2. Restatement

On March 31, 2011, Sinovel Wind Co. Ltd., ("Sinovel"), a manufacturer of wind energy systems in China and the Company's largest customer, refused to accept scheduled shipments from the Company. This action, combined with aging receivables from Sinovel and certain of its other customers in China, prompted the Company to re-evaluate its previous accounting judgments around revenue recognition and accounts receivable and the effectiveness of its internal control over financial reporting. This re-evaluation included an internal review of documents and interviews with management and other personnel with the assistance of external counsel. As a result, the Company determined that revenues and accounts receivable were incorrectly recorded in the quarterly period ended September 30, 2010 for certain of its customers in China, not including Sinovel, as the fee for shipments of products to these customers was not fixed or determinable or collectability was not reasonably assured at the time of shipment. Further, as a result of aging receivables and other negative events surrounding the customer relationship, the Company concluded that revenue related to shipments to Sinovel in the quarterly period ended December 31, 2010 was incorrectly recorded since collectability was not reasonably assured at the time of shipment. For Sinovel and certain other customers in China, the Company has restated revenues based on a cash basis of accounting with cash applied first against accounts receivable balances, as in the case of Sinovel as of September 30, 2010, then costs of shipments (inventory and value added taxes) before recognizing any gross margin. The Company had previously recognized revenues in the quarters ended September 30, 2010 and December 31, 2010 based on the receipt of shipments by these customers but prior to the Company's receipt of payment for such shipments.

Accordingly, the Company's unaudited condensed consolidated financial statements for the three and six months ended September 30, 2010 have been restated to reflect restatement adjustments to record revenues on a cash basis for these certain customers in China as well as the related effects to accounts receivable, inventory, deferred taxes, stockholders' equity, cost of revenues, income taxes and other accounts on the unaudited condensed consolidated financial statements. Included in the restatement adjustments for the three months ended September 30, 2010, is an increase in the provision for excess and obsolete inventory of $0.6 million and a write-off of certain prepaid value added taxes of $0.2 million that relate to amounts due from certain of its customers in China which the Company determined were not recoverable as of September 30, 2010. In addition, the Company recorded an adjustment of $1.8 million to increase property, plant and equipment and accrued expenses related to the implementation of the Company's new enterprise resource planning system. The restatement adjustments decreased the Company's revenues by $3.5 million, decreased net income by $2.1 million and decreased basic and diluted net income per share by $0.05 for the three and six months ended September 30, 2010. The restatement adjustments decreased the Company's total assets by $0.4 million, increased total liabilities by $1.8 million, and decreased total stockholders' equity by $2.2 million as of September 30, 2010.

The effects of the restatement on the Company's unaudited condensed consolidated balance sheet as of September 30, 2010 are as follows (in thousands):

	September 30, 2010
	Previously reported	Adjustments	Restated
Accounts receivable	$ 96,042	$ (3,486)	$ 92,556
Inventory	45,241	817	46,058
Prepaid expenses and other current assets	21,357	(221)	21,136
Deferred tax assets	3,117	722	3,839
Total current assets	293,074	(2,168)	290,906
Property, plant and equipment, net	78,160	1,810	79,970
Total assets	465,235	(358)	464,877
Accounts payable and accrued expenses	94,184	1,810	95,994
Total current liabilities	120,877	1,810	122,687
Total liabilities	139,657	1,810	141,467
Accumulated other comprehensive loss	(1,557)	(19)	(1,576)
Accumulated deficit	(391,732)	(2,149)	(393,881)
Total stockholders' equity	325,578	(2,168)	323,410
Total liabilities and stockholders' equity	$ 465,235	$ (358)	$ 464,877

The effects of the restatement on the Company's unaudited condensed consolidated statements of income for the three and six months ended September 30, 2010 are as follows (in thousands, except share data):

