COMPOSITE TECHNOLOGY CORP - FORM 10-Q

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, 2010

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

EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 0-10999

COMPOSITE TECHNOLOGY CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

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

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

(949) 428-8500

(Registrant's Telephone Number, Including Area Code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES o NO o

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

Large accelerated filer o	Accelerated filer x
Non-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 9, 2010

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

COMPOSITE TECHNOLOGY CORPORATION

Form 10-Q for the Quarter ended June 30, 2010

Table of Contents

	Page
PART I – FINANCIAL INFORMATION
Item 1 Financial Statements	3
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3 Quantitative and Qualitative Disclosures About Market Risk	36
Item 4 Controls and Procedures	36

PART II – OTHER INFORMATION
Item 1 Legal Proceedings	38
Item 1A Risk Factors	38
Item 2 Unregistered Sales of Equity Securities and the Use of Proceeds	39
Item 3 Defaults Upon Senior Securities	39
Item 4 (Removed and Reserved)	39
Item 5 Other Information	39
Item 6 Exhibits	40
SIGNATURES	41
EXHIBITS

PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements

COMPOSITE TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS)

	June 30, 2010			September 30, 2009
	(unaudited)
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents	$	7,382		$	23,968
Restricted Cash, Current Portion (Note 2)		5,500			5,500
Accounts Receivable, net of reserve of $87 and $81		950			1,732
Inventory, net of reserve of $1,179 and $923		3,292			4,378
Prepaid Expenses and Other Current Assets		1,225			959
Current Assets of Discontinued Operations (Note 2)		1,453			2,522
Total Current Assets		19,802			39,059

Property and Equipment, net of accumulated depreciation of $2,600 and $3,766		2,935			3,214
Restricted Cash, Non-Current (Note 2)		11,688			11,675
Other Assets		894			891
TOTAL ASSETS	$	35,319		$	54,839

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts Payable and Other Accrued Liabilities	$	5,480		$	7,217
Deferred Revenues and Customer Advances		1,470			16
Warranty Provision		327			258
Derivative Liabilities – Current (Note 1)		31			—
Notes Payable – Current, net of discount of $0 and $315		—			8,723
Current Liabilities of Discontinued Operations (Note 2)		36,182			43,469
Total Current Liabilities		43,490			59,683

LONG-TERM LIABILITIES
Long Term Portion of Deferred Revenues		545			561
Long-Term Portion of Warranty Provision		286			306
Derivative Liabilities – Long-Term (Note 1)		1,596			—
Long-Term Debt, net of discount of $1,214 and $0		8,786			—
Non-Current Liabilities of Discontinued Operations (Note 2)		806			1,120
Total Long-Term Liabilities		12,019			1,987
Total Liabilities		55,509			61,670

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS’ EQUITY (DEFICIT)
Common Stock, $.001 par value 600,000,000 shares authorized 288,269,660 and 288,088,370 issued and outstanding		288			288
Additional Paid-in Capital		251,625			259,755
Accumulated Deficit		(272,103	)		(266,874	)
Total Shareholders’ (Deficit)		(20,190	)		(6,831	)
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)	$	35,319		$	54,839

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

COMPOSITE TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

(UNAUDITED)

	Three Months Ended June 30,						Nine Months Ended June 30,
	2010			2009			2010			2009

Revenue	$	583		$	3,562		$	7,536		$	14,124

Cost of Revenue		742			2,931			6,466			10,063
Gross Profit (Loss)		(159	)		631			1,070			4,061

OPERATING EXPENSES
Officer Compensation		546			771			1,931			2,527
General and Administrative		2,824			2,162			9,814			6,629
Research and Development		499			499			1,645			1,910
Sales and Marketing		1,505			1,108			4,489			3,856
Depreciation & Amortization		101			93			360			274
Total Operating Expenses		5,475			4,633			18,239			15,196
LOSS FROM OPERATIONS		(5,634	)		(4,002	)		(17,169	)		(11,135	)

OTHER INCOME / (EXPENSE)
Interest Expense		(613	)		(461	)		(1,681	)		(1,371	)
Interest Income		6			2			27			16
Other Expense		(136	)		(8	)		(400	)		(8	)
Change in Fair Value of Derivative Liabilities (Note 1)		597			—			1,437			—
Total Other Income / (Expense)		(146	)		(467	)		(617	)		(1,363	)

Loss from Continuing Operations before Income Taxes		(5,780	)		(4,469	)		(17,786	)		(12,498	)
Income Tax Expense		—			—			14			4
NET LOSS FROM CONTINUING OPERATIONS		(5,780	)		(4,469	)		(17,800	)		(12,502	)

Income (Loss) from Discontinued Operations, net of tax of $0, $0, $1 and $(8) (Note 2)		2,376			(22,456	)		3,460			(33,413	)
NET LOSS		(3,404	)		(26,925	)		(14,340	)		(45,915	)

OTHER COMPREHENSIVE INCOME (LOSS)
Foreign Currency Translation Adjustment:
Unrealized Holding Gain (Loss) Arising During Period		—			(1,566	)		—			658
Other Comprehensive Income (Loss), net of tax of $0, $0, $0 and $0		—			(1,566	)		—			658
COMPREHENSIVE LOSS	$	(3,404	)	$	(28,491	)	$	(14,340	)	$	(45,257	)

BASIC AND DILUTED LOSS PER SHARE
Loss per share from continuing operations	$	(0.02	)	$	(0.01	)	$	(0.06	)	$	(0.04	)
Income (loss) per share from discontinued operations	$	0.01		$	(0.08	)	$	0.01		$	(0.12	)
TOTAL BASIC AND DILUTED LOSS PER SHARE	$	(0.01	)	$	(0.09	)	$	(0.05	)	$	(0.16	)
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING		288,269,660			287,988,370			288,201,292			287,988,370

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

COMPOSITE TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

	Nine Months Ended June 30,
	2010			2009

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(14,204	)	$	(45,915	)
(Income) loss from discontinued operations		(3,460	)		33,413
Adjustments to reconcile net loss to net cash used in operating activities:
Interest and deferred finance charge amortization related to detachable warrants and fixed conversion features		881			818
Depreciation & amortization		486			722
Share-based compensation		2,085			3,762
Amortization of prepaid expenses paid in stock/warrants		204			246
Issuance of warrants for services		57			22
Issuance of stock for services		45			—
Expense related to modification of stock warrants		—			7
Change in fair value of derivative liabilities		(1,437	)		—
Bad debt expense		32			—
Inventory reserve expense and inventory impairment charges		1,166			171
Loss on disposal of fixed assets		90			—
Loss on foreign exchange		(136	)		—
Changes in Assets / Liabilities:
Accounts receivable		750			1,454
Inventory		(79	)		820
Prepaids and other current assets		(283	)		(251	)
Other assets		34			61
Accounts payable and other accruals		(1,738	)		484
Deferred revenue		1,438			(166	)
Accrued warranty liability		50			145
Net assets/liabilities of discontinued operations		(2,982	)		(10,927	)
Cash used in operating activities – continuing operations		(17,001	)		(15,134	)
Cash used in operating activities – discontinued operations		—			(4,687	)
Net cash used in operating activities	$	(17,001	)	$	(19,821	)

CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property and equipment	$	(195	)	$	(710	)
Restricted cash		(13	)		693
Cash used in investing activities – continuing operations		(208	)		(17	)
Cash used in investing activities – discontinued operations		—			(806	)
Net cash used in investing activities	$	(208	)	$	(823	)

CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options	$	7		$	—
Proceeds from senior secured debt agreements (net of fees of $347 and $295)		9,653			4,705
Repayment of notes payable		(9,037	)		—
Net cash provided by financing activities	$	623		$	4,705
Total net decrease in cash and cash equivalents	$	(16,586	)	$	(15,939	)
Cash and cash equivalents at beginning of period		23,968			23,085
Cash and cash equivalents at end of period	$	7,382		$	7,146

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
INTEREST PAID	$	706		$	560
INCOME TAX PAID	$	14		$	3

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

SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:

During the nine months ended June 30, 2010, the Company:

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

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

Issued 600,000 warrants at an exercise price of $0.35 per share valued at $95,000 in connection with an ongoing service agreement. The Company recorded $16,000 to general and administrative expense related to services rendered during the nine months ended June 30, 2010.

Issued 10,000,000 warrants (5 million at an exercise price of $0.29 per share and 5 million at an exercise price of $1.00 per share) for an aggregate value of $1,494,000 in connection with the April 2010 debt financing transaction. The Company recorded $1,488,000 (net of $6,000 in cash consideration) as a debt discount. See Note 8.

During the nine months ended June 30, 2009, the Company:

Issued 150,000 warrants at an exercise price of $0.96 per share in settlement of a disputed financing fee related to the May, 2008 debt financing.

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

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.

COMPOSITE TECHNOLOGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

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

BASIS OF PRESENTATION AND PRINCIPALS OF CONSOLIDATION

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not contain all of the information and footnotes required for complete financial statements. Interim information is unaudited, however, in the opinion of the Company's management, the accompanying unaudited, consolidated financial statements reflect all adjustments (consisting of normal, recurring adjustments) considered necessary for a fair presentation of the Company's interim financial information. These financial statements and notes should be read in conjunction with the audited consolidated financial statements of the Company included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2009, filed with the Securities and Exchange Commission (SEC) on December 14, 2009.

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

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

DISCONTINUED OPERATIONS AND SALE OF DEWIND

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

REVENUE RECOGNITION

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

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

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

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

CTC Cable sales for the three and nine months ended June 30, 2010 and 2009 consisted of stranded ACCC® conductor and ACCC® hardware sold to end user utilities and sales of ACCC® conductor core and ACCC® hardware to our stranding manufacturers. All ACCC® product related sales were recognized upon delivery of product and transfer of title. For ACCC® conductor product sales made directly by us and not through a manufacturer or distributor, through a third-party insurance company, we provide the option to purchase an extended warranty for periods up to five, seven or ten years. We allocate a portion of sales proceeds to the estimated fair value of the cost to provide such a warranty. To date, most of our ACCC® related product sales have been without warranty coverage.

CONSULTING REVENUE. Consulting revenues are generally recognized as the consulting services are provided. We have entered into service contract agreements with electric utility and utility services companies that generally require us to provide engineering or design services, often in conjunction with current or future product sales. In return, we receive engineering service fees payable in cash. For the three and nine months ended June 30, 2010 and 2009, we recognized no consulting revenues.

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

WARRANTY PROVISIONS

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

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

USE OF ESTIMATES

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

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

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

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

the assumptions used to calculate fair value of our share-based compensation and derivative liabilities, primarily the volatility component of the Black-Scholes-Merton (Black-Scholes) 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, forfeiture rates over time, as well as the estimate of the option life.

the estimates and assumptions used to determine the settlement of certain accounts related to the sale of the DeWind assets for which a final accounting has not been completed and which may result in the increase or decrease of asset reserves or increase or decrease of accrued liabilities, principally penalty payments, interest, and other costs associated with the turbine parts suppliers for DeWind turbine parts. See related discussion at Note 2.

DERIVATIVE FINANCIAL INSTRUMENTS

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

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

	Nine Months Ended
	June 30,
	2010			2009
Risk Free Rate of Return		0.82-2.60	%		0.50-2.54	%
Volatility		95.0-108	%		75-116	%
Dividend yield		0	%		0	%
Expected life	2-5 yrs			.5-5 yrs

Derivative Liabilities and Change in Accounting Principle

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

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

For the three and nine months ended June 30, 2010, we recognized gains of $597,000 and $1,437,000, respectively, related to the revaluation of our derivative liabilities. The 2010 revaluation gains resulted mainly from the decrease in our stock price from the prior year and from expired arrangements during the year.

In connection with the warrants issued to investors as discussed above, the Company has issued warrants to compensate for financing fees and other service fees incurred. Such compensatory warrants are recorded at fair value in the same manner as non-compensatory warrants, however, the recognized expense is offset to additional paid-in-capital. Such warrants are considered equity transactions in accordance with US GAAP. Additionally, warrants issued without anti-dilution provisions are generally considered equity transactions in accordance with US GAAP. All of our outstanding warrants including those subject to liability accounting treatment are further discussed in Note 9.

Change in Accounting Principle

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

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

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

(A)

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

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

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

Share-Based Compensation

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

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

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

Additional information about share-based compensation is disclosed in Note 10.

Convertible Debt

Convertible debt is accounted for under specific guidelines established in US GAAP. The Company records a beneficial conversion feature (BCF) related to the issuance of convertible debt that have conversion features at fixed or adjustable rates that are in-the-money when issued and records the fair value of warrants issued with those instruments. The BCF for the convertible instruments is recognized and measured by allocating a portion of the proceeds to warrants and as a reduction to the carrying amount of the convertible instrument equal to the intrinsic value of the conversion features, both of which are credited to paid-in-capital or liabilities as appropriate. The Company calculates the fair value of warrants issued with the convertible instruments using the Black-Scholes valuation method, using the same assumptions used for valuing employee options, except that the contractual life of the warrant is used. Upon each issuance, the Company evaluates the variable conversion features and determines the appropriate accounting treatment as either equity or liability, in accordance with US GAAP. The Company first allocates the value of the proceeds received to the convertible instrument and any other detachable instruments (such as detachable warrants) on a relative fair value basis and then determines the amount of any BCF based on effective conversion price to measure the intrinsic value, if any, of the embedded conversion option. Using the effective yield method, the allocated fair value is recorded as a debt discount or premium and is amortized over the expected term of the convertible debt to interest expense. For a conversion price change of a convertible debt issue, the additional intrinsic value of the debt conversion feature, calculated as the number of additional shares issuable due to a conversion price change multiplied by the previous conversion price, is recorded as additional debt discount and amortized over the remaining life of the debt. As of June 30, 2010 we had no convertible debt outstanding.

