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BROADWIND ENERGY, INC. AND SUBSIDIARIES

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BROADWIND ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)
(in thousands, except share and per share data)

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BROADWIND ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)
(in thousands)

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increase the authorized number of common shares from 100,000,000 to 150,000,000; and ratified the selection of Grant Thornton LLP as the Company’s independent registered public accounting firm for 2008.

Significant accounting policies disclosed in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2007 remain applicable at June 30, 2008, with the exception of the following:

Basis of consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Tower Tech, RBA, Brad Foote, EMS, and Badger. RBA and Brad Foote were acquired by the Company on October 1, 2007 and October 19, 2007, respectively. EMS and Badger were acquired by the Company on January 16, 2008 and June 4, 2008, respectively.  The financial position and results of operations of these subsidiaries are included in the Company’s consolidated financial statements from the date of acquisition. All significant intercompany accounts and transactions have been eliminated in consolidation.

Revenue Recognition

We recognize revenue when persuasive evidence of an arrangement exists, transfer of title has occurred or services have been rendered, the selling price is fixed or determinable, collectability is reasonably assured, and delivery has occurred per the contract terms. Customer deposits and other receipts are deferred and recognized when earned.

Segment reporting

As of June 30, 2008, Broadwind operates and manages two reporting segments:  Products and Components; and Service, Transportation and Maintenance. Initially, the Company created a Service and Maintenance segment in January 2008 when it acquired EMS.  In connection with the June 2008 acquisition of Badger, a transportation services company, we added a transportation component to this segment and created the Service, Transportation and Maintenance segment.  For the three and six months ended June 30, 2007, the Company operated as a single segment, Towers & Fabrication, as the Company’s only subsidiary in existence as of June 30, 2007 was its Tower Tech subsidiary.  The Towers & Fabrication segment is now part of the Products and Components segment, which also includes the Company’s previously reported Gearing Systems segment.  Refer to Note 18 for summarized financial information of the Company’s segments.

Reclassification

Certain reclassifications have been made in the prior periods financial statements to conform to current period presentation.

Effect of recently issued accounting standards

In February 2007, the FASB issued Statement of Financial Accounting Standards Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115 (“SFAS 159”). This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. This standard is effective for financial statements issued for fiscal years beginning after November 15, 2007. We adopted the provisions of SFAS 159 on January 1, 2008. The Company did not elect to measure any of our financial assets or liabilities using the fair value option of SFAS 159. The Company will assess at each measurement date whether to use the fair value option on any future financial assets or liabilities as permitted pursuant to the provisions of SFAS 159.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”). This standard clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability. Additionally, it establishes a fair value hierarchy that prioritizes the information used to develop those assumptions.

In February 2008, the FASB issued FASB Staff Position No. 157-2 (“FSP 157-2”), which delayed the effective date by which companies must adopt the provisions of SFAS 157. FSP 157-2 defers the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The adoption of this standard is not anticipated to have a material impact on our financial position, results of operations, or cash flows.

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In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141R, Business Combinations (“SFAS 141R”), which establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS 141R also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008. Early adoption is not permitted.  SFAS 141R is to be applied prospectively to business combinations for which the acquisition date is on or after the first reporting period beginning on or after December 15, 2008.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51 (“SFAS 160”), which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company has evaluated the effect of the adoption of SFAS 160, but does not presently anticipate it will have a material effect on its consolidated financial position or results of operations, as all subsidiaries are 100% owned.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”). This statement is intended to enhance required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding how: (a) an entity uses derivative instruments; (b) derivative instruments and related hedged items are accounted for under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities; and (c) derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the effect of adoption of SFAS 161, but does not presently believe that it will have a material effect on its consolidated financial position or results of operations.

Note 2 — Inventories

The components of inventories as of June 30, 2008 and December 31, 2007 are summarized as follows:

Note 3 — Acquisitions

Badger Transport, Inc.

On June 4, 2008, the Company acquired all of the outstanding shares of Badger for aggregate purchase price of $11,811 exclusive of $125 of transaction-related acquisition costs.  The purchase price consisted of $5,811 of cash and 581,959 unregistered shares of Broadwind common stock at a price per share of $10.31.  The Company entered into a registration rights agreement with the former owner of Badger that provides the former owner with limited piggyback registration rights.  The Company financed the cash portion of the acquisition with cash on hand.

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The following table summarizes the estimated fair values of the Badger assets acquired and liabilities assumed on the date of the acquisition:

The Company may adjust goodwill as necessary as it finalizes purchase price allocations for acquisitions.  Typical adjustments include outstanding professional fees and fixed asset valuations.  None of the goodwill associated with the purchase of Badger is expected to be deductible for income tax purposes.

