2006 through
      November, 2006 we had one independent director and two non-independent
      directors comprising our Board of Directors. In October, 2007 we added one
      additional independent director who also serves on the Audit and
      Compensation committees.





·
            The
      Company did not have an independent internal audit function due to the
      small size of the organization.





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





Information
Technology Controls (ITCs). ITCs are policies and procedures that relate to many
applications and support the effective functioning of application controls by
helping to ensure the continued proper operation of information
systems.





Information
Technology General Controls (ITGC'S). ITGC'S include four basic information
technology (IT) areas relevant to internal control over financial reporting:
program development, program changes, computer operations, and access to
programs and data. As of September 30, 2008, a material weakness existed
relating to our information technology general controls, including ineffective
controls relating to access to programs and data including (1) user
administration, (2) application and system configurations, and (3) periodic user
access validation.




42




Inventory
Processes. The following material weaknesses existed related to ineffective
controls over our inventory processes:





·
            Perpetual
      Inventory records: Ineffective controls to (a) accurately record the raw
      materials inventory moved out of inventory stores and into manufacturing
      production and later into finished goods, (b) accurately record
      manufacturing variances, (c) properly reconcile in sufficient detail all
      inventories for turbine parts owned by the Company but held at third
      parties.





Procure
to Pay process. During our fiscal 2008 assessment of the Company’s procure to
pay (cash payments and disbursements) cycle, we determined that there were
numerous significant control deficiencies relating primarily to inventory
purchasing and related purchasing and payable system control deficiencies. If
assessed on an individual basis, none of these deficiencies were determined to
be material weaknesses. However, taken in the aggregate we believe the following
constitute a material weakness:





i) There
were inadequate system driven matching controls over the receiving function for
inventory parts and supplies. Receiving tolerances for inventory related pricing
and quantities received are not established systematically.





ii) There
were inadequate vendor management duties and responsibilities during the
year





iii)
There was a lack of sufficient purchasing reports for management
review.





Equity
Administration Process. During our 2008 assessment, we noted a lack of
segregation of duties over tracking and recording stock related
activity.





Accounting
personnel. During our 2008 assessment, we determined that we do not have a
sufficient number of accounting personnel trained in Generally Accepted
Accounting Principles working in our DeWind subsidiary.





Project
review process. We determined that we had an inadequate review process over
turbine supply contract review and the turbine project accounting system was
inadequate.





During
the nine months ended June 30, 2009 and through the date of this report, the
Company improved the internal control structure and addressed the identified
material weaknesses as follows:





·
            In
      January, 2009 the Company appointed a third independent Director who will
      serve on the Audit and Compensation Committees as well as to provide a
      majority of independent directors on our five person Board of
      Directors.





·
            In
      October, 2008, the Company completed an important phase of the upgrade to
      its accounting and manufacturing IT systems to more adequately track and
      maintain inventory and to automate manufacturing and inventory
      costing.





·
            The
      Company improved its IT processes surrounding security of information and
      user administration and access validation
  procedures.





·
            Additional
      accounting and finance personnel were added in late fiscal 2008 to address
      proper segregation of duties and inadequate
  training.





·
            The
      Company implemented a complete and thorough project accounting review on a
      quarterly basis which is reviewed by senior management and the principal
      accounting officer.




The
Company's management has identified the steps necessary to address the material
weaknesses existing in 2008 described above and that remain as of June 30, 2009,
as follows:





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





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




43




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





(4)
Requiring senior accounting personnel and the principal accounting officer to
review complex, non-routine transactions to evaluate and approve the accounting
treatment for such transactions;




(5)
Evaluating the internal audit function in relation to the Company's financial
resources and requirements. We expect to pursue a strategy of outsourcing our
internal audit function in fiscal 2009;





(6)
Develop and maintain an effective inventory reconciliation process between
DeWind’s accounting records and TECO Westinghouse records.





(7)
Invest in additional enhancements to our IT systems including enhancements to
processing manufacturing and inventory transactions, equity administration
processes, and security over user access and administration.