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

CASH AND CASH EQUIVALENTS

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

RESTRICTED CASH

The Company considers cash to be restricted cash if it is cash on deposit under control of the Company that secures standby letters of credit and other payment guarantees for certain vendors, as well as cash held in jointly controlled escrow accounts. As of June 30, 2010 and September 30, 2009, restricted cash consisted of cash held in escrow in connection with the sale of DeWind as discussed in Note 2, amounting to $17,188,000 and $17,175,000, respectively. During the nine months ended June 30, 2010, we reported an additional $13,000 from interest income, in accordance with the escrow agreement.

ACCOUNTS RECEIVABLE

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

CONCENTRATIONS OF CREDIT RISK

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

INVENTORIES

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

PROPERTY AND EQUIPMENT

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

Change in Accounting Estimate

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

IMPAIRMENT OF LONG-LIVED ASSETS

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

We did not recognize any impairment charges during the nine months ended June 30, 2010 and 2009, respectively.

FAIR VALUE MEASUREMENTS

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

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

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

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Inputs are based on management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

As of June 30, 2010, the Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis. The fair value of these assets and liabilities was determined using the following inputs:

(Unaudited, In Thousands)
Description	Total		Level 1		Level 2		Level 3
Cash deposits (1)	$	66	$	66	$	—	$	—
Restricted cash (Note 2)		17,188		17,188		—		—
Total assets	$	17,254	$	17,254	$	—	$	—

Derivative liabilities	$	1,627	$	—	$	—	$	1,627

(1)

Short-term certificates of deposit and money market accounts included in cash and cash equivalents in our consolidated balance sheet.

During the nine months ended June 30, 2010, there were no transfers into or out of Levels 1 and 2. Financial instruments classified as Level 3 in the fair value hierarchy as of June 30, 2010 include derivative liabilities resulting from recent financing transactions. In accordance with current accounting rules, the derivative liabilities are being marked-to-market each quarter-end until they are completely settled or expire. The derivative liabilities are valued using the Black-Scholes valuation model, using both observable and unobservable inputs and assumptions consistent with those used in our estimate of fair value of employee stock options. See “Derivative Liabilities” above in Note 1.

The following table summarizes our fair value measurements using significant Level 3 inputs, and changes therein, for the nine months ended June 30, 2010:

(Unaudited, In Thousands)	Level 3 Derivative Liabilities
Balance as of October 1, 2009	$	1,570
Transfers into/out of Level 3		—
Initial valuation of derivative liabilities (1)		1,494
Change in fair value of derivative liabilities - expired		(221	)
Change in fair value of derivative liabilities - held		(1,216	)
Balance as of June 30, 2010	$	1,627

(1)

During the nine months ended June 30, 2010, we issued warrants in connection with a debt financing transaction, which are subject to derivative liability accounting (see Note 9 “Warrants” for additional information).

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

FAIR VALUE INFORMATION ABOUT FINANCIAL INSTRUMENTS

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

FOREIGN CURRENCY TRANSLATION

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

COMPREHENSIVE LOSS

Comprehensive loss includes all changes in shareholders’ equity (deficit) except those resulting from investments by, and distributions to, shareholders. Accordingly, the Company’s Consolidated Statements of Comprehensive Loss include net loss and foreign currency translation adjustments that arise from the translation of foreign currency financial statements into U.S. dollars. For both the three and nine months ended June 30, 2010, we reported no Other Comprehensive Loss from continuing operations. For the three and nine months ended June 30, 2009, we reported Other Comprehensive Income (Loss) from discontinued operations foreign currency translation adjustments of $(1,566,000) and $658,000, respectively.

In connection with the sale of DeWind and resulting discontinued operations (see Note 2), our Consolidated Statement of Operations and Comprehensive Loss for the year ended September 30, 2009 included a reclassification adjustment of the accumulated foreign currency translation adjustments for DeWind through September 4, 2009 (date of sale), to recognize the accumulated adjustments as a component of the loss from discontinued operations within net loss. Since inception, other comprehensive income (loss) had been derived from DeWind foreign currency translation adjustments. For the three and nine months ended June 30, 2010, other comprehensive income in the amounts of $2,921,000 and $5,611,000, respectively, derived from DeWind foreign currency translation adjustments, has been recognized and included as a component of the Income (Loss) from Discontinued Operations within Net Loss.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses are charged to operations as incurred.

START-UP COSTS

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

During the three and nine months ended June 30, 2010, we recorded start-up expenses in the amounts of $10,000 and $169,000, respectively, which are included in general and administrative expenses. Our start-up activities related to professional fees for organization costs incurred. No start-up expenses were incurred during fiscal 2009.

DEFINED CONTRIBUTION PLAN

The Company maintains a 401(k) plan covering substantially all of its employees who are at least 21 years old with 1,000 hours of service. Such employees are eligible to contribute a percentage of their annual eligible compensation and receive discretionary Company matching contributions. Discretionary Company matching contributions are determined by the Board of Directors and may be in the form of cash or Company stock. To date, the Company has not made any matching contributions in either cash or Company stock. There were no changes to the 401 (k) plan during the nine months ended June 30, 2010.

INCOME TAXES

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

No provisions for income taxes were made for the three months ended June 30, 2010 and 2009, respectively. We made provisions for income taxes of $14,000 and $4,000 for the nine months ended June 30, 2010 and 2009, respectively. We have determined that due to our continuing operating losses as well as the uncertainty of the timing of profitability in future periods, we should fully reserve our deferred tax assets. As of June 30, 2010, our deferred tax assets continued to be fully reserved. We will continue to evaluate, on a quarterly basis, the positive and negative evidence affecting our ability to realize our deferred tax assets.

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

The Company recognizes potential accrued interest and penalties related to uncertain tax positions in income tax expense, as appropriate. During the three and nine months ended June 30, 2010 and 2009, the Company did not recognize any amount of income tax expense from potential interest and penalties associated with uncertain tax positions.

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

During fiscal 2008, the Company’s federal returns were selected for examination by the Internal Revenue Service (IRS) for prior fiscals years ended September 30, 2001 through 2005, all years in which net losses were reported and filed. The examination has been completed. During the quarter ended December 31, 2009, the IRS proposed certain preliminary adjustments related to payroll tax returns filed during the period under audit. No adjustments were proposed in connection with our previously filed federal income tax returns. Based on the preliminary IRS findings, the Company recorded a payroll tax liability in the amount of $1,008,000, which was allocated to General and Administrative Expense ($560,000), Interest Expense ($277,000) and Other Expense from penalties ($171,000), during the three months ended December 31, 2009. During the quarter ended June 30, 2010, the Company received a final determination of adjustment from the IRS. Accordingly, the Company has begun making payments relating to the assessment arising from the 2001 through 2005 payroll tax audits, which have totaled $285,000 to date. As of June 30, 2010, the remaining payroll tax liability is $723,000, included as a component of Accounts Payable and Accrued Liabilities (see Note 6). During the fourth quarter ending September 30, 2010, the IRS is expected to provide further adjustment to interest and penalties and a final payment schedule, however based on the information available today, our existing provisions are adequate.