	Three months ended September 30, 2010
	Previously reported	Adjustments	Restated
Revenues	$ 101,529	$ (3,456)	$ 98,073
Cost of revenues	60,226	(810)	59,416
Selling, general and administrative	17,127	219	17,346
Total cost and operating expenses	85,584	(591)	84,993
Operating income	15,945	(2,865)	13,080
Income before income tax expense	18,584	(2,865)	15,719
Income tax expense	8,596	(716)	7,880
Net income	$ 9,988	$ (2,149)	$ 7,839
Net income per common share - basic	$ 0.22	$ (0.05)	$ 0.17
Net income per common share - diluted	$ 0.22	$ (0.05)	$ 0.17


	Six months ended September 30, 2010
	Previously reported	Adjustments	Restated
Revenues	$ 198,739	$ (3,456)	$ 195,283
Cost of revenues	118,450	(810)	117,640
Selling, general and administrative	32,310	219	32,529
Total cost and operating expenses	166,714	(591)	166,123
Operating income	32,025	(2,865)	29,160
Income before income tax expense	35,010	(2,865)	32,145
Income tax expense	15,853	(716)	15,137
Net income	$ 19,157	$ (2,149)	$ 17,008
Net income per common share - basic	$ 0.42	$ (0.05)	$ 0.37
Net income per common share - diluted	$ 0.42	$ (0.05)	$ 0.37

The effects of the restatement on the Company's unaudited condensed consolidated statements of comprehensive income for the three and six months ended September 30, 2010 are as follows (in thousands):

	Three months ended September 30, 2010
	Previously reported	Adjustments	Restated
Net income	$ 9,988	$ (2,149)	$ 7,839
Foreign currency translation	16,525	(19)	16,506
Total other comprehensive income, net of tax	17,955	(19)	17,936
Comprehensive income	$ 27,943	$ (2,168)	$ 25,775


	Six months ended September 30, 2010
	Previously reported	Adjustments	Restated
Net income	$ 19,157	$ (2,149)	$ 17,008
Foreign currency translation	4,190	(19)	4,171
Total other comprehensive income, net of tax	5,454	(19)	5,435
Comprehensive income	$ 24,611	$ (2,168)	$ 22,443

The effects of the restatement on the Company's unaudited condensed consolidated statement of cash flows for the six months ended September 30, 2010 are as follows (in thousands):

	Six months ended September 30, 2010
	Previously reported	Adjustments	Restated
Cash flows from operating activities:
Net income	$ 19,157	$ (2,149)	$ 17,008
Provision for excess and obsolete inventory	-	580	580
Allowance for doubtful accounts	959	(963)	(4)
Write-off of prepaid value added taxes	210	221	431
Deferred income taxes	(71)	(722)	(793)
Accounts receivable	(36,953)	4,449	(32,504)
Inventory	(8,934)	(1,414)	(10,348)
Prepaid expenses and other current assets	(6,618)	(2)	(6,620)
Net cash (used in) provided by operating activities	$ (1,878)	$ -	$ (1,878)

As a result of these errors, the Company identified certain deficiencies in its internal control over financial reporting that constitute material weaknesses. The Company determined that its disclosure controls and procedures were not effective as of September 30, 2010. For a discussion of management's consideration of the Company's disclosure controls and procedures and the material weaknesses identified, see Part I, Item 4, "Controls and Procedures," of this amended Quarterly Report on Form 10-Q.

Concurrent with the filing of this Form 10-Q/A, the Company will file an amended Form 10-Q to reflect the effects of these accounting errors on the unaudited condensed consolidated financial statements as of and for the three and nine months ended December 31, 2010. The restatement adjustments decreased the Company's revenues by $82.6 million and $86.1 million, decreased net income by $34.2 million and $36.3 million, decreased basic net income per share by $0.71 and $0.78 and decreased diluted net income per share by $0.71 and $0.78 for the three and nine months ended December 31, 2010, respectively. The restatement adjustments decreased the Company's total assets by $67.3 million, decreased total liabilities by $29.5 million, and decreased total stockholders' equity by $37.8 million as of December 31, 2010.