**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10-QSB**





( Mark
      One )


**þ**
            **Quarterly
                Report Pursuant to Section 13 or 15(d) of Securities Exchange Act
                of
                1934**  **For
              the quarterly period ended June 30,
              2007**




**o**
            **Transition
                report under Section 13 or 15(d) of the Securities Exchange Act of
                1934**  **For
              the transition period from __________________ to
              __________________.**




**Commission
      file number** **0-11454**





**VALENTEC
      SYSTEMS, INC.**


(Name
      of
      small business issuer in its charter)





**Delaware**
            
            **59-2332857**(State
                or Other Jurisdiction of Incorporation
            
            (I.R.S.
                Employer Identification No.)or
                Organization)





**2629
                York Avenue****Minden,
                LA 71055**
            
            **71055**(Address
                of principal executive offices)
            
            (Zip
                code)





**(318)
      382-4574**


(Issuer’s
      Telephone Number, Including Area Code)





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 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 R  No £





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes £   No R





There
      were 15,538,165 par value $0.01 per share, shares of common stock outstanding
      as
      of August 14, 2007.





Transitional
      Small Business Disclosure Format: Yes £   No R













VALENTEC
      SYSTEMS, INC.


FORM
      10-QSB


INDEX





**Page Number**Part
                I Financial Information
            
            
            3Item
                1. Financial Statements
            
            
            3Item
                2: Management’s Discussion And Analysis Or Plan Of
                Operation
            
            
            18Part
                II Other Information
            
            
            23Item
                1: Legal Proceedings
            
            
            23Item
                2: Unregistered Sales Of Equity Securities And Use Of
                Proceeds
            
            
            24Item
                3: Defaults Upon Senior Securities
            
            
            24Item
                4: Submission Of Matters To A Vote Of The Security Holders
            
            
            24Item
                5: Other Information
            
            
            24Item
                6: Exhibits And Reports On Form 8-K
            
            
            24Signatures
            
            
            25Exhibit
                10.1Exhibit
                10.2Exhibit
                31.1Exhibit
                32.1




2





**PART
      I**





**FINANCIAL
      INFORMATION**





**ITEM
      1. FINANCIAL STATEMENTS**





The
      accompanying unaudited financial statements of Valentec Systems, Inc. (together
      with Valentec Operating Corp., the “Company” or “Valentec”) have been prepared
      in accordance with the instructions to Form 10-QSB and Item 310(b) of Regulation
      S-B, and, therefore, do not include all information and footnotes necessary
      for
      a complete presentation of financial position, results of operations, cash
      flows, and stockholders’ equity in conformity with generally accepted accounting
      principles. In the opinion of the Company’s management, all adjustments
      considered necessary for a fair presentation of the results of operations and
      financial position have been included and all such adjustments are of a normal
      recurring nature. It is suggested that the following consolidated financial
      statements of the Company be read in conjunction with the year-end consolidated
      financial statements and notes thereto included in our Annual Report on Form
      10-KSB for the year ended December 31, 2006. Operating results of the Company
      for the six months ended June 30, 2007 are not necessarily indicative of the
      results that can be expected for the year ending December 31, 2007 or for any
      other period.




3





**VALENTEC
      SYSTEMS, INC. AND SUBSIDIARY**





**CONTENTS**





PAGE
            5
            UNAUDITED
                CONDENSED CONSOLIDATED BALANCE SHEET AS OF JUNE 30,
                2007PAGE
            6
            UNAUDITED
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND
                SIX
                MONTHS ENDED JUNE 30, 2007 AND 2006PAGE
            7
            UNAUDITED
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS
                ENDED
                JUNE 30, 2007 AND 2006PAGE
            8
            UNAUDITED
                NOTES TO CONDENSED CONSOLIDATED FINANCIAL
                STATEMENTS