The
Company began to execute the remediation plans identified above in the first
fiscal quarter of 2009. These remediation efforts are expected to continue
through fiscal 2009.





Except
for the beginning of the transition of control of our DeWind inventory to
TECO/Westinghouse in the fourth fiscal quarter of 2008 and which continued into
the first fiscal quarter of 2009 as noted above, there were no changes in our
internal control over financial reporting during the nine months ended
June 30, 2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting, other than the
remediation measures which are described above.





SingerLewak
LLP, our independent registered public accounting firm, has audited management's
assessment of the effectiveness of the Company's internal control over financial
reporting as of September 30, 2008 as stated in their report which appears in
the Annual Report on Form 10-K/A filed with Securities and Exchange Commission
on March 9, 2009.





Evaluation
of Effectiveness of Disclosure Controls and Procedures





Under the
supervision and with the participation of our management, including our Chief
Executive Officer/ and our Chief Financial Officer, we evaluated the
effectiveness of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
ineffective as of June 30, 2009 because of the material weaknesses identified
above.





PART
II - OTHER INFORMATION




ITEM
1 - LEGAL PROCEEDINGS





There
have been no material changes to the Legal Proceedings described in Form 10-K/A
to be filed with the Securities and Exchange Commission on March 9, 2009, except
as noted in Footnote
13.




ITEM
1A. RISK FACTORS





The
following risk factors (i) have been added in connection with the Company’s
pending Dewind asset sale transaction or (ii)  update the information
contained in the Risk Factors listed in the Form 10-K/A filed with the
Securities and Exchange Commission on March 9, 2009.  All of these
risk factors should be read in conjunction with the risk factors listed in such
Form 10-K/A
 
 Risks
Regarding the Asset Sale Transaction
 THE
AMOUNT OF CASH THE COMPANY RECEIVES IN THIS ASSET SALE TRANSACTION WILL VARY,
DEPENDING ON THE RESULT OF CERTAIN POST-CLOSING ADJUSTMENTS, SO THAT IT MAY NOT
RETAIN ALL OF THE CASH PAID TO IT AT THE CLOSING UNDER THE ASSET PURCHASE
AGREEMENT.
 Pursuant
to the terms of the Asset Purchase Agreement, as consideration for the Dewind
Asset Sale, the purchaser (“DSME”) will pay the Company approximately
$49.5 million in cash at the closing of the sale of Dewind assets (“Dewind
Asset Sale”).  This amount does not include a projected $2.3 million
in transaction costs which the Company has incurred.  Within 90
calendar days following the closing of the Dewind Asset Sale, and depending
whether the calculation yields a positive or a negative number, DSME or the
Company will pay an additional amount to the other party, which is
referred  to as the “purchase price adjustment,” equal to the
difference (an amount which may be a positive or a negative number) obtained by
subtracting (i) $25.2 million from (ii) the net value of the Dewind Assets
(assets less assumed liabilities), as of the date of closing of the Dewind Asset
Sale. While the Company does not currently expect that any reduction in the
$49.5 million will be required as a result of these adjustments, there can
be no assurance that it will not have to return a portion of the
$49.5 million to DSME as a result of these adjustments.
  44
 THE
AGREEMENT GOVERNING THE SALE OF THE DEWIND ASSETS REQUIRES THAT CERTAIN PROCEEDS
ARE ESCROWED.  THE COMPANY HAS AGREED TO INDEMNIFY THE PURCHASER FOR
BREACHES OF THE COMPANY’S REPRESENTATIONS MADE IN THE ASSET PURCHASE AGREEMENT
AND SATISFACTORY COMPLETION OF TRANSITION ITEMS. THIS MAY RESULT IN CLAIMS
AGAINST THE ESCROWED PROCEEDS.  IF INDEMNIFICATION CLAIMS ARE MADE,
THE PROCEEDS OF THE ASSET SALE MAY BE SIGNIFICANTLY LOWER THAN
EXPECTED.
 DSME has
required that approximately $11 million of the proceeds of the asset sale be
placed into escrow for release up to two years after closing upon satisfactory
completion of transition items, if the Company has not satisfied certain
conditions required under the agreement, and if DSME has suffered damages as a
result.  Some of these conditions may be outside of the control of the
Company’s management to affect or it may be uneconomical for the Company to
satisfy some of these conditions.  As a result, some or all of the
escrowed funds may be withheld and remitted back to DSME if damages can be
proven.  In addition, for misrepresentation of certain intellectual
property sale representations, DSME may be indemnified for up to 75% of the
purchase price of the assets under certain conditions and if actual damages can
be proven.  As a result, there may be a requirement to indemnify DSME
and the effective transaction price may be significantly and materially lower
than expected by the Company.
 
