2. Restatement

On March 31, 2011, Sinovel Wind Group 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, 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 Sinvoel, 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 nine months ended December 31, 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, operating expenses, income taxes and other accounts on the unaudited condensed consolidated financial statements. The restatement adjustments decreased revenues by $82.6 million and $86.1 million, decreased net income by $34.2 million and $36.3 million, decreased basic and 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 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.

Included in the restatement adjustments for the three months ended December 31, 2010, is an increase in the provision for excess and obsolete inventory of $2.1 million and a write-off of certain prepaid value added taxes of $0.1 million that relate to amounts due from certain of its customers in China which the Company determined were not recoverable as of December 31, 2010. In addition, the Company determined that the achievement of certain Company performance measures were not probable to occur as of December 31, 2010 with revenue for certain customers now being recorded on a cash basis. The Company recorded an adjustment to reduce its bonus accrual, recorded in accrued expenses, and cost and operating expenses by $1.4 million and stock-based compensation expenses by $1.2 million related to performance-based stock awards. The Company also recorded an adjustment of $0.6 million to increase property, plant and equipment and accrued expenses related to the implementation of the Company's new enterprise resource planning system. In addition, the Company identified and corrected minor errors in the unaudited condensed consolidated statement of cash flows for the nine months ended December 31, 2010.

The effects of the restatement on the Company's unaudited condensed consolidated balance sheet as of December 31, 2010 are as follows (in thousands):


	December 31, 2010
	Previously reported	Adjustments	Restated
Accounts receivable	$ 121,376	$ (95,105)	$ 26,271
Inventory	40,841	36,803	77,644
Prepaid expenses and other current assets	36,230	5,823	42,053
Deferred tax assets	3,640	2,654	6,294
Total current assets	450,451	(49,825)	400,626
Property, plant and equipment, net	89,131	567	89,698
Long-term deferred tax assets	4,471	1,116	5,587
Other assets	30,245	(19,203)	11,042
Total assets	640,441	(67,345)	573,096
Accounts payable and accrued expenses	95,806	(2,639)	93,167
Deferred revenue	21,837	(10,388)	11,449
Total current liabilities	120,296	(13,027)	107,269
Long-term deferred revenue	18,299	(16,469)	1,830
Total liabilities	140,470	(29,496)	110,974
Additional paid-in capital	883,097	(1,197)	881,900
Accumulated other comprehensive loss	(7,905)	(341)	(8,246)
Accumulated deficit	(375,728)	(36,311)	(412,039)
Total stockholders' equity	499,971	(37,849)	462,122
Total liabilities and stockholders' equity	$ 640,441	$ (67,345)	$ 573,096

The effects of the restatement on the Company's unaudited condensed consolidated statements of operations for the three and nine months ended December 31, 2010 are as follows (in thousands, except share data):

	Three months ended December 31, 2010
	Previously reported	Adjustments	Restated
Revenues	$ 114,193	$ (82,623)	$ 31,570
Cost of revenues	67,709	(36,181)	31,528
Research and development	9,057	(640)	8,417
Selling, general and administrative	15,564	(1,372)	14,192
Total cost and operating expenses	92,723	(38,193)	54,530
Operating (loss) income	21,470	(44,430)	(22,960)
(Loss) income before income tax expense	23,779	(44,432)	(20,653)
Income tax (benefit) expense	7,775	(10,270)	(2,495)
Net (loss) income	$ 16,004	$ (34,162)	$ (18,158)
Net (loss) earnings per common share - basic	$ 0.33	$ (0.71)	$ (0.38)
Net (loss) earnings per common share - diluted	$ 0.33	$ (0.71)	$ (0.38)

	Nine months ended December 31, 2010
	Previously reported	Adjustments	Restated
Revenues	$ 312,932	$ (86,079)	$ 226,853
Cost of revenues	186,160	(36,993)	149,167
Research and development	24,249	(639)	23,610
Selling, general and administrative	47,874	(1,150)	46,724
Total cost and operating expenses	259,437	(38,782)	220,655
Operating (loss) income	53,495	(47,297)	6,198
(Loss) income before income tax expense	58,789	(47,297)	11,492
Income tax (benefit) expense	23,628	(10,986)	12,642
Net (loss) income	$ 35,161	$ (36,311)	$ (1,150)
Net (loss) earnings per common share - basic	$ 0.76	$ (0.78)	$ (0.02)
Net (loss) earnings per common share - diluted	$ 0.76	$ (0.78)	$ (0.02)

The effects of the restatement on the Company's unaudited condensed consolidated statements of comprehensive (loss) income for the three and nine months ended December 31, 2010 are as follows (in thousands, except share data):

	Three months ended December 31, 2010
	Previously reported	Adjustments	Restated
Net (loss) income	$ 16,004	$ (34,162)	$ (18,158)
Foreign currency translation	(5,063)	(323)	(5,386)
Total other comprehensive income, net of tax	(6,348)	(323)	(6,671)
Comprehensive (loss) income	$ 9,656	$ (34,485)	$ (24,829)

	Nine months ended December 31, 2010
	Previously reported	Adjustments	Restated
Net (loss) income	$ 35,161	$ (36,311)	$ (1,150)
Foreign currency translation	(873)	(342)	(1,215)
Total other comprehensive income, net of tax	(894)	(341)	(1,235)
Comprehensive (loss) income	$ 34,267	$ (36,652)	$ (2,385)

The effects of the restatement on the Company's unaudited condensed consolidated statement of cash flows for the nine months ended December 31, 2010 are as follows (in thousands, except share data):

	Nine months ended December 31, 2010
	Previously reported	Adjustments	Restated
Cash flows from operating activities:
Net (loss) income	$ 35,161	$ (36,311)	$ (1,150)
Stock-based compensation expense	11,269	(1,196)	10,073
Provision for excess and obsolete inventory	-	2,667	2,667
Allowance for doubtful accounts	1,262	(1,237)	25
Write-off of prepaid value added taxes	210	340	550
Deferred income taxes	(262)	(3,640)	(3,902)
Accounts receivable	(69,709)	110,140	40,431
Inventory	(4,446)	(38,488)	(42,934)
Prepaid expenses and other current assets	(16,091)	(882)	(16,973)
Accounts payable and accrued expenses	9,616	(4,671)	4,945
Deferred revenue	6,442	(26,469)	(20,027)
Net cash (used in) provided by operating activities	(16,336)	294	(16,042)

As a result these errors, the Company has identified certain deficiencies in its internal control over financial reporting that constitute material weaknesses. The Company has determined that its disclosure controls and procedures were not effective as of December 31, 2010. For a discussion of management's consideration of the Company's disclosure controls and procedures and the material weaknesses identified, see Item 4, "Controls and Procedures," of this 10-Q/A.