4




**VALENTEC
      SYSTEMS, INC. AND SUBSIDIARY**


**CONDENSED
      CONSOLIDATED BALANCE SHEET**


**AS
      OF JUNE 30, 2007**


**(Unaudited)**





**ASSETS****CURRENT
                ASSETS**Cash
            
            
            345,205Accounts
                receivable and in-process billings, net
            
            
            16,871,939Other
                Miscellaneous Receivables
            
            
            36,321Inventories,
                net
            
            
            452,746Prepaid
                and other expenses
            
            
            219,005Total
                Current Assets
            
            
            17,925,216**PROPERTY
                AND EQUIPMENT, NET**
            
            
            2,609,167**OTHER
                ASSETS**Deferred
                income tax
            
            
            92,513Contract
                development cost, net
            
            
            5,578,201Insurance
                Receivable
            
            
            249,850Deposits
            
            
            28,436Total
                Other Assets
            
            
            5,949,000**TOTAL
                ASSETS**
            
            
            26,483,383**LIABILITIES
                AND STOCKHOLDERS’ DEFICIT****CURRENT
                LIABILITIES**Accounts
                payable and accrued expenses
            
            
            11,652,992Accrued
                salaries and payroll withholding
            
            
            164,690Lines
                of credit
            
            
            11,930,739Deferred
                revenue
            
            
            1,026,803Notes
                Payable –
                stockholders
            
            
            1,454,129Notes
                Payable – related party
            
            
            3,104,964Due
                to related party
            
            
            1,842,941Capital
                lease
            
            
            38,034Customer
                Deposits
            
            
            124,898Deferred
                income taxes payable
            
            
            475,240Total
                Current Liabilities
            
            
            31,815,430**LONG
                TERM LIABILITIES**Capital
                lease – long term
            
            
            296,231Total
                Long Term Liabilities
            
            
            296,231**TOTAL
                LIABILITIES**
            
            
            32,111,661**COMMITMENTS
                AND CONTINGENCIES**
            
            
            —**STOCKHOLDERS’
                DEFICIT**Preferred
                stock, $0.01 par value, 10,000,000 authorized, none issued and
                outstanding
            
            
            —Common
                stock, $0.01 par value, 250,000,000 shares authorized, 15,538,165
                shares
                issued and outstanding
            
            
            155,382Additional
                paid in capital
            
            
            3,205,737Retained
                earnings
            
            
            (8,821,584
            )Less:
                Stockholder Advances
            
            
            (167,813
            )Total
                Stockholders’ Deficit
            
            
            (5,628,278
            )**TOTAL
                LIABILITIES AND STOCKHOLDERS’ DEFICIT**
            
            
            26,483,383





See
      accompanying notes to unaudited condensed consolidated financial
      statements.




5


**VALENTEC
      SYSTEMS, INC. AND SUBSIDIARY**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**FOR
      THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006**


**(Unaudited)**





**Three Months Ended June 30,**
            
            ******Six Months Ended June 30,****2007**
            
            **2006**
            
            **2007**
            
            **2006****REVENUES**Contract
                revenues
            
            $
            5,270,780
            
            $
            4,299,983
            
            $
            6,857,273
            
            $
            10,272,874**COST
                OF GOODS SOLD**
            
            
            4,297,641
            
            
            4,132,550
            
            
            5,836,961
            
            
            8,154,021**GROSS
                PROFIT**
            
            
            973,139
            
            
            167,433
            
            
            1,020,312
            
            
            2,118,853**OPERATING
                EXPENSES**Fringe
                benefit expenses
            
            
            23,001
            
            
            155,156
            
            
            116,119
            
            
            304,397Overhead
                expenses
            
            
            822,153
            
            
            1,167,518
            
            
            1,691,221
            
            
            1,945,824General
                and administrative
            
            
            731,627
            
            
            769,628
            
            
            1,387,678
            
            
            1,524,505Total
                Operating Expenses
            
            
            1,576,781
            
            
            2,092,302
            
            
            3,195,018
            
            
            3,774,726**INCOME/(LOSS)
                     FROM OPERATIONS**
            
            
            (603,642
            )
            