LOSS PER SHARE

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

The following common stock equivalents were excluded from the calculation of diluted loss per share for the three and nine months ended June 30, 2010 and 2009 since their effect would have been anti-dilutive (assumes all outstanding options and warrants are in-the-money):

(Unaudited)	June 30,
	2010		2009
Options for common stock		26,816,024		26,611,499
Warrants for common stock		17,900,000		22,934,649
Convertible Debentures, if converted		—		9,037,280
		44,716,024		58,583,428

RECLASSIFICATIONS

Certain prior year balances have been reclassified to conform to the current period presentation. Additionally, as discussed in Note 2, we have classified all operations of our former DeWind segment as discontinued operations. During the three and nine months ended June 30, 2010, we reclassified production equipment dies valued at $103,000 from other current assets to property and equipment based on management’s re-evaluation of its estimated useful life.

RECENT ACCOUNTING PRONOUNCEMENTS

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

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

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

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

Significant recent accounting policies adopted or implemented during the nine months ended June 30, 2010

On October 1, 2009, we adopted a new FASB rule that revises existing business combination rules. The new rule requires most identifiable assets, liabilities, non-controlling interests, and goodwill acquired in a business combination to be recorded at “full fair value.” The new rule applies to all business combinations, including combinations among mutual entities and combinations by contract alone. Additionally, all business combinations will be accounted for by applying the acquisition method. The new rule was effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of this standard did not have an impact on our consolidated financial statements.

On October 1, 2009, we adopted new FASB rules related to accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies. The new rules apply to all assets acquired and liabilities assumed in a business combination that arise from certain contingencies as defined by the FASB and requires (i) an acquirer to recognize at fair value, at the acquisition date, an asset acquired or liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of that asset or liability can be determined during the measurement period, otherwise the asset or liability should be recognized at the acquisition date if certain defined criteria are met; (ii) contingent consideration arrangements of an acquiree assumed by the acquirer in a business combination be recognized initially at fair value; (iii) subsequent measurements of assets and liabilities arising from contingencies be based on a systematic and rational method depending on their nature and contingent consideration arrangements be measured subsequently; and (iv) disclosures of the amounts and measurement basis of such assets and liabilities and the nature of the contingencies. The new rules were effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of this standard did not have an impact on our consolidated financial statements.

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

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

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

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

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

NOTE 2 – DISCONTINUED OPERATIONS AND SALE OF DEWIND

As of June 30, 2010, all operations of our former DeWind segment have been classified as discontinued operations.

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

The sale of DeWind was valued at $49.5 million in cash. The Company received approximately $32.3 million in cash with $17.2 million in cash escrowed to cover certain contingent liabilities. Of the escrowed cash, $5.5 million is expected to be released within one year after the achievement of certain milestones and $11.7 million is expected to be released over time periods that may be as late as 2012 under certain conditions. The purchase price is further subject to adjustment based on delivery of the value of the assets transferred net of liabilities assumed. The Company has placed the $17.2 million in cash in escrow to indemnify the buyer if claims are made against them by third parties and those claims are determined to be valid and enforceable. Our intention is to vigorously defend against any such claims should they occur. Defense of such claims may result in additional costs to maintain the Company’s interest in the restricted cash or to limit potential liability. In the event that claims are successful, the balance payable to the buyer may include all, part, or cash amounts in excess of the $17.2 million escrowed, including potentially an additional $17.7 million up to a total of $34.9 million under certain conditions, which are not expected by the Company. If such claims are successfully made, this would result in additional losses on the DeWind sale transaction and could require a substantial refund of the proceeds received. The Company believes the $17.2 million in escrow will be released per the terms of the agreement. Accordingly, at June 30, 2010, we have classified the $17.2 million held in escrow as restricted cash, with $5.5 million as current and $11.7 million as long-term (see Note 1 “Restricted Cash”).

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

(In Thousands)	June 30, 2010			September 30, 2009
	(unaudited)
ASSETS
Accounts Receivable, net	$	1,035		$	2,461
Prepaid Expenses and Other Current Assets		418			61
TOTAL ASSETS	$	1,453		$	2,522

LIABILITIES
Accounts Payable and Other Accrued Liabilities	$	33,034		$	39,356
Deferred Revenues and Customer Advances		2,207			2,869
Warranty Provision		941			1,244
Total Current Liabilities		36,182			43,469
Long-Term Portion of Warranty Provision		806			1,120
Total Liabilities		36,988			44,589

Net Liabilities of Discontinued Operations	$	(35,535	)	$	(42,067	)

Except for former intercompany loans, significantly all of the assets and liabilities of the discontinued operations pertain to activities outside of the United States, primarily for turbines sold and installed in Europe and South America and technology licenses to Chinese customers. At June 30, 2010 and September 30, 2009, included above in Accounts Payable and Other Accrued Liabilities are net payables related to formerly consolidated, now insolvent European subsidiaries of approximately $18 million and $22 million, respectively, substantially all of which has been assigned by the insolvency receiver to a third party. As of June 30, 2010, the net payables from insolvent subsidiaries are comprised of assets in the amount of $7 million and liabilities in the amount of $25 million. We did not receive an update from the insolvency receiver related to the assets and liabilities for the insolvent subsidiaries during the quarter ended June 30, 2010.

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

	Three Months Ended June 30,						Nine Months Ended June 30,
(Unaudited, In Thousands)	2010				2009			2010			2009
Revenues	$	5		$	431		$	1,466		$	16,362
Cost of Revenues		435			959			2,094			18,795
Operating Expenses		119			21,960			1,538			31,043
Other (Income) Expense		(2,925	)		(32	)		(5,627	)		(55	)
Income Tax Expense (Benefit)		—			—			1			(8	)
Income (Loss) from Discontinued Operations	$	2,376		$	(22,456	)	$	3,460		$	(33,413	)

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

On December 4, 2009, DSME provided the Company with a preliminary net asset value calculation in accordance with the terms and conditions of the Asset Purchase Agreement dated September 4, 2009. The Company responded with an adjusted net asset value calculation on December 16, 2009. In January 2010, the Company and DSME had a series of meetings to discuss the differences. Negotiations and resolution of all differences continued during the June 2010 quarter. In July 2010, the Company received $836,000 of the escrowed cash with $16.4 million remaining in escrow.