 THE
FAILURE TO COMPLETE THE DEWIND ASSET SALE MAY RESULT IN A DECREASE IN THE MARKET
VALUE OF COMPANY COMMON STOCK AND OTHERWISE MATERIALLY AND ADVERSELY AFFECT THE
COMPANY.
 DeWind,
the Company and DSME are required to satisfy certain conditions prior to
closing.  If either DeWind or the Company is unable to satisfy these
conditions, some of which may be outside of the direct control of Dewind, the
Company, or its management and personnel, and unless DSME approves a waiver of
these conditions, the transaction closing may be delayed, the terms of the
transaction may be modified, or the transaction may be cancelled in its
entirety.  Should this occur, a separate bidder may need to be found
which may result in a significant and material difference in the value of the
DeWind assets. As a result, the Company cannot assure you that the Dewind Asset
Sale will be completed. If the Dewind Asset Sale is not completed for any
reason, the market price of our common stock may decline. In addition, failure
to complete the Dewind Asset Sale may substantially affect the Company’s ability
to implement its business.
  A PORTION
OF THE CASH PROCEEDS RELATE TO ASSETS SOLD BY A EUROPEAN SUBSIDIARY OF THE
COMPANY.  RESIDUAL LIABILITIES AND TAX CONSEQUENCES MAY AFFECT THE
COMPANY’S ABILITY TO ULTIMATELY RECEIVE SUCH PROCEEDS.
 Approximately
$3 million of the proceeds of the transaction relates to a bulk asset sale of
assets located in Germany.  The repayment of intercompany loans and
other cash transfers for these funds may not be possible or the residual
liabilities may consume the cash paid for these assets.  Repatriation
of this cash may cause tax liabilities or other tax or capital account
consequences for the remaining European subsidiaries.
 
 THE
COMPANY WILL BE UNABLE TO COMPETE WITH DEWIND BUSINESS FOR FIVE YEARS FROM THE
DATE OF CLOSING.
 The
Company  has agreed that, for a period of five years after the closing
of the Dewind Asset Sale, it will not (i) directly or indirectly
participate with, control or own an interest in any entity that is engaged in
the business of manufacturing, selling, or marketing wind turbines anywhere in
the world,or
(ii) solicit, induce, encourage or attempt to persuade any employee of
Dewind to terminate his or her employment relationship with Dewind, or offer to
hire any Dewind employee. The Company’s remaining business, the CTC Cable
business along with the wind farm business, are not deemed to compete with
Dewind’s business. However, the non-compete provisions will restrict the
Company’s ability to engage in any business that competes with Dewind’s business
for five years from the date of closing.
  ALTHOUGH
THE BOARD OF DIRECTORS MAY, SUBJECT TO COMPLIANCE WITH THE TERMS OF THE ASSET
PURCHASE AGREEMENT, TERMINATE THE ASSET PURCHASE AGREEMENT IN COMPLIANCE WITH
ITS FIDUCIARY DUTIES IN ORDER TO ACCEPT AN UNSOLICITED SUPERIOR ACQUISITION
PROPOSAL, THE REQUIREMENT THAT THE COMPANY PAYS A TERMINATION FEE IN ORDER TO
ACCEPT SUCH A PROPOSAL MAY DISCOURAGE THE MAKING OF ANY SUCH
PROPOSAL.
 The board
of directors may, subject to compliance with the terms of the Asset Purchase
Agreement, terminate the Asset Purchase Agreement in order to comply with its
fiduciary obligations to the shareholders, which could include the ability to
accept an unsolicited superior proposal. However, the requirement that the
Company pays DSME a termination fee of $2,000,000 in certain circumstances in
order to accept an unsolicited superior proposal may operate to discourage
third-parties from making any such proposal.
 