            (1,924,869
            )
            
            (2,174706
            )
            
            (1,655,873
            )**OTHER
                INCOME (EXPENSE)**Interest
                income
            
            
            275
            
            
            413
            
            
            558
            
            
            1,088Miscellaneous
            
            
            76,562
            
            
            4,003
            
            
            80,516
            
            
            6,384Interest
                expense
            
            
            (690,703
            )
            
            (434,081
            )
            
            (1,334,435
            )
            
            (826,042
            )Total
                Other Income (Expense)
            
            
            (613,866
            )
            
            (429,665
            )
            
            (1,253,361
            )
            
            (818,570
            )**NET
                INCOME (LOSS) BEFORE INCOME TAXES**
            
            
            (1,217,508
            )
            
            (2,354,534
            )
            
            (3,428,067
            )
            
            (2,474,443
            )Provision
                for Income Taxes
            
            
            -
            
            
            -
            
            
            -
            
            
            -**NET
                INCOME (LOSS)**
            
            
            (1,217,508
            )
            
            (2,354,534
            )
            $
            (3,428,067
            )
            $
            (2,474,443
            )Net
                income (loss) per share — basic and diluted
            
            
            (.08
            )
            
            (.15
            )
            $
            (.22
            )
            $
            (.16
            )Weighted
                Average Shares (Basic and Diluted)
            
            
            15,538,165
            
            
            15,538,165
            
            
            15,538,165
            
            
            15,538,165





See
      accompanying notes to unaudited condensed consolidated financial
      statements.




6




**VALENTEC
      SYSTEMS, INC. AND SUBSIDIARY**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**FOR
      THE SIX MONTH PERIOD ENDED JUNE 30, 2007 AND 2006**


**(Unaudited)**





Six
                Months
            
            Six
                MonthsEnded
            
            EndedJune
                30, 2007
            
            June
                30, 2006**CASH
                FLOWS FROM OPERATING ACTIVITIES:****Net
                income (Loss)**
            
            $
            (3,428,067
            )
            $
            (2,474,443
            )**Adjustments
                to reconcile net income (loss) to net cash provided by (used in)
                operating
                activities:**Depreciation
                and amortization
            
            
            507,701
            
            
            455,393In-kind
                contribution, interest
            
            
            21,006
            
            
            15,685Stock
                Option Expense
            
            
            14,050
            
            
            -Changes
                in operating assets and liabilities:(Increase)
                decrease in:Accounts
                receivable and in-process billings
            
            
            500,832
            
            
            (2,561,097
            )Inventory
            
            
            (38,816
            )
            
            174,654Prepaid
                expense
            
            
            (125,123
            )
            
            (20,396
            )Increase
                (decrease) in:Accounts
                payable, related party and accrued expenses
            
            
            3,189,626
            
            
            1,237,147Due
                to related party
            
            
            424,019
            
            
            327,473Deferred
                income taxesDeferred
                revenue
            
            
            (300,744
            )
            
            (1,012,910
            )Net
                Cash Provided By (Used In) Operating Activities
            
            
            764,484
            
            
            (3,858,494
            )**CASH
                FLOWS FROM INVESTING ACTIVITIES:**Purchase
                of property and equipment
            
            
            (967,901
            )
            
            (128,958
            )Net
                Cash Used In Investing Activities
            
            
            (967,901
            )
            
            (128,958
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES:**Repayment
                of Capital Leases
            
            
            (14,784
            )
            
            -Proceeds
                from Stockholder Advances
            
            
            28,936
            
            
            -Proceeds
                from issuance of common stock
            
            
            -
            
            
            85,411Proceeds
                from Notes Payable from Related Party
            
            
            2,000,000
            
            
            -Proceeds
                / (Repayment) of Line of Credit
            
            
            (1,615,960
            )
            