NOTE 3 - ACCOUNTS RECEIVABLE

Accounts receivable, net consists of the following:

(In Thousands)	June 30, 2010			September 30, 2009
	(unaudited)
Cable Receivables	$	1,037		$	1,813
Reserves		(87	)		(81	)
Net Accounts Receivable	$	950		$	1,732

NOTE 4 – INVENTORY

Inventories consist of the following:

(In Thousands)	June 30, 2010			September 30, 2009
	(unaudited)
Raw Materials	$	1,853		$	2,040
Work-in-Progress		136			—
Finished Goods		2,482			3,261
Gross Inventory		4,471			5,301
Reserves		(1,179	)		(923	)
Net Inventory	$	3,292		$	4,378

NOTE 5 – PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

(In Thousands)	Estimated Useful Lives		June 30, 2010			September 30, 2009
			(unaudited)
Office Furniture and Equipment		3-10 yrs	$	794		$	936
Production Equipment		10-20 yrs		3,983			4,994
Construction-in-Progress		—		—			302
Leasehold Improvements	Lesser of lease term or 7 yrs			758			748
Total Property				5,535			6,980
Accumulated Depreciation				(2,600	)		(3,766	)
Property and Equipment, net			$	2,935		$	3,214

Depreciation expense was $168,000 and $486,000, for the three and nine months ended June 30, 2010, respectively. Depreciation expense was $257,000 and $722,000, for the three and nine months ended June 30, 2009, respectively. As of October 1, 2009, the Company changed its method of depreciating production equipment, which included applying an estimated useful life of 10-20 years as compared to a range of 3-10 years applied in prior periods. Refer to discussion in Note 1 “Property and Equipment – Change in Accounting Estimate”.

NOTE 6 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consisted of the following:

(In Thousands)	June 30, 2010		September 30, 2009
	(unaudited)
Trade Payables	$	1,990	$	4,179
Accrued Commissions		664		667
Accrued Insurance		97		441
Accrued Payroll and Payroll Related		842		541
Accrued Payroll Tax Liability (A)		723		—
Accrued Interest		—		183
Deferred Rents		246		133
Accrued Sales Tax		128		128
Accrued Other		790		945
Total Accounts Payable and Accrued Liabilities	$	5,480	$	7,217

(A)

During the nine months ended June 30 2010, the Company accrued a payroll tax liability as a result of an IRS audit (see “Income Taxes” in Note 1 for additional information).

NOTE 7 – DEFERRED REVENUES AND CUSTOMER ADVANCES

The Company records all cash proceeds received from customers on orders and extended warranties, as opted by the customer, to deferred revenues and customer advances until such time as the revenue cycle is completed and the amounts are recognized into revenues. Deferred revenues and customer advances consist of the following:

(In Thousands)	June 30, 2010		September 30, 2009
	(unaudited)
Deferred Revenues	$	1,368	$	563
Customer Advances		647		14
Total Deferred Revenues and Customer Advances		2,015		577
Less amount classified in current liabilities		1,470		16
Long-term Deferred Revenues	$	545	$	561

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

NOTE 8 – DEBT

The following table summarizes the Company’s debt structure as of June 30, 2010 and September 30, 2009:

(In Thousands)	June 30, 2010		September 30, 2009

Senior Secured Loan due April 2012, net discount of $1,214 and $0	$	8,786	$	—
Senior Convertible 8% Notes due January 2010, net discount of $0 and $315		—		8,723
Total Debt		8,786		8,723
Less amount classified in current liabilities		—		8,723
Long-Term Debt	$	8,786	$	—

Debt outstanding or issued during the nine months ended June 30, 2010 consists of:

In April 2010, the Company issued a $10.0 million Senior Secured Loan due in April 2012 and received $9.7 million in cash net of fees and costs of $0.3 million. The loan bears interest at 7.5% payable monthly on balances secured by qualified accounts receivable of the Company and interest at 12.5% payable monthly on balances not secured by qualified accounts receivable. Qualified accounts receivable consist of 80% of current trade accounts receivable. The loan package included an issuance of a total of 10 million warrants to purchase a like number of the Company’s common stock in two tranches. The first tranche is for 5 million warrants with a three year life and an exercise price of $0.29 per warrant. The second tranche is for 5 million warrants with a five year life and an exercise price of $1.00 per warrant. Both warrant tranches may be exercised at any time prior to expiration on a cashless basis and are automatically exercised at expiration on a cashless basis for shares of the Company. We valued the 10 million warrants at $1,494,000 using the Black-Scholes option-pricing model (see Note 9 “Warrants”). The value assigned to the warrants issued (net of $6,000 in cash consideration) was recorded as a debt discount and will be amortized to interest expense over the two-year life of the loan.

The issuance of the warrants triggered anti-dilution protection in one series of previously issued warrants. Previously outstanding warrants with exercise prices of $0.95 and $0.98 and which expire in May, 2011 were reset by $0.01 per warrant. We determined this modification, calculated as the difference in fair value of the warrants immediately before and after the change in exercise prices, had no significant impact on our results.

The loan has two financial covenants, measured monthly consisting of i) a liquidity covenant and ii) a profitability covenant. The liquidity covenant requires the maintenance of a minimum of $7.5 million of combined cash and accounts receivable balances, measured at month-end. The profitability covenant consists of a maximum accumulated adjusted operating loss of $5.0 million, measured beginning April 1, 2010. The adjusted operating loss consists of operating loss, less depreciation, amortization, and certain other non-cash charges including stock related compensation and increased or decreased by the corresponding increase or decrease in deferred revenues as compared to the March 31, 2010 deferred revenue balance. As of June 30, 2010, the Company was in compliance with its debt covenants.

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

In January 2010 the Company repaid in full all outstanding Senior Convertible 8% Notes payable. A total of $9,037,000 plus interest for the month of January 2010 was repaid.

NOTE 9 – SHAREHOLDERS’ EQUITY (DEFICIT)

COMMON STOCK

The following issuances of common stock were made during the nine months ended June 30, 2010:

CASH

During the nine months ended June 30, 2010 the Company received $7,000 in cash from the exercise of 20,000 consultant options.

SERVICES

During the nine months ended June 30, 2010 the Company issued 161,290 shares of common stock to John Brewster, former CTC Cable President valued at $45,000 at the date of issuance in partial payment of an employment acceptance bonus.

WARRANTS

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

The following table summarizes the Warrant activity for the nine months ended June 30, 2010:

(Unaudited)	Number of Warrants			Weighted-Average Exercise Price
Outstanding, September 30, 2009		22,934,649		$	0.95
Granted		10,900,000			0.62
Exercised		—			—
Cancelled		(15,934,649	)		1.11
OUTSTANDING, June 30, 2010		17,900,000		$	0.59

EXERCISABLE, June 30, 2010		17,500,000		$	0.59

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

Dividend rate = 0%

Risk free return of 0.82%

Volatility of 108%

Market price of $0.37 per share

Maturity of 2 years

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

Dividend rate = 0%

Risk free return of 1.40%

Volatility of 98%

Market price of $0.28 per share

Maturity of 3 years

On April 12, 2010 we issued 10,000,000 warrants in two tranches in connection with a debt financing transaction. The first tranche is for 5 million warrants with a three-year life and an exercise price of $0.29 per warrant. The second tranche is for 5 million warrants with a five-year life and an exercise price of $1.00 per warrant. Both warrant tranches may be exercised at any time prior to expiration on a cashless basis and are automatically exercised at expiration on a cashless basis for shares of the Company. We have determined these warrants are subject to derivative liability accounting treatment as discussed in Note 1 “Derivative Liabilities”. The issuance of the warrants triggered anti-dilution protection in one series of previously issued warrants. Previously outstanding warrants with exercise prices of $0.95 and $0.98 and which expire in May, 2011 were reset by $0.01 per warrant. We determined this modification, calculated as the difference in fair value of the warrants immediately before and after the change in exercise prices, had no significant impact on our results. We valued the 10 million warrants at $1,494,000 using the Black-Scholes option-pricing model and the following assumptions:

Dividend rate = 0%

Risk free return of 1.65% and 2.60%

Volatility of 95%

Market price of $0.27 per share

Maturity of 3 and 5 years

Management has reviewed and assessed the warrants issued during the nine months ended June 30, 2010 and, except for the April 12, 2010 warrants, determined that they do not qualify for treatment as derivatives under applicable US GAAP rules.

