The discussion contained herein contains "forward-looking statements" that involve risk and uncertainties. These statements may be identified by the use of terminology such as "believes," "expects," "may," "should" or "anticipates" or expressing this terminology negatively or similar expressions or by discussions of strategy. The cautionary statements made in our Annual Report on Form 10-K, filed March 31, 2009, should be read as being applicable to all related forward-looking statements wherever they appear in this Form 10-Q. Our actual results could differ materially from those discussed in this report. The following discussion should be read in conjunction with the financial statements and the related notes included herein as Item 1.

Accounting Policies and Estimates

The methods, estimates and judgments that we use in applying our critical accounting policies have a significant impact on the results that we report in our financial statements. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. We also have other policies that we consider key accounting policies, such as those for revenue recognition; however, these policies typically do not require us to make estimates or judgments that are difficult or subjective.

We have identified accounting policies that we consider critical in Note 2 "Nature of Business and Significant Accounting Policies" of the notes to our financial statements included in this report. The accounting policies and estimates described in this report should be read in conjunction with Note 1, "Nature of Business and Significant Accounting Policies," of the notes to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2008, which includes a discussion of the policies identified in this report and other significant accounting policies.

Overview

Energy Composites Corporation (formerly Las Palmas Mobile Estates) ("we," "us," "our," or the "Company") is a manufacturer of composite structures and vessels for a range of clean technology industries. Based on our research of companies in this sector, we believe we have the Midwest's largest and most automated manufacturing capabilities with our world-class, automated 73,000 square foot climate-controlled manufacturing facility in Wisconsin Rapids, Wisconsin.

Our Company was incorporated on October 29, 1992 under the laws of the State of Nevada. At first, we were defined as a "shell" company whose sole purpose was to locate and consummate a merger or acquisition with a private entity. As of October 14, 2008, we completed a reverse acquisition of Advanced Fiberglass Technologies, Inc., a Wisconsin corporation ("AFT"). Pursuant to the reverse acquisition, we issued 28,750,000 shares of our common stock to AFT's shareholders (approximately 72% of the then issued and outstanding common stock) and AFT's shareholders gained voting control of our Company. As a result of the reverse acquisition, we are no longer considered a "shell" company. AFT is now our wholly-owned subsidiary.

Advanced Fiberglass Technologies. AFT was incorporated in the state of Wisconsin on January 1, 2005, following nearly ten years operating as M&W Fiberglass, LLC ("M&W"). Founded in 1995 by Jamie Lee Mancl, M&W was the operating entity that developed and operated AFT's business. In January 2005, M&W transferred all operating assets and liabilities into a newly formed S-Corporation: AFT. M&W, solely owned by Jamie Lee Mancl, retained ownership of AFT's former manufacturing facility. In February 2007, M&W sold AFT's former manufacturing facility to the city of Wisconsin Rapids. M&W and AFT then purchased and developed our current manufacturing facility by obtaining $4,000,000 of financing in the form of industrial revenue bonds. On December 31, 2008, we purchased the manufacturing facility from M&W by assuming the industrial revenue bonds, paying M&W $500,000 in cash and delivering a promissory note to M&W for $1,045,328.

Fiberglass Piping & Fitting Company. In September 2006, our largest shareholder, Jamie Lee Mancl, formed Fiberglass Piping & Fitting Company ("FPF"). FPF is a wholesale distributor of imported fiberglass piping and fitting products. We purchase products from FPF from time to time for use in the manufacture of our products pursuant to a long-term supply agreement at a price equal to FPF's net direct costs for such products.

Both M&W and FPF were considered variable interest entities ("VIEs") until December 31, 2008. In general, a VIE is a corporation, partnership, limited liability company, trust, or any other legal structure used to conduct activities or hold assets that either (i) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (ii) has a group of equity owners that are unable to make significant decisions about its activities, or (iii) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations. On December 30, 2008, we terminated the beneficiary relationship with these VIE entities by: (A) purchasing the manufacturing facility from M&W on December 31, 2008; (B) the sole stockholder of FPF contributing an additional $200,000 of capital to FPF so that FPF would be sufficient on its own; and (C) all prior guarantees of M&W and FPF debt by AFT having been released by the lender. We consolidated M&W and FPF's operations with AFT's operations for financial accounting and reporting purposes up to December 30, 2008, the date the VIE relationship ended.