            4,025,934Net
                Cash Provided By Financing Activities
            
            
            398,192
            
            
            4,111,345NET
                INCREASE (DECREASE) IN CASH
            
            
            194,775
            
            
            123,893CASH
                AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
            
            
            150,430
            
            
            81,878CASH
                AND CASH EQUIVALENTS AT END OF PERIOD
            
            $
            345,205
            
            $
            205,771Cash
                paid for interest
            
            $
            1,334,435
            
            $
            826,041Cash
                paid for income taxes
            
            $
            -
            
            $
            -**SUPPLEMENTAL
                DISCLOSURE OF NON CASH INVESTING AND
                FINANCING:**Fixed
                assets acquired under capital leases by Company during
                period
            
            $
            214,552
            
            $
            86,901





See
      accompanying notes to unaudited condensed consolidated financial
      statements.




7


**VALENTEC
      SYSTEMS, INC. AND SUBSIDIARY**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE SIX MONTH PERIOD ENDED JUNE 30, 2007**


**(Unaudited)**





**NOTE
              1**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES AND
                ORGANIZATION**





***(A)
      Organization***




Valentec
      Systems, Inc. is a Delaware corporation incorporated on September 8, 1983.
      Prior
      to April 10, 2006, the name of the corporation was Acorn Holding
      Corp.




Valentec
      Operating Corp., the wholly owned subsidiary of Valentec Systems, Inc., is
      an
      ammunition and systems integration company that provides ammunition to the
      United States Army and systems integration for foreign governments. Valentec
      Operating Corp. was incorporated on May 1, 1998 in the state of Delaware. Prior
      to April 10, 2006, Valentec Operating Corp. had the corporate name “Valentec
      Systems, Inc.”




Valentec
      Systems, Inc. and its wholly owned subsidiary Valentec Operating Corp are
      hereafter collectively referred to as (the “Company”).




***B)
      Basis of Presentation***





The
      accompanying unaudited condensed financial statements have been prepared in
      accordance with accounting principles generally accepted in The United States
      of
      America and the rules and regulations of the Securities and Exchange Commission
      for interim financial information. Accordingly, they do not include all the
      information necessary for a comprehensive presentation of financial position
      and
      results of operations.





It
      is
      management’s opinion, however that all material adjustments (consisting of
      normal recurring adjustments) have been made which are necessary for a fair
      financial statements presentation. The results for the interim period are not
      necessarily indicative of the results to be expected for the year.





***B)
      Use of Estimates***





The
      preparation of financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the reported amounts of assets and liabilities and disclosure of
      contingent assets and liabilities at the date of the financial statements and
      the reported amounts of revenues and expenses during the reporting period.
      Actual results could differ from those estimates. Significant estimates for
      2007
      and 2006 include amortization of development costs, estimation of cost to
      complete long term contracts, valuation allowance on deferred tax asset and
      allocation of overhead costs.





***(C)
      Cash and Cash Equivalents***





For
      purposes of financial statement presentation, the Company considers all highly
      liquid debt instruments with initial maturities of ninety days or less to be
      cash equivalents.




8





***(D)
      Principles of Consolidation***





The
      consolidated financial statements include the accounts of Valentec Systems,
      Inc., and its subsidiary, Valentec Operating Corp. All significant inter company
      accounts and transactions have been eliminated.





***(E)
      Inventory***





Inventories
      are valued at the lower of cost or market. Cost is determined using the
      first-in, first-out (FIFO) method. Provision for potentially obsolete or slow
      moving inventory is made based on management’s analysis of inventory levels and
      future sales forecasts.





***(F)
      Property and Equipment***





Property
      and equipment are recorded at the original cost to the Company. Assets are
      being
      depreciated using the straight line balance method over predetermined lives
      of
      three to seven years.