NOTE 10 – SHARE-BASED COMPENSATION

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

The values of the financial instruments are estimated using the Black-Scholes option-pricing model. Key assumptions used during the nine months ended June 30, 2010 and 2009 to value options granted are as follows:

	Nine Months Ended
	June 30,
	2010			2009
Risk Free Rate of Return		2.00-2.58	%		1.67-2.54	%
Volatility		95.6	%		88-95.6	%
Dividend yield		0	%		0	%
Expected life	5 years			5 years

Our computation of expected volatility for the nine months ended June 30, 2010 is based on historical volatility over the expected life of the options granted. Our computation of expected life is based on historical exercise patterns pursuant to SEC guidelines. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant.

Share-based compensation included in the results of operations for the three and nine months ended June 30, 2010 and 2009 is as follows:

	Three Months Ended June 30,				Nine Months Ended June 30,
(Unaudited, In Thousands)	2010			2009		2010		2009
Cost of Product Sold	$	23	$	18	$	78	$	63
Officer Compensation		259		528		946		1,789
Selling and marketing		84		100		273		546
Research and development		10		146		76		647
General and administrative		220		170		712		717
Totals	$	596	$	962	$	2,085	$	3,762

The Company recorded zero and $89,000 of equity-based compensation into discontinued operations for the three and nine months ended June 30, 2010, respectively. The Company recorded $151,000 and $823,000 of equity-based compensation into discontinued operations for the three and nine months ended June 30, 2009, respectively.

As of June 30, 2010, there was $2.4 million of total unrecognized compensation cost related to unamortized accrued share-based compensation arrangements related to outstanding employee stock options. The costs are expected to be recognized over a weighted-average period of 1.8 years. For the remainder of fiscal 2010, we expect share-based compensation expense related to employee stock options of $537,000 before income taxes. Such amounts may change as a result of additional grants, forfeitures, modifications in assumptions and other factors.

Significantly all of our existing options are subject to time of service vesting. Our stock options vest either on an annual or a quarterly basis for options subject to time of service vesting, or on specific performance measurements for option vesting tied to performance criteria. Compensation cost is generally calculated on a daily basis over the requisite service period incorporating actual vesting period dates, and includes expected forfeiture rates between 0% and 15%.

Certain options granted under the 2008 Plan may be exercised at any time for restricted stock of the Company if not otherwise prohibited by the Company’s Board of Directors. Any 2008 Plan option exercises for unvested options have restricted stock issued that is earned according to the terms of the option agreement that gave rise to the restricted stock issuance. The Company has the right, but not the obligation, to repurchase restricted stock that is unearned as of the date of any optionee’s termination. As of June 30, 2010 all of the 2008 Plan option grants were exercisable. To date, no restricted stock has been issued under the 2008 Plan. Of the 2008 plan options exercisable, 4,257,756 options were vested and are exercisable into unrestricted stock.

The following table summarizes the Stock Plan stock option activity for the nine months ended June 30, 2010:

(Unaudited)	2002 Plan Number of Options			2008 Plan Number of Options			Total Number of Options			Average Exercise Price
Outstanding, September 30, 2009		16,212,156			9,688,808			25,900,964		$	0.35
Granted		—			3,765,000			3,765,000			0.35
Exercised		(20,000	)		—			(20,000	)		0.35
Cancelled		(52,291	)		(2,074,792	)		(2,127,083	)		0.35
Outstanding, June 30, 2010		16,139,865			11,379,016			27,518,881		$	0.35

Exercisable , June 30, 2010		15,437,008			11,379,016			26,816,024		$	0.35

The weighted-average remaining contractual life of the options outstanding at June 30, 2010 was 6.4 years. The exercise prices of the options outstanding at June 30, 2010 ranged from $0.25 to $1.00, and information relating to these options is as follows (unaudited):

Range of Exercise Prices	Stock Options Outstanding		Stock Options Exercisable		Weighted Average Remaining Contractual Life in years		Weighted Average Exercise Price of Options Outstanding		Weighted Average Exercise Price of Options Exercisable
$0.25-0.34		728,000		728,000		6.51	$	0.25	$	0.25
$0.35-$0.49		26,761,481		26,058,624		6.40	$	0.35	$	0.35
$0.50-$1.00		29,400		29,400		0.66	$	1.00	$	1.00
Total		27,518,881		26,816,024

NOTE 11 – LITIGATION

FKI PLC and FKI Engineering Ltd v. Stribog Ltd and De Wind GmbH

On or about January 21, 2010, FKI Engineering Ltd. and FKI Ltd., formerly FKI Plc., filed an action against Stribog Ltd., formerly DeWind Ltd., in the Commercial Court, Queen’s Bench Division, United Kingdom (Case No. 2010 Folio 61). FKI Engineering Ltd. and FKI Ltd.’s claim is brought pursuant to an assignment agreement executed by the German insolvency administrator of DeWind GmbH assigning to FKI Engineering Ltd. and FKI Ltd. the right to pursue claims on behalf of DeWind GmbH for amounts allegedly owed to DeWind GmbH by Stribog Ltd.. In particular, the claim alleges that Stribog Ltd. is in breach of an August 1, 2005 business transfer agreement where DeWind GmbH agreed to sell and Stribog Ltd. agreed to purchase the assets of DeWind GmbH. FKI Engineering Ltd. and FKI Ltd. claim that DeWind GmbH is owed approximately 46,681,543 Euros ($60,695,000 at July 27, 2010 exchange rates). Stribog Ltd. disputes that it owes any funds to DeWind GmbH and is vigorously contesting the validity of this allegation.