 ASSUMPTIONS
REGARDING THE STATE AND FEDERAL TAX CONSEQUENCES OF THE TRANSACTION MAY BE
INACCURATE.
 The
proposed Dewind Asset Sale will be a taxable transaction to the Company and
Dewind for U.S. federal and state income tax purposes. If the Dewind Asset
Sale is completed, the Company will realize gain with respect to the
Dewind assets equal to the difference between the proceeds received by
Dewind on such sale and our tax basis in the assets sold.
  For
purposes of calculating the amount of the tax gain, the proceeds received by the
Company will include the cash received, and any other consideration received.
The Company does not believe, however, that there will be material tax
incurred.  The Company believes it has sufficient usable net operating
losses to offset a majority of the income or gain recognized by it for “regular”
federal income tax purposes as a result of the Dewind Asset Sale. The Company
also expects the Dewind Asset Sale will not generate a significant federal
alternative minimum tax liability. Therefore, it will not set aside any material
amounts of cash specifically for the payment of any tax liability. It may also
be subject to state income taxes to the extent that gains exceed losses for
state tax law purposes, but it does not estimate that such taxes will be
significant. However, there can be no assurance that the Internal Revenue
Service or relevant state tax authorities will ultimately assent to management’s
tax treatment of the Dewind Asset Sale or the net operating losses. To the
extent the Internal Revenue Service or any relevant state tax authorities
ultimately prevail in re-characterizing the tax treatment of the Dewind Asset
Sale or the net operating losses, there may be adverse tax consequences to the
Company, including that it could owe income taxes with respect to the entire
purchase price.
  45
 THE
COMPANY’S BUSINESS FOLLOWING THE SALE OF DEWIND ASSETS WILL BE ENTIRELY
DEPENDENT ON THE SUCCESS OF ITS CTC CABLE SUBSIDIARY, WHICH FOR THE NINE MONTHS
ENDED JUNE 30, 2009  REPRESENTED  46.4% OF ITS
REVENUE.
 After the
closing of the Dewind Asset Sale, the Company will be smaller and have limited
assets and revenue. Accordingly, management’s focus will be on the development
and growth of its remaining subsidiary, CTC Cable, which, for the nine months
ended June 30, 2009, has generated less than 47% of the Company’s total revenues
and as of June 30, 2009, constituted 10.8% of total assets. For the year ended
September 30, 2008, CTC Cable accounted for less than 44% of total revenues and
approximately 29% of total cost of goods. The Company’s net sales for the
foreseeable future will be substantially lower after the sale of the Dewind
assets. The Company cannot assure you that the CTC Cable business will achieve
profitability in the near term.  All risk factors of the CTC Cable
business as described in the Company’s Form 10-K/A for the year ended September
30, 2008 are magnified for the Company as CTC Cable will be its primary business
following the Dewind Asset Sale.




Risk
Factors that update information contained in the Form 10-K
filing




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 $60 million in
ACCC product sales since inception and we have $57 million in Turbine and
related services revenues since the acquisition of DeWind on July 3, 2006.
Historically, we have incurred substantial losses and we may experience
significant quarterly and annual losses for the foreseeable future. We may never
become profitable. If we do achieve profitability, we may not be able to sustain
or increase profitability on a quarterly or annual basis. We expect the need to
significantly increase our product development and product prototype and
equipment prototype production expenses, as necessary. As a result, we will need
to generate significant revenues and earnings to achieve and maintain
profitability.





WE HAVE A
SIGNIFICANT PORTION OF OUR CURRENT REVENUES AND ORDER BOOKINGS CONCENTRATED WITH
A SMALL NUMBER OF CUSTOMERS.