Innovative Composite Solutions, LLC. In June 2009, further executing our growth strategy, we established Innovative Composite Solutions, LLC ("ICS") as a wholly-owned subsidiary of Energy Composites Corporation. ICS will serve as our distribution arm for resins and composite materials. Through September 30, 2009, ICS has established and stocked three regional warehouses in the United States with resin inventory, has completed the hiring of its sales personnel in each of those regions, and has begun generating revenue in each of these regions. As of September 30, 2009 the operating results of ICS are immaterial to the Company and are included in the Industrial Tank and Piping reporting segment under the Products category.

Results of Operations

The tables below separate our results from the 2008 revenues and expenses
attributable to M&W and FPF so that appropriate comparisons can be made. Unless
otherwise noted, the discussion refers only to our results on a non-consolidated
basis in 2008.

Revenue                                Three months ended September 30,              Nine months ended September 30,
                                         2009                    2008                  2009                   2008
ECC/AFT/ICS                        $       1,861,409       $       2,012,362     $      6,210,734       $      5,274,711
M&W/FPF, net of eliminations                       -                 147,547                    -                454,523
Total consolidated revenue         $       1,861,409       $       2,159,909     $      6,210,734       $      5,729,234

ECC/AFT/ICS increase/(decrease)
from 2008                          $        (150,953 )                           $        936,023
ECC/AFT/ICS %
increase/(decrease) from 2008                  (7.5% )                                      17.7%

During the third quarter of 2009, we recorded $195,619 of increased revenue from product sales, while field services revenues decreased $346,572. For the nine-month period ended September 30, 2009, revenue from product sales increased $1,422,420 primarily as a result of several tank and pipe contracts with a major chlor-alkali producer. Field service revenue revenues decreased $486,397 during the nine months ended September 30, 2009. The decrease in field service revenues during both periods has primarily been timing driven with the rescheduling and postponement of outage-related work and the timing of contract completion.

Cost of goods sold                     Three months ended September 30,              Nine months ended September 30,
                                         2009                    2008                  2009                   2008
ECC/AFT/ICS                        $       1,502,393       $       1,874,152     $      5,235,857       $      4,638,790
M&W/FPF, net of eliminations                       -                 121,835                    -                386,721
Total cost of goods sold           $       1,502,393       $       1,995,987     $      5,235,857       $      5,025,511

ECC/AFT/ICS increase/(decrease)
from 2008                          $        (371,759 )                           $        597,067
ECC/AFT/ICS %
increase/(decrease) from 2008                 (19.8% )                                      12.9%

The primary components of cost of goods sold are raw materials used in manufacturing, manufacturing labor, and manufacturing overhead. The primary raw materials used in our manufacturing processes are isophathalic, polyester, and vinyl-ester resins and fiberglass. Manufacturing labor includes wages, employment taxes, employee benefits, and union expenses. The major components of manufacturing overhead are utilities and depreciation associated with our manufacturing facility and equipment, travel and lodging expense associated with field service activities and manufacturing supplies.

For the three months ended September 30, 2009, our cost of materials decreased to 20% of revenue from 26% of revenue for the three months ended September 30, 2008. The decrease in materials as a percent of revenue was primarily driven by a greater mix of sales coming from small diameter pipe in both the product and service categories during the quarter. The field service related activities during the three months ended September 30, 2008 included a higher percentage of tank relining work in the field as well as a higher percentage of large diameter tank sales in the product category. For the nine months ended September 30, 2009, material costs were 26% of revenue compared to 27% for the nine months ended September 30, 2008. This decrease in cost as a percent of revenue is also a result of the sales mix shift during the nine months ended September 30, 2009.

Our cost of labor decreased to 42% of revenue for the three months ended September 30, 2009 compared to 43% of revenue for the comparable period in 2008. For the nine-month period ended September 30, 2009, our cost of labor remained at 39% of revenue, the same level recorded for the comparable period in 2008. Decreases in labor cost as a percent of sales for the third quarter 2009 are primarily attributable to pipe and tank contracts completed during the quarter that required a lower mix of union pipefitters.