***(G)
      Contract Revenue***





Revenue
      from fixed-price type contracts is recognized under the percentage-of-completion
      using the cost-to-cost method of accounting, with cost and estimated profits
      included in contract revenue as work is performed. If actual and estimated
      costs
      to complete a contract indicate a loss, a provision is made currently for the
      loss anticipated on the contract. Advance payments received are reported in
      the
      accompanying balance sheet as deferred revenue.





Revenue
      from time and materials type contracts is recognized as costs are incurred
      at
      amounts represented by the agreed-upon billing amounts.





Revenue
      recognized on contracts for which billings have not been presented to customers
      is included in the accounts receivable classification on the balance
      sheet





***(H)
      Fair Value of Financial Instruments***





The
      carrying amounts of the Company’s financial instruments including accounts
      receivable, accounts payable, notes payable, capital leases, lines of credit
      and
      deferred revenue approximate fair value due to the relatively short period
      to
      maturity for these instruments.





***(I)
      Earnings (Loss) Per Share***





Basic
      and
      diluted net earnings (loss) per common share is computed based upon the weighted
      average common shares outstanding as defined by Financial Accounting Standards
      No. 128, “Earnings Per Share.” As of June 30, 2007, the Company has 2,000,000
      warrants and options outstanding that are not included in dilutive net earnings
      per share as the effect is anti-dilutive. As of June 30, 2006, the Company
      has
      1,000,000 warrants and options outstanding that are not included in dilutive
      net
      earnings per share as the effect is anti-dilutive.





***(J)
      Product Information***





The
      company operates in three product lines, systems management and integration,
      energetic manufacturing and metal parts.





**Six
      months ended June 30, 2007**





**Systems**
            
            **Energetic**
            
            **Metal
                Parts**
            
            **Total**Revenues
            
            $
            4,752,097
            
            $
            2,105,176
            
            $
            -
            
            $
            6,857,273Gross
                Profit
            
            
            714,070
            
            
            944,679
            
            
            (638,437
            )
            
            1,020,312Order
                Backlog
            
            
            10,437,880
            
            
            5,121,756
            
            
            -
            
            
            15,559,636




9





***(K)
      Long-Lived Assets***





The
      Company accounts for long-lived assets under the Statements of Financial
      Accounting Standards Nos. 142 and 144 “Accounting for Goodwill and Other
      Intangible Assets” and “Accounting for Impairment or Disposal of Long-Lived
      Assets” (“SFAS No. 142 and 144”). In accordance with SFAS No. 142 and 144,
      long-lived assets, goodwill and certain identifiable intangible assets held
      and
      used by the Company are reviewed for impairment whenever events or changes
      in
      circumstances indicate that the carrying amount of an asset may not be
      recoverable. For purposes of evaluating the recoverability of long-lived assets,
      goodwill and intangible assets, the recoverability test is performed using
      undiscounted net cash flows related to the long-lived assets.





***(L)
      Reclassification***





Certain
      amounts from prior periods have been reclassified to conform to the current
      year
      presentation.





***(M)
      Income Taxes***





The
      Company accounts for income taxes under the Statement of Financial Accounting
      Standards No. 109, “Accounting for Income Taxes” (“Statement 109”). Under
      Statement 109, deferred tax assets and liabilities are recognized for the future
      tax consequences attributable to differences between the financial statement
      carrying amounts of existing assets and liabilities and their respective tax
      bases. Deferred tax assets and liabilities are measured using enacted tax rates
      expected to apply to taxable income in the years in which those temporary
      differences are expected to be recovered or settled. Under Statement 109, the
      effect on deferred tax assets and liabilities of a change in tax rates is
      recognized in income in the period that includes the enactment
      date.