In connection with the Badger acquisition, the Company was required to fund approximately $4,500 of equipment purchases that Badger had on order for expansion.  The Company has funded $3,933 of this commitment as of August 11, 2008.

Energy Maintenance Service, LLC

As disclosed in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, on January 16, 2008, the Company acquired all of the outstanding membership interests in EMS, a South Dakota based company engaged in the sale, installation, and repair of wind-powered electric generators. The aggregate consideration paid was $32,772, which included 1,629,834 shares of the Company’s common stock at a price per share of $8.48 and $522 of transaction-related acquisition costs.  The cash portion of the purchase price was financed by a private placement of Company common stock, as described in Note 10 below.

The following table summarizes the estimated fair values of the EMS assets acquired and liabilities assumed on the date of the acquisition:

The Company may adjust goodwill as necessary as it finalizes purchase price allocations for acquisitions. Typical adjustments include outstanding professional fees and fixed asset valuations. Goodwill of $4,025, and other intangibles of $26,490 are expected to be deductible for income tax purposes over 15 years.

The Company does not have any contingent payments or commitments in relation to the acquisition of EMS, with the exception of certain stock options that were awarded as a result of the acquisition. Stock options are a share-based compensation expense and are subject to accounting treatment under SFAS No. 123(R) as discussed in Note 11.

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Note 5 — Accrued liabilities

Accrued liabilities at June 30, 2008 and December 31, 2007 consisted of the following:

Note 6 — Lines of credit and notes payable

Lines of credit and notes payable at June 30, 2008 and December 31, 2007 consisted of the following:

On April 24, 2008, TMF, TP, and TOF each converted the full original principal amount of their respective 9.5% related party notes into shares of Company common stock. Upon conversion, an aggregate of 3,333,332 shares of the Company’s common stock were issued to TMF, TP and TOF.  Interest that had accumulated in the aggregate amount of $1,223 on the notes as of the conversation date was paid by the Company to TMF, TP, and TOF with cash.

In connection with its acquisition of EMS, on January 16, 2008 the Company issued a related-party note to Joseph A. Kolbach, a former member of EMS who remains employed by the Company as the president of EMS. The note was in the amount of $1,365 and related to a limited liability company tax payment.  In May 2008, the Company paid the note in full.

Note 7 — Long-term debt

Long-term debt at June 30, 2008 and December 31, 2007 consisted of the following:

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Maturities of long-term debt for each of the five years following June 30, 2008 are as follows:

The Company was in compliance with all debt covenants as of June 30, 2008, with the exception of a debt coverage ratio related to an EMS note in the amount of $1,491 at June 30, 2008.  On August 8, 2008, the Company refinanced the note and received notice and a one-time waiver for the covenant violation from its lender.

Note 8 — Interest rate swaps

In 2007, the Company entered into two interest rate swap agreements to minimize the impact of interest rate fluctuations on its debt. Interest rate swap agreements involve exchanges of fixed or floating rate interest payments periodically over the life of the agreement without the exchange of the underlying principal amounts.  Under the provisions of SFAS No. 133, all derivatives are measured at fair value and recognized as either assets or liabilities in the Company’s balance sheet. The accounting for changes in the fair value of a derivative is dependent upon the use of the derivative and its resulting designation. Unless specific hedge accounting criteria are met, changes in fair value must be recognized currently in earnings. The Company’s interest rate swaps do not qualify for hedge accounting under SFAS No. 133. Therefore, the Company is required to recognize the swap at its fair market value and record the fluctuations in the fair value of the swap in current earnings. The unrealized gain related to these fluctuations was approximately $241 and $11 for the three and six-month ended June 30, 2008, respectively, and is recognized within interest expense, net. The fair market value of the interest rate swaps of $377 and $388 is recorded as a long-term liability as of June 30, 2008 and December 31, 2007, respectively.

Note 9 — Capital leases

The Company leases equipment from various financing companies under capital leases with terms that extend to 2012. The economic substance of the leases is that the Company is financing the acquisition of the assets through the leases, and accordingly, they are recorded in the Company’s assets and liabilities. Amortization of the capital leases has been included in depreciation expense. The following is an analysis of the leased assets included in property and equipment as of June 30, 2008 and December 31, 2007.

Gross capital lease assets obtained through the acquisition of Badger was $5,769.