For both
our cable and turbine business units, revenues recognized over the past two
fiscal quarters and order bookings received to date are concentrated with a very
small number of customers, primarily our Cable customer in China, a Cable
customer in Poland, and for turbine related contracts, orders to our Chinese
licensees, Czech customer, and a customer in Argentina. The loss of one or more
of our customers or material changes to the contracts with or payment terms of
these customers may result in a significant business interruption through
reduced revenues, reduced cash flows, delays in revenues or cash flows and such
delays or reductions could have a material impact on the future revenue growth
and profitability of the Company.




OUR INDEPENDENT AUDITORS HAVE ISSUED A QUALIFIED
REPORT AS OF AND FOR THE YEAR ENDED SEPTEMBER 30, 2008 WITH RESPECT TO OUR
ABILITY TO CONTINUE AS A GOING CONCERN, AND WE MAY NEVER ACHIEVE
PROFITABILITY.


Since
inception, our accountants have issued a report relating to our audited
financial statements which contains a qualification with respect to our ability
to continue as a going concern because, among other things, our ability to
continue as a going concern is dependent upon our ability to generate profitable
operations in the future or to obtain the necessary financing to meet our
obligations and repay our liabilities from normal business operations when they
come due. There is no guarantee that the products will be accepted or provide a
marketable advantage, and therefore, no guarantee that the commercialization
will ever be profitable. For the nine months ended June 30, 2009, we had a net
loss from continuing operations of $45.9 million and negative cash flows from
operations of $19.9 million. For the fiscal year ended September 30, 2008, we
had a net loss from continuing operations of $43.3 million and negative cash
flows from operations of $51.4 million. For the fiscal year ended September 30,
2007, we had a net loss from continuing operations of $30.6 million and negative
cash flows from operations of $22.2 million. For the fiscal year ended September
30, 2006, we had a net loss from continuing operations of $26.6 million and
negative cash flows from operations of $6.5 million.





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


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


46
  WE HAVE
SUBSTANTIAL EXPOSURE TO EXCHANGE RATE RISK AS WE PURCHASE A SUBSTANTIAL QUANTITY
AND VALUE OF TURBINE PARTS FROM EUROPEAN BASED SUPPLIERS AND WE HAVE SIGNIFICANT
LIABILITIES DENOMINATED IN FOREIGN CURRENCIES.
 Over the
past 27 months, the US Dollar has fluctuated against foreign currencies, notably
the Euro. When the Company purchased the DeWind subsidiary in July, 2006, the
Dollar to Euro exchange rate was approximately $1.29 to the Euro. As of June 30,
2008 the exchange rate was $1.58 to the Euro for a 22.5% decline in the dollar
from July 3, 2006 to June 30, 2008. The Euro subsequently devalued to $1.41 as
of June 30, 2009. We currently do not hedge our foreign currency
risk.  We currently purchase significantly all of our turbine
components and parts from overseas suppliers, primarily in Europe and a
significant percentage of our parts are payable in Euros. We have contractual
commitments with certain key suppliers that call for payment denominated in the
Euro. We also have contractual commitments under past warranties that call for
payments in Euros and we conduct a substantial portion of our DeWind development
efforts in Germany. To the extent that the Dollar to Euro exchange rates change
significantly, any such change could have a material impact on the operations
and financial results of the company.
 