Manufacturing overhead decreased from 24% of revenue during the third quarter of 2008 to 19% in the third quarter 2009. Lower travel and lodging expenses related to field service work, and lower freight expense on tank shipments contributed to the decrease as a percent of revenue. During the nine-month period ended September 30, 2009, manufacturing overhead decreased to 19% of revenue compared to 22% for the same period in 2008. We have incurred increased depreciation expense and utility cost from added equipment; however, our increased year-to-date revenue has allowed for better absorption of these cost increases, thus lowering manufacturing overhead cost as a percent of revenue.

Gross profit                          Three months ended September 30,             Nine months ended September 30,
                                         2009                   2008                 2009                   2008
ECC/AFT/ICS                        $        359,016       $        138,210     $        974,877       $        635,921
M&W/FPF, net of eliminations                      -                 25,712                    -                 67,802
Total gross profit                 $        359,016       $        163,922     $        974,877       $        703,723

ECC/AFT/ICS % of revenue                      19.3%                   6.9%                15.7%                  12.1%



Selling, general &
administrative expenses               Three months ended September 30,             Nine months ended September 30,
                                         2009                   2008                 2009                   2008
ECC/AFT/ICS                        $        978,014       $        635,997     $      2,752,176       $      1,817,903
M&W/FPF, net of eliminations                      -                (72,157 )                  -               (229,097 )
Total SG&A expenses                $        978,014       $        563,840     $      2,752,176       $      1,588,806

ECC/AFT/ICS % of revenue                      52.5%                  31.6%                44.3%                  34.5%

The increase in our selling, general and administrative expenses is driven by our continued investment in our growth strategy, notably our investment in expanded in-house capabilities, increased sales and sales support staff, and the creation of ICS as our resin and composites materials distribution arm in June 2009. Taken together, these additional expenses represent a platform for managing and driving our growth. We have also continued our investment into the development of our WindFiber™ strategy, including planning the construction of a significant wind blade production plant in Wisconsin Rapids within the next 12 months.

(Loss) from operations                Three months ended September 30,           Nine months ended September 30,
                                         2009                   2008                 2009                 2008
ECC/AFT/ICS                        $       (618,998 )     $       (497,787 )   $     (1,777,299 )     $  (1,181,982 )
M&W/FPF, net of eliminations                      -                 97,869                    -             296,899
Total (loss) from operations       $       (618,998 )     $       (399,918 )   $     (1,777,299 )     $    (885,083 )

ECC/AFT/ICS % of revenue                     (33.3% )               (24.7% )             (28.6% )            (22.4% )

The $121,211 and $595,317 increases in our operating loss for the three and nine months ended September 30, 2009, respectively, are primarily due to industry postponement of anticipated projects leading to insufficient sales to cover our planned increase in overhead, increased cost of goods sold, and the increase in selling, general and administrative expenses observed in 2009, as described above.

Other (expense)                       Three months ended September 30,            Nine months ended September 30,
                                         2009                   2008                  2009                  2008
ECC/AFT/ICS                        $       (235,023 )     $        (57,018 )   $       (1,675,145 )     $   (124,100 )
M&W/FPF                                           -                (54,031 )                    -           (158,755 )
Total other (expense)              $       (235,023 )     $       (111,049 )   $       (1,675,145 )     $   (282,855 )

ECC/AFT/ICS % of revenue                     (12.6% )                (2.8% )               (27.0% )            (2.4% )

Other income and expense consists of interest expense, interest income, non-cash amortization of deferred financing costs, and non-cash amortization of beneficial conversion features and warrant discounts associated with convertible debt. Non-cash amortization of debt discounts for warrants and beneficial conversion feature related to the convertible debt was $118,333 and $1,327,291 for the three and nine months ended September 30, 2009, respectively. The remaining increase in expenses in 2009 compared to 2008 is due to additional interest expense from increased short and long-term debt borrowings in 2009 relating to the manufacturing facility acquired at the end of 2008 and equipment and working capital notes to fund our growing operations. For the three and nine months ended September 30, 2009, interest expense was partially offset by bank interest income of $2,686 and $14,480, respectively.