***(N)
      Stock Based Compensation Policy***





The
      Company adopted the provisions of SFAS No. 123R, “Share-Based Payment”, which
      replaces SFAS No. 123, “Accounting for Stock-Based Compensation”, and supersedes
      APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related
      interpretations. SFAS No. 123(R) requires compensation costs related to
      share-based payment transactions, including employee stock options, to be
      recognized in the financial statements by defining a fair value method of
      accounting for stock options and similar equity instruments. Under the fair
      value method, compensation cost is measured at the grant date based on the
      fair
      value of the award and is recognized over the service period, which is usually
      the vesting period.





In
      adopting SFAS No. 123(R), the Company applied the modified prospective approach
      to transition. Under the modified prospective approach, the provisions of SFAS
      No. 123(R) are to be applied to new awards and to awards modified, repurchased,
      or cancelled after the required effective date. Additionally, compensation
      cost
      for the portion of awards for which the requisite service has not been rendered
      that are outstanding as of the required effective date shall be recognized
      as
      the requisite service is rendered on or after the required effective date.
      The
      compensation costs for that portion of awards shall be based on the grant-date
      fair value of those awards as calculated for either recognition or pro-forma
      disclosures under SFAS No. 123.





In
      addition, the Company adheres to the guidance set forth within SEC Staff
      Accounting Bulletin No. 107, which provides the views of the staff of the SEC
      regarding the interaction between SFAS No. 123(R) and certain SEC rules and
      regulations and provides interpretations with respect to the valuation of
      share-based payments for public companies.





***(O)
      Recent Accounting Pronouncements***





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. The
      objective of SFAS 157 is to increase consistency and comparability in fair
      value
      measurements and to expand disclosures about fair value measurements. SFAS
      157
      defines fair value, establishes a framework for measuring fair value in
      generally accepted accounting principles, and expands disclosures about fair
      value measurements. SFAS 157 applies under other accounting pronouncements
      that
      require or permit fair value measurements and does not require any new fair
      value measurements. The provisions of SFAS No. 157 are effective for fair value
      measurements made in fiscal years beginning after November 15, 2007. The
      adoption of this statement is not expected to have a material effect on the
      Company's future reported financial position or results of
      operations.




10





In
      February 2007, the Financial Accounting Standards Board (FASB) issued SFAS
      No.
      159, “The Fair Value Option for Financial Assets and Financial Liabilities -
      Including an Amendment of FASB Statement No. 115”. This statement permits
      entities to choose to measure many financial instruments and certain other
      items
      at fair value. Most of the provisions of SFAS No. 159 apply only to entities
      that elect the fair value option. However, the amendment to SFAS No. 115
“Accounting for Certain Investments in Debt and Equity Securities” applies to
      all entities with available-for-sale and trading securities. SFAS No. 159 is
      effective as of the beginning of an entity’s first fiscal year that begins after
      November 15, 2007. Early adoption is permitted as of the beginning of a fiscal
      year that begins on or before November 15, 2007, provided the entity also elects
      to apply the provision of SFAS No. 157, “Fair Value Measurements”. The adoption
      of this statement is not expected to have a material effect on the Company's
      financial statements.





**NOTE
              2**
            **ACCOUNTS
                RECEIVABLE AND IN-PROCESS
                BILLINGS**





Accounts
      receivable consist of billed and unbilled accounts under contracts in progress
      with governmental units, principally with the Department of Defense and the
      Government of Israel. The components of accounts receivable at June 30, 2007
      were:





Billed
            
            $
            4,686,352Unbilled
            
            
            12,185,587Total
            
            $
            16,871,939





Unbilled
      accounts receivable relates to work that has been performed for which billings
      have not been presented to customers. It is anticipated that the unbilled
      amounts will be collected within the current fiscal year.





Accounts
      receivable from the U.S. Government at June 30, 2007 was $3,374,919, which
      is
      included in billed receivables of $1,195,274 and unbilled receivables of
      $2,179,645. Currently there is an ongoing Request for Equitable Adjustment
      (REA)
      dispute with the U.S. Army in the amount of $1,085,192, which is included in
      the
      Accounts Receivable from the U.S. Government, and unbilled receivables of
      $295,476.