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

On September 18, 2009 the Company’s wholly owned subsidiary, Stribog Ltd. (formerly DeWind Ltd.), filed an action for a negative declaration in the Court of Lubeck, Germany against FKI Engineering Ltd. and FKI Ltd., formerly FKI Plc (“FKI”)(Case No. 17 O 256/09) to obtain a court’s declaration that FKI is not entitled to any rights to rescission and claims against Stribog Ltd. pursuant to an assignment agreement executed by the German insolvency administrator of DeWind GmbH assigning such alleged rights to FKI. In its defense FKI states (i) that the license agreement dated August 1, 2005 and the following transfer of those licenses for a purchase price of EUR 500,000 ($650,000 at July 27, 2010 exchange rates) from DeWind GmbH to Stribog Ltd. in August 2008 could be challenged, in particular as the transferred licenses would have a significant higher value and (ii) that claims for damages could arise from a sale and transfer agreement dated August 1, 2005. Any particular amount in this respect was not provided by FKI. The Company believes (i) that fair market value was paid for this intellectual property and the transaction were conducted at arm’s length, therefore any rights to rescission do not exist and (ii) that the assignment agreement is invalid. DeWind Ltd. has not recorded a liability as it is uncertain (i) whether the court decides that such rights to challenge the transfer exist or not and whether the assignment of such rights to FKI is valid and (ii) if the court decides that such rights can be claimed by FKI, whether FKI will challenge the transfer accordingly.

Composite Technology Corporation and CTC Cable Corporation v. Mercury Cable & Energy, LLC, Ronald Morris, Edward Skonezny, Wang Chen, and “Doe” Defendants 1-100 (“Mercury”)

On August 15, 2008 the Company filed suit in the Superior Court of the State of California, County of Orange, Central Justice Center (Case No. 30-2008 00110633) against the Mercury parties including multiple unknown “Doe” defendants, expected to be named in discovery proceedings, claiming Breach of Contract, Unfair Competition, Fraud, Intentional Interference with Contract, and Injunctive Relief. Several of the Mercury parties had filed a claim under the Company’s Chapter 11 bankruptcy proceedings which was settled during the bankruptcy and which provided for certain payments for sales made to China. The settlement agreement included non-compete agreements and stipulated the need to maintain confidentiality for the Company’s technology, processes, and business practices. The Company claims that the Mercury parties have taken actions, which violate the Settlement Agreement and the Bankruptcy Court Order, including the development of and attempting to market similar conductor products and misusing confidential information and the Company further claims that the Settlement Agreement was entered into with fraudulent intent. The Company claims that the Mercury parties engaged in unlawful, unfair, and deceptive conduct and that these actions were performed with malice and with intent to cause injury to the Company. Discovery is underway and trial is currently scheduled for September 20, 2010. It is likely this trial date will be extended.

CTC Cable Corporation v. Mercury Cable & Energy, LLC

March 3, 2009, CTC Cable filed action against Mercury Cable for patent infringement in the U.S. District Court, Central District of California, Southern Division (Case No. SACV 09-261 DOC (MLGx)). CTC Cable believes upon information that the Defendant has infringed, contributed to infringement of, and/or actively induced infringement by itself and/or through its agents, unlawfully and wrongfully making, using, offering to sell, and/or selling products and materials embodying the patented invention within and outside the United States without permission or license from CTC Cable. Until recently, the action was stayed pending reexamination of the patents at issue by the United States Patent and Trademark Office. The reexamination has now been completed and all original claims have been upheld with only minor amendments. No claims have been finally rejected. The discovery stay has now been lifted and CTC Cable is in process of discovery. CTC Cable has filed a motion to amend its complaint to add additional corporate and individual defendants to this action. CTC Cable’s motion to amend has not yet been ruled on by the Court.

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

On June 26, 2009 Mr. Brad Thomas, alleged to be a shareholder of the Company, filed a shareholder derivative complaint in the Superior Court of the State of California, County of Orange (Case No. 30-2009-00125211) for damages and equitable relief. The complaint asserts claims for negligence, gross negligence, breach of fiduciary duty, waste, mismanagement, gross mismanagement, abuse of control, negligent misrepresentation, intentional misrepresentation, fraudulent promise, constructive fraud, and violations of the California Corporations Code, and seeks an accounting, rescission and/or reformation. The complaint focuses on the Company’s acquisition of its DeWind subsidiary and also related self-interested transactions, accounting deficiencies and misstatements. Certain of the defendants are current directors and/or officers or past officers of the Company. Under the Company’s articles of incorporation and bylaws, the Company is obligated to provide for indemnification for director and officer liability. Such indemnification is covered by existing Directors and Officers insurance policies. On October 13, 2009, the Company and the individual defendants filed demurrers (motions to strike) to the Complaint on the grounds that Plaintiff Thomas did not make a written demand on the Company’s board of directors prior to filing the Complaint as required under Nevada law and that any decisions made by the individual director/office defendants in relation to the subject matter of the Complaint are protected under the business judgment rule. Prior to the scheduled hearing on the demurrer, Plaintiff Thomas filed a First Amended Complaint on or about November 11, 2009 naming three additional current board members. In addition, on October 20, 2009, the Company filed a Motion to Stay Discovery in this matter on the grounds that Plaintiff Thomas should not be permitted to conduct discovery until such time as the dispute over the sufficiency of the First Amended Complaint is decided by the Court. On January 22, 2010, the Company filed another demurrer (motion to strike) to the First Amended Complaint on the same grounds as the original demurrers. On January 27, 2010, the Court conducted a hearing on the merits of the demurrer and took the matter under submission. On March 8, 2010, the Court overruled the demurrer and lifted the stay on discovery. On March 25, 2010, Plaintiff Thomas filed a Second Amended Complaint containing substantially the same allegations against the individual defendants as the previous complaints. The Company has filed a responsive pleading to the Second Amended Complaint and the discovery process is underway. On July 19, 2010, the Company filed a Motion for Judgment on the Pleadings seeking to dismiss the action in its entirety. Trial of this matter is currently scheduled for November 8, 2010. The Company has not reserved any amounts for this litigation as the amounts are undeterminable and are further eligible for reimbursement under existing insurance policies.

NOTE 12 – SEGMENT INFORMATION

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

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

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

	Three Months Ended June 30,				Nine Months Ended June 30,
(Unaudited, In Thousands)	2010			2009		2010		2009
Europe	$	10	$	118	$	115	$	759
China		—		2,344		181		9,897
Other Asia		491		421		2,112		430
North America		6		270		3,613		2,099
South America		76		—		1,515		1
Mexico		—		409		—		938
Total Revenue	$	583	$	3,562	$	7,536	$	14,124

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

For the three months ended June 30, 2010, two customers represented 97% of revenue (one in Indonesia at 84% and one in Chile at 13%). For the nine months ended June 30, 2010, five customers represented 91% of revenue (two in the U.S. at 43%, two in Indonesia at 28% and one in Chile at 20%).

For the three months ended June 30, 2009, four customers represented 95% of revenue (one in China at 66%, one in Mexico at 11%, one in Indonesia at 12% and one in the U.S. at 6%). For the nine months ended June 30, 2009, four customers represented 90% of revenue (one in China at 70%, one in the U.S. at 8%, one in Mexico at 7% and one in Belgium at 5%). No other customer represented greater than 5% of consolidated revenue.

NOTE 13 – SUBSEQUENT EVENTS (Unaudited)

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

In July 2010, in connection with the DeWind asset sale (see Note 2), the Company received $836,000 of the escrowed (restricted) cash leaving $16.4 million remaining in escrow.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our interim financial statements and the related notes appearing at the beginning of this report. The interim financial statements and this Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the year ended September 30, 2009 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 14, 2009.