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Future minimum rental payments due under capitalized leases:

Note 10 — Stockholders’ equity

On January 16, 2008, to finance the cash portion of the EMS acquisition, the Company sold an aggregate of 2,031,250 shares of unregistered common stock in a private placement to TP and T25 at $8.48 per share for a total purchase price of $17,225, pursuant to a previously disclosed Amended and Restated Securities Purchase Agreement with TCP, TP and T25.

In connection with the acquisition of EMS, on January 16, 2008, the Company issued 1,629,834 shares of unregistered common stock to the members of EMS, calculated at $8.48 per share, for total stock consideration of $13,821.  Upon consummation of the Company’s acquisition of EMS, 7,500 shares of restricted stock previously granted to certain Company executives vested; another 7,500 restricted shares remain unvested, and have a vesting date of January 16, 2009.

In the second quarter of 2008, the Company completed transactions resulting in the sale of an aggregate of $100,500 worth of its unregistered common stock, of which $500, or 62,814 shares, was purchased by a member of the Company’s Board of Directors at a price of $7.96 per share and an aggregate of $100,000 worth, or 12,562,814 shares, was purchased by TCP, TP, TOF, and T25 at a price of $7.96 per share.  Thomas Weisel Partners issued a fairness opinion in connection with the Tontine parties’ investment.

On April 24, 2008, TMF, TP, and TOF each converted the full original principal amount of their respective 9.5% related party notes into shares of Company common stock.  Upon conversion, an aggregate of 3,333,332 shares of the Company’s common stock were issued to TMF, TP and TOF.

On June 4, 2008, the Company acquired all of the outstanding capital stock of Badger for total purchase price of $11,881, exclusive of transaction-related acquisition costs.  A portion of the purchase price consisted of 581,959 unregistered shares of Broadwind’s common stock at a price per share of $10.31.

Note 11 — Stock-based compensation

The Company grants incentive stock options and other equity awards pursuant to the EIP which was approved by the Company’s Board of Directors in October 2007 and by the Company’s stockholders in June of 2008. On August 8, 2008, the Company’s Board of Directors approved certain non-material amendments to the EIP that clarify the terms and conditions of restricted stock grants under the EIP and provide that the administrator of the EIP has the authority to effect future amendments to the plan. The EIP reserves 3,500,000 shares of common stock for grants to officers, directors, and other key employees.  Total stock-based compensation expense included in the Company’s consolidated statements of operations for the three and six months ended June 30, 2008 is $403 and $784, respectively. There was no stock-based compensation expense for the three and six months ended June 30, 2007.  There were 2,042,000 shares available for grant under the EIP as of June 30, 2008.

Stock Options

Compensation expense for incentive stock option grants is recognized over the requisite service period for vesting of the award, or to an employee’s eligible retirement date, if earlier and applicable. As of June 30, 2008, the Company had $7,340 of unrecognized compensation expense related to the outstanding stock options, which will be recognized over a weighted-average period of 4.75 years.

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calculated by multiplying the number of shares by the weighted average price on the grant date.  For the six months ended June 30, 2008, the Company had $37 of stock-based compensation expense related to non-vested awards.

Restricted stock activity is summarized for the six months ended June 30, 2008

Total fair value of vested shares was $82 as of June 30, 2008.

Note 12 — Income taxes

The Company accounts for income taxes pursuant to SFAS No. 109, Accounting for Income Taxes, which provides for an asset and liability approach to accounting for income taxes. Deferred tax assets and liabilities represent the future tax consequences of the differences between the financial statement carrying amounts of assets and liabilities versus the tax basis of assets and liabilities. Under this method, deferred tax assets are recognized for deductible temporary differences, and operating loss and tax credit carryforwards. Deferred liabilities are recognized for taxable temporary differences. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The impact of the tax rate changes on deferred tax assets and liabilities is recognized in the year that the change is enacted.

The Company adopted the provision of Financial Standards Accounting Board Interpretation No. 48 “Accounting for Uncertainty in Income Taxes — An interpretation of FASB Statement No. 109 (“FIN 48”) on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized no material adjustments in the liability for unrecognized income tax benefits.  There have been no significant changes in unrecognized income tax benefits during the first two quarters of 2008.

The Company recognizes interest and penalties related to uncertain tax position in income tax expense.  As of June 30, 2008, the Company had no accrued interest or penalties related to uncertain tax positions.

The Company files income tax returns in the U.S. federal and state jurisdictions.  As of June 30, 2008, open tax years in the federal and some state jurisdictions date back to 1996 due to the taxing authorities’ ability to adjust operating loss carry forwards.  No changes in settled tax years have occurred through June, 2008.  The Company does not anticipate there will be a material change in the total amount of unrecognized tax benefits within the next 12 months.