Net loss                              Three months ended September 30,           Nine months ended September 30,
                                         2009                   2008                 2009                 2008
Loss before provision for income
taxes                              $       (854,021 )     $       (510,967 )   $     (3,452,444 )     $  (1,167,938 )
Income tax benefit                          306,000                228,000            1,334,000             413,000
Net loss for ECC                   $       (548,021 )     $       (282,967 )   $     (2,118,444 )     $    (754,938 )
Less: Net income attributable to
M&W/FPF                                           -                (43,838 )                  -            (138,144 )
Net loss                           $       (548,021 )     $       (326,805 )   $     (2,118,444 )     $    (893,082 )

% of ECC/AFT/ICS revenue                     (29.4% )               (16.2% )             (34.1% )            (16.9% )

ECC/AFT/ICS increase/(decrease)
from 2008                          $       (265,054 )                          $     (1,363,506 )
ECC/AFT/ICS %
increase/(decrease) from 2008                (93.7% )                                   (180.6% )

The net income tax benefit recorded during the three and nine months ended September 30, 2009 was the result of deferred tax assets recorded relative to net operating losses being generated and timing differences between financial and income tax reporting. We believe it is more likely than not that we will realize the full benefit of the deferred tax assets and have not recorded a valuation allowance as of September 30, 2009 due to our previous history of operating profits prior to 2008 and other factors. We will reassess this position at the end of 2009. Effective January 1, 2008, we terminated our S-Corporation election and began operating as a C-Corporation. As a result of the change in tax status, an initial $110,000 of net deferred tax liability was recorded as income tax expense which was offset by a net income tax benefit of $523,000 associated with net operating losses and temporary book

and tax timing differences for the nine months ended September 30, 2008. Significant components of the income tax benefit include the net operating loss for the year, fair value of warrants and temporary timing differences of fixed assets, accruals, and reserves.

The increase in our 2009 net loss stems from our investment in our growth strategy and recessionary economic pressures. In our bid to grow, we have invested in our infrastructure and overhead, adding selling, general and administrative costs and increasing our borrowings and interest expense. We continue to face a difficult economic period in the United States and the world. While we continue to record increases in our product sales, the growth is slower than what we would expect in a robust economy and we anticipated faster growth in this category due to our expansion efforts. Additionally, we have experienced a shift in timing of our outage-related service sales volume as our customers have postponed planned repairs due to poor economic conditions. The economic downturn has also placed pressure on our pricing strategy as our customers become more sensitive to price. The pressure on our prices has limited our ability to pass along our expenses to our customers in the form of incremental price increases. Although we have recorded improvement in margins, the improvement in margins is also slower than what we would expect in a robust economy. We anticipate that the launch of several material innovations, including the use of our new abrasion-resistant tank liner, will allow us to increase our margins in our legacy business. We continue to pursue our four-part strategy to expand and diversify our business. We believe that our increasing involvement in the wind energy industry and other market segments will also position our Company to profit when and as the economy recovers and expands.

Liquidity and Capital Resources

Our liquidity and capital resources continue to be driven by our growth strategy. Beginning in 2007 and continuing into 2009, we have significantly expanded our operations and our manufacturing capabilities. We have invested in our plant and equipment to become a large manufacturing concern with a diverse manufacturing capability, both in-house and on-client-site. As a result of our expansion efforts, we believe we are well positioned to take advantage of market opportunities and to introduce our products and services into emerging markets like wind energy.

To capitalize on our expanding manufacturing capabilities, we have made significant investments in our sales personnel, marketing program, our new WindFiber™ strategy, and our new raw materials distribution arm, ICS. With these expenditures, we have increased our visibility in our existing markets and have captured early attention from major targeted customers within the wind energy market and in our core markets. Furthermore, we anticipate field service revenues will begin to increase consistent with historical seasonal trends as major manufacturers complete planned and re-scheduled maintenance, repair and overhaul activities.