Billed
      accounts receivable also includes $3,467,810 from a foreign government, the
      Department of Defense, Israel. Unbilled accounts receivable for foreign
      governments, Israel, is $10,002,958 at June 30, 2007.





The
      Company received advance payments from the Israeli Department of Defense and
      applied it to unbilled receivables as a percentage of unbilled accounts
      receivable to liquidate the advance payments upon completion of the contracts
      under the previsions of each contract.





The
      Company recorded a provision for doubtful accounts of $-0- and $-0- for the
      six
      months ended June 30, 2007 and 2006.





**NOTE
              3**
            **INSURANCE
                PROCEEDS RECEIVABLE ARISING FROM INVOLUNTARY LOSS CONVERSION DUE
                TO
                FIRE**





On
      August
      14, 2006, Valentec Systems, Inc. sustained a fire in its 40mm manufacturing
      facility. As a result of the fire, the Company experienced a loss of a
      significant amount of Machinery and Equipment, Inventory and Leasehold
      Improvements. The Company believed it had property insurance in the amount
      of
      $1,284,850. However, in December 2006 the Company was notified by its Insurance
      Broker that the additional $249,850 in coverage requested and believed to be
      in
      place as of August 10, 2006, four days before the fire, had not been placed.
      (See Note 15A)




**NOTE
              4**
            **INVENTORY**





Inventory
      is stated at the lower of cost or market value using the average cost method.
      Inventories at June 30, 2007 consist of:





Finished
                goods
            
            $
            452,745





The
      Company reviews its inventory for impairment and as of June 30, 2007 and 2006
      there were none.




11





**NOTE
              5**
            **PROPERTY
                AND EQUIPMENT**





The
      following is a summary of property and equipment at June 30, 2007:





Furniture
                and fixtures
            
            $
            106,351Machinery
                and equipment
            
            
            2,495,312Leasehold
                improvements
            
            
            1,632,8104,234,473Less
                accumulated depreciation
            
            
            (1,625,306
            )$
            2,609,167





Depreciation
      expense was $243,992 and $215,936 for the six month periods ended June 30,
      2007
      and 2006, respectively.




**NOTE
              6**
            **DEVELOPMENT
                COSTS**





The
      Company incurred development cost associated with the development of six new
      product lines of $6,261,979 in 2004 and an additional $512,961 in 2005 for
      a
      total of $6,774,940. These costs are being allocated to associated contracts
      beginning in 2005. The cost relates to the following product lines:





Keshet
                –
                Systems Integration
            
            $
            3,026,140Ammunition
                Mortar Rounds (60,81,120 mm)
            
            
            854,10840mm
            
            
            2,894,6926,774,940Less
                development cost amortization
            
            
            (1,196,739
            )$
            5,578,201





Total
      amortization expense for the six months ending June 30, 2007 and 2006, is
      $263,709 and $239,458, respectively.





**NOTE
              7**
            **NOTE
                PAYABLE –
                LINE OF
                CREDIT**





The
      line
      of credit from Bank Hapoalim in the amount of $4,000,000 accrues interest at
      a
      rate of Libor plus 1.75% (at June 30, 2007 — 7.13% per annum). The line of
      credit is secured by a letter of credit from a stockholder. At June 30, 2007
      $3,930,000 was outstanding under this line.





The
      line
      of credit from Bank Leumi in the amount of $500,000 accrues interest at a rate
      of 7.10% per annum. The line of credit is secured by a letter of credit from
      a
      stockholder. At June 30, 2007 $500,000 was outstanding under this line.