 THE
COMPANY HAS HAD A HISTORY OF MATERIAL WEAKNESSES IN THE ACCOUNTING, FINANCIAL,
AND BUSINESS CONTROL STRUCTURE AND THE ACQUISITION OF EU ENERGY/DEWIND HAS
RESULTED IN ADDITIONAL SARBANES-OXLEY ISSUES AND MATERIAL WEAKNESSES IN THE
CONTROL STRUCTURE.
 The
Company has determined that the disclosure and internal control structure of the
consolidated entity has material weaknesses that will require the investment of
additional resources to mitigate and resolve. EU Energy was a UK company that
was not previously subject to the requirements of the Sarbanes- Oxley Act of
2002. The operations of EU Energy are material to the results of the
post-acquisition combined entity and management’s initial assessment of the EU
Energy control structure has identified several additional key material control
weaknesses that may require the investment of additional resources. The Company
may be required to hire additional employees, consult with expert advisors,
invest in Informational Technology, and provide for additional Board oversight
including additional independent directors, and audit committee, and an internal
audit function. These remediation efforts may consume additional financial
resources resulting in additional expense to the company.  These
weaknesses may also lead to errors with our financial results. For instance, in
February 2009, the Company concluded that errors were made in its wind turbine
contract review procedures and that contract losses of $7,960,000 should have
been recorded for expected costs in excess of expected proceeds for turbines
that were shipped during the quarter ended December 31, 2008. Both the expected
costs and the expected proceeds were determinable and estimable as of the year
ended September 30, 2008, and a contract loss should have been
recorded.
  THE PRICE
OF OUR COMMON STOCK IS VOLATILE. VOLATILITY MAY INCREASE IN THE FUTURE, WHICH
COULD AFFECT OUR ABILITY TO RAISE CAPITAL IN THE FUTURE OR MAKE IT DIFFICULT FOR
INVESTORS TO SELL THEIR SHARES.
 The
market price of our common stock may be subject to significant fluctuations in
response to our operating results, announcements of new products or market
expansions by us or our competitors, changes in general conditions in the
economy, the financial markets, the electrical power transmission and
distribution industry, or other developments and activities affecting us, our
customers, or our competitors, some of which may be unrelated to our
performance. The sale or attempted sale of a large amount of common stock into
the market may also have a significant impact on the trading price of our common
stock. During the last 12 months, the closing bid prices for our common stock
have fluctuated from a high of $1.36 to a low of $0.16. Fluctuations in the
trading price or liquidity of our common stock may adversely affect our ability
to raise capital through future equity financings.
  47
  AS OF
AUGUST 5, 2009, 4,728,000 COMMON SHARES ARE ISSUABLE UPON EXERCISE OF ALL
OUTSTANDING OPTIONS, WARRANTS AND CONVERSION OF CONVERTIBLE NOTES FOR LESS THAN
THE MARKET PRICE OF $0.30 PER SHARE. CASH PROCEEDS RESULTING FROM THE FULL
EXERCISE AND CONVERSION OF THESE SECURITIES WOULD BE APPROXIMATELY $1,182,000.
WHILE CURRENT MARKET PRICES ARE BELOW SUBSTANTIALLY ALL OF OUR CONVERTIBLE
EQUITY SECURITIES, INCLUDING OPTIONS AND WARRANTS, A SUBSTANTIAL NUMBER OF
OPTIONS WERE RECENTLY RE-PRICED TO $0.35 PER SHARE.  A PRICE INCREASE
ABOVE THAT STRIKE PRICE WOULD RESULT IN APPROXIMATELY 22,000,000 OPTIONS
EXERCISABLE AT $0.35 PER OPTION OF WHICH FULL EXERCISE WOULD INCREASE THE
OUTSTANDING COMMON SHARES BY 9% TO APPROXIMATELY 314,716,000
SHARES.
 The
exercise price or conversion price of outstanding options, warrants and
convertible notes may be less than the current market price for our common
shares. In the event of the exercise of these securities, a shareholder could
suffer substantial dilution of his, her or its investment in terms of the
percentage ownership in us as well as the book value of the common shares held.
At the August 5, 2009 market price of $0.30 per share, 4,728,000 shares would be
exercisable or convertible for less than the market prices. Full exercise and
conversion of these below market shares would result in us receiving cash
proceeds of $1,182,000 and would increase the outstanding common shares to
approximately 292,716,000 shares.  While current market prices are
below substantially all of our convertible equity securities, during the quarter
ended March 31, 2009 most employee and contractor options were re-priced to
$0.35 per option.  As of March 31, 2009 approximately 22,000,000
options were vested and exercisable at $0.35 or less.  Full exercise
of these options and in the money warrants and options would increase the
outstanding common shares by 9% to approximately 314,716,000 shares with
proceeds of approximately $8.6 million if fully exercised for
cash.