Our primary sources of liquidity to fund our growth strategy are cash generated from operations and short and long-term term financing arrangements. As of September 30, 2009, cash and cash equivalents totaled $1,392,875. Our working capital was $823,176 at September 30, 2009. We believe we have sufficient resources available to meet our liquidity requirements, including debt service, for the remainder of 2009. We will require additional financing to pursue our WindFiber™ strategy over the next 12 months, including the construction of a new wind blade production plant.

Operating Cash Flows

Operating activities used $1,295,437 and $1,237,326 of cash for the nine months ended September 30, 2009 and 2008, respectively. The increase in cash used by operating activities for 2009 was due primarily to the significant decreases in accounts payable and customer deposits associated with the large tank contract we completed and the increase in the overall net loss for the nine months ended September 30, 2009. The increase in cash used in operations was partially offset by decreases in accounts receivable and inventories primarily associated with the same contract.

Investing Cash Flows

Investing activities used $444,299 and $723,648 of cash for the nine months ended September 30, 2009 and 2008, respectively. The primary use of cash in investing activities for both periods was the purchase of additional manufacturing equipment supporting plant and field service activities, as well as the purchase of office equipment for added office staff positions.

Financing Cash Flows

Financing activities provided $147,322 and $2,666,992 for the nine months ended September 30, 2009 and 2008, respectively. Proceeds from financing activities for the nine months ended September 30, 2009 were $497,934 raised from additional short-term notes and our line of credit which was partially offset by financing costs and payments on long-term debt of $347,292. For the nine months ended September 30, 2008, proceeds from financing activities included proceeds from short-term notes and our line of credit of $3,080,396. Cash used in financing activities for the nine months ended September 30, 2008 included a reduction in bank overdrafts of $168,087, payments on long-term debt of $193,067, and distributions to a stockholder of $52,250 primarily for income taxes due by the shareholders relating to the pass through income from M&W and FPF.

Debenture Financing

In August to December 2008, we raised $6,370,000 by selling units, each unit consisting of (i) a 3-year, 6% convertible debenture (the "Debentures") with a conversion price of $2.50 per share (subject to adjustment for stock splits and stock dividends), and (ii) a number of warrants equal to the number of shares issuable upon conversion of the principal amount of the Debenture (the "Warrants"). The Debentures sold included the issuance of 2,548,000 Warrants. Each Warrant is exercisable into shares of common stock for a term of 3 years at $5.00 per share. The Warrant also provides anti-dilution protection for the following events: reorganization, reclassification, consolidation, merger or sale; subdivision, combination or dividend of our common stock.

At September 30, 2009, Debentures totaling $1,420,000 remain outstanding and will become due during the last part of 2011. $4,950,000 of Debentures has been converted to common stock as of September 30, 2009. Many Debenture holders have elected to receive interest in the form of stock, lowering our cash outlays for debt service on the Debentures. We believe that the growth of our business and revenue will improve the value of our stock and motivate the remaining Debenture holders to convert their debt into stock which will further reduce our cash requirements to settle the debt in 2011. We also anticipate that the Debenture holders will exercise their Warrants when and if the value of our stock increases above $5.00 per share. The money we raise from the exercise of Warrants, if any, will be used to continue our growth strategy.

As we roll out the sequential elements of our WindFiber™ strategy, it may be appropriate to pursue an additional tranche of equity financing to support the construction of a new manufacturing plant and logistics center, the equipping of the production lines, training of employee-associates, the development of a research and development center, and WindFiber™ -related working capital. While we anticipate a substantial portion of our WindFiber™ financing requirements will be met with subsidized or otherwise advantaged debt financing, it may be prudent to support such financing with a tranche of supplemental equity.

Purchase of Manufacturing Plant and Related Debts

On December 31, 2008, we exercised our option to purchase the manufacturing facility we were leasing from M&W for a purchase price of $4,500,000. We elected to exercise this option in order to lower the monthly cash requirement associated with our manufacturing facility and to remove conflicting interests between our business and Jamie and Jennifer Mancls' other business interest:
M&W. The favorable interest rate we negotiated with the Mancls (described below) will improve our cash flows by approximately $72,000 annually because the associated annual debt service is less than the annual lease payments we were paying. We believe removing the Mancls' control over our business (as exercised through the facility lease) will, in the long run, improve our balance sheet and our ability to borrow money from large institutional investors.

. . .