The following discussion and other parts of this Form 10-Q contain forward-looking statements that involve risks and uncertainties. Forward-looking statements can be identified by words such as “anticipates,” “expects,” “believes,” “plans,” and similar terms. Our actual results could differ materially from any future performance suggested in this report as a result of factors, including those discussed elsewhere in this report and in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009. All forward-looking statements are based on information currently available to Composite Technology Corporation and we assume no obligation to update such forward-looking statements, except as required by law. Service marks, trademarks and trade names referred to in this Form 10-Q are the property of their respective owners.

OVERVIEW

The financial results for the nine months ended June 30, 2010 reflected revenue declines over prior year periods caused by significant order reductions from customers in China, Mexico, and Europe. These declines were partially offset by order increases from North American, South American, and other Asian market customers. CTC Cable business growth slowed due to the continuing worldwide economic downturn that resulted in delays of several anticipated line projects that had specified ACCC® conductor in both new international markets and the United States. We had a decrease of ACCC® products shipped from 2,379 kilometers in the nine months ended June 30, 2009 to 641 kilometers in the nine months ended June 30, 2010. The decrease in shipments resulted in significant decreases in production levels during the quarter ended June 30, 2010 for our manufacturing plant in Irvine, California. While our individual sales at historical fiscal 2007 through 2009 standard costs were in line with historical margins, the historically low utilization of our plant resulted in a much less efficient allocation of our fixed overhead and trained production labor force. If order levels and production levels increase in the near term, the Company expects to see gross margins in line with historical levels.

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

In April 2010, Composite Technology Corporation issued a $10.0 million Senior Secured Loan due in April 2012 and received $9.7 million in cash net of fees and costs of $0.3 million. The loan bears interest at 7.5% payable monthly on balances secured by qualified accounts receivable of the Company and interest at 12.5% payable monthly on balances not secured by qualified accounts receivable. Qualified accounts receivable consist of 80% of current trade accounts receivable. The loan has two financial covenants, measured monthly consisting of i) a liquidity covenant and ii) a profitability covenant. The liquidity covenant requires the maintenance of a minimum of $7.5 million of combined cash and accounts receivable balances, measured at month end. The profitability covenant consists of a maximum accumulated adjusted operating loss of $5.0 million, measured beginning April 1, 2010. The adjusted operating loss consists of operating loss, less depreciation, amortization, and certain other non-cash charges including stock related compensation and increased or decreased by the corresponding increase or decrease in deferred revenues as compared to the June 30, 2010 deferred revenue balance. As of June 30, 2010 the Company was in compliance with its debt covenants.

CTC Cable Division

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

RECENT DEVELOPMENTS

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

Between March and July 2010, CTC Cable continued to fill key positions to drive business development expansion strategies and business optimization and to provide additional sales coverage worldwide. During the quarter, the Company formed a new subsidiary, CTC Cable Asia, to better serve markets in China, Southeast Asia, Korea, and Japan. CTC Cable also filled staffing voids in our business development and operational environment with resource skill-sets including executive leaders in international sales and marketing. These individuals added additional international sales coverage and business development acumen in China, Europe, the Middle East, and South America, one of whom was the primary driver behind receiving the initial order in Qatar. Coupled with our existing sales and marketing personnel and agents, these new resources allow CTC Cable to access a significant portion of the estimated $10 billion annual transmission conductor market. The new additions to the CTC Cable team have also worked to refine the international sales and marketing messaging and to provide focus on project identification and marketing efforts.

During the June quarter CTC Cable supplemented its technical skill set through several key technical hires. In June 2010, CTC Cable hired a new VP of Research and Development, a PhD who has significant experience in advanced composite materials design and development. We expect this individual to be a key manager of, and contributor to, our technical team and he is undergoing a thorough review of our products and testing protocols as well as directing new product development. The Company continued to develop a new twisted pair ACCC® conductor that we anticipate should have superior engineering advantages over other similar conductors including General Cable’s T-2® conductors. We received initial tests results in July 2010 and have further testing scheduled for later calendar 2010. Also in June 2010, CTC Cable hired several key leaders and contributors in our utility transmission design as well as our pre-sales team and our post-sales installation team.

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

Despite slower than expected sales in the beginning of this year attributable to customers pushing orders out to the latter half of the calendar year, CTC Cable’s business development efforts continue to show growth through orders from new and existing customers. Our first high voltage line in Europe was energized at 400kV in Germany, which will provide critical high voltage operating data for the German market, much of which is at 380kV to 400kV. Market penetration continues with sales to new customers worldwide including a new customer in Qatar announced in June 2010 and a repeat order to a customer sold through our Engineering and Professional Consulting (EPC) channel in Africa in July 2010. We are selling our products as a critical component of an engineered solution and we intend to expand our efforts to partner with EPC service providers.

CTC Cable continues its pursuit of relationships with additional suppliers and it is working with our existing suppliers to expand the support of ACCC® conductors and hardware into new geographic regions. These expanded efforts are focused not only on new stranding relationships, but are also targeted towards developing multiple hardware suppliers. We anticipate that the availability of ACCC® hardware from different regions will support our recent efforts to sign agreements with additional stranding sources. Discussions with new stranding partners are continuing at multiple locations worldwide in particular with several stranding manufacturers and distributors in Asia, South America, and Mexico. We believe the strategy to localize stranding and hardware manufacturing will provide a solid platform from which to grow cable sales and to provide support for our worldwide customer base. We intend to couple this local presence with key relationships to better vertically integrate our ACCC® products as an engineered solution.

CTC Cable Revenues were as follows for the three and nine months ended June 30, 2010 and 2009:

(Unaudited, In Thousands -	Three Months Ended June 30,				Nine Months Ended June 30,
except kilometer related amounts)	2010			2009		2010		2009
Europe	$	10	$	118	$	115	$	759
China		—		2,344		181		9,897
Other Asia		491		421		2,112		430
North America		6		270		3,613		2,099
South America		76		—		1,515		1
Mexico		—		409		—		938
Total Revenue	$	583	$	3,562	$	7,536	$	14,124
Kilometers shipped		96		665		641		2,379
Revenue per kilometer	$	5,113	$	4,100	$	10,127	$	4,871

Total Revenues for the quarter decreased to $0.6 million as compared to $3.6 million for the same period in the prior year. One order to a new customer in Qatar for $0.7 million was completed prior to the quarter end but was shipped in July 2010 and was not recognized in the June 2010 quarter.

The worldwide economic downturn continues to effect sales of ACCC® conductor worldwide and has impacted the timeline for receipt of new cable orders. Although we have received nearly $4 million in orders in the month of July 2010 we continue to see project delays as well as a restriction of customers’ capital required to construct new projects and reconductor lines for several of ou

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COMPOSITE TECHNOLOGY CORP - FORM 10-Q - August 9, 2010