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




Item 3.02 Unregistered Sales of
Equity Securities.
 
 On June
30, 2009, we issued 4,000,000 warrants with an exercise price of $0.25 per
warrant and a 10% secured promissory note in the principal amount of $5.0
million due December 30, 2009  to an accredited investor in connection
with a bridge financing.
 
 The
issuance of the warrants triggered anti-dilution protection in several series of
previously issued warrants and in the conversion price of the remaining
$9,037,280 of Convertible Notes due January 30, 2010.  The conversion
price of the Convertible Notes was reduced from $1.00 to $0.99, which would
result in an additional 91,289 shares issuable upon full conversion of the
remaining Notes.   The intrinsic value of the additional shares
issuable upon full conversion is $27,000, which will be amortized to interest
expense over the expected remaining life of the Convertible
Notes.  Previously outstanding warrants with exercise prices between
$0.96 and $1.28 and which expire between February, 2010 and May, 2011 were reset
by between $0.01 and $0.02 per warrant and which resulted in $10,000 of
additional expense, calculated as the difference in fair value of the warrants
immediately before and after the change in exercise prices.
 
 The
issuances to these investors were exempt from registration pursuant to Section
4(2) of the Securities Act.


ITEM
3 - DEFAULTS ON SENIOR SECURITIES





None





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




None




ITEM
5 - OTHER INFORMATION




None




48





ITEM
6 - EXHIBITS





EXHIBIT
INDEX




Number
            
            Description3.1(1)
            
            Articles
      of Incorporation of the Company3.2(2)
            
            Certificate
      of Amendment to Articles of Incorporation3.2(3)
            
            Bylaws
      of Composite Technology Corporation, as modified January 6,
      200610.1(4)
            
            Letter
      and Option agreement by and between Composite Technology Corporation and
      Michael Lee10.2(5)
            
            Form
      of 2002 Non-Qualified Stock Compensation Plan Master Option Agreement10.3(5)
            
            Form
      of 2002 Non-Qualified Stock Compensation Plan Stock Option Notice of
      Modification and Reissuance10.4(5)
            
            Form
      of 2008 Stock Option Plan Stock Option Grant Notice10.5(5)
            
            Form
      of 2008 Stock Option Plan Master Option
Agreement10.6(6)
            
            Loan
      Agreement dated as of June 30, 200910.7(6)
            
            Promissory
      Note dated as of June 30, 200910.8(6)
            
            Form
      of Warrant to purchase common stock10.9(6)
            
            Security
      Agreement dated as of June 30, 200910.10(6)
            
            Stock
      Pledge Agreement (including form of Irrevocable Proxy) dated as of June
      30, 200910.11(6)
            
            Subsidiary
      Guaranty dated as of June 30, 200910.12(6)
            
            Grant
      of Security Interest in Trademarks between the Lender and the Company
      dated as of June 30, 200910.13(6)
            
            Grant
      of Security Interest in Patents between the Lender and CTC Cable
      Corporation dated as of June 30, 200910.14(6)
            
            Grant
      of Security Interest in Copyright between the Lender and CTC Cable
      Corporation dated as of June 30, 200910.15(6)
            
            Grant
      of Security Interest in Trademarks between the Lender and CTC Cable
      Corporation dated as of June 30, 200910.16(6)
            
            Grant
      of Security Interest in Patents between the Lender and DeWind, Inc. dated
      as of June 30, 200931.1(7)
            
            Rule
      13a-14(a) / 15d-14(a)(4) Certification of Chief Executive
      Officer31.2(7)
            
            Rule
      13a-14(a) / 15d-14(a)(4) Certification of Chief Financial
      Officer32.1(7)
            
            Section
      1350 Certification of Chief Executive Officer32.2(7)
            
            Section
      1350 Certification of Chief Financial
Officer




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




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




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




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




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




(6) Incorporated
herein by reference to Form 8-K filed with the U.S. Securities and Exchange
Commission on July 7, 2009.








49




SIGNATURE





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





COMPOSITE
TECHNOLOGY CORPORATION


(Registrant)





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





August
10, 2009




50