The
      line
      of credit from Rockland Credit Finance has a facility limit of $10,000,000
      accruing interest at 1% per month on outstanding balances plus Prime plus 2%
      per
      annum (at June 30, 2007 - 10.25%). The line of credit is secured under a Master
      Factoring Agreement which includes a lien on all the assets of the Company.
      The
      total amount available under the line varies based on the total billed and
      unbilled accounts receivable. The total available as of June 30, 2007 was
      $10,000,000, based on 70% of in-process receivables and 90% of billed accounts
      receivable. At June 30, 2007, $6,547,290 was outstanding under this line. The
      line of credit agreement requires the Company to submit monthly and annual
      financial reports and stay in compliance with various state and federal laws.
      Rockland will consider increasing Total Facility limit up to $15 million based
      on collateral formula should collateral support increase.





**NOTE
              8**
            **NOTE
                PAYABLE –
                SHORT
                TERM**




On
      April
      12, 2007, the Company became indebted to Rockland Credit Finance for a short
      term note in the amount of $1,100,000. The note bears a varying interest rate
      of
      Prime plus 13.5757% per annum (at June 30, 2007 - 21.8257%) and is accrued
      and
      paid monthly. The note is an interest only note and the principal balance is
      payable in full on or before September 1, 2007. As of June 30, 2007, the
      outstanding balance is $953,449.





**NOTE
              9**
            **NOTE
                PAYABLE – STOCKHOLDERS**





The
      Company is indebted under notes payable to two stockholders of the Company.
      The
      notes bear interest at various rates based on prime rate per annum which was
      8.25% as of June 30, 2007. Since 2005, the two stockholders have waived their
      right to interest under the notes. For the six months ending June 30, 2007,
      the
      Company has recorded an in-kind contribution in the amount of $21,006. The
      notes
      are due on demand and have an outstanding balance of $433,274 as of June 30,
      2007.




12





The
      Company is indebted under a notes payable to a stockholder who repaid $1,000,000
      of a Bank Line of Credit called in November 2006 by securing a loan against
      personal real estate with Rockland Credit Finance. The original amount of the
      note payable to Rockland Credit Finance was $1,050,000, which included incurred
      and accrued closing costs on the real estate. The note bears an interest rate
      of
      20.0% payable monthly. The note is an interest only note and the principal
      balance is payable in full on October 31, 2007. As of June 30, 2007, the
      outstanding balance is $1,020,855.





The
      Company is indebted under a notes payable to a stockholder, through a related
      Company holding, who repaid $1,000,000 of a Bank Line of Credit called in
      November 2006. The amount of the note payable to Mikal LTD, a wholly owned
      Company of the Stockholder, is $1,000,000. The note bears a varying interest
      rate of LIBOR+2%, (at June 30, 2007 - 7.40%)
      accrued monthly and payable annually. The note is an interest only note and
      the
      principal and accrued interest balance is payable in full on October 31, 2007.
      As of June 30, 2007, the outstanding balance is $1,045,120.





On
      April
      17, 2007, the Company became indebted under a notes payable to a stockholder,
      through a related Company holding, Mikal LTD, a wholly owned Company of the
      Stockholder, in the amount of $2,000,000. The note bears a fixed interest rate
      of 15%, accrued monthly and payable at maturity. The note is an interest only
      note and the principal and accrued interest balance is payable in full on
      September 30, 2007. As of June 30, 2007, the outstanding balance is
      $2,059,844.





**NOTE
              10**
            **EQUITY**





The
      Company entered into an agreement in April 2005 with an investment firm to
      provide up to $15,000,000 of equity per a Standby Equity Distribution Agreement
      (SEDA). The common stock issued under the SEDA would be at 98% of market value.
      In addition, each advance has a 5% transaction fee. In connection with this
      transaction, the Company, issued a warrant to the investment company to acquire
      200,000 shares of common stock at an exercise price of $.01 per share. The
      warrants were valued based on the Black-Scholes option pricing model with the
      following assumptions: dividend yield of 0%, term of 2 years, volatility of
      130%
      and risk-free rate of 4.05%. The Company recorded $621,254 of fees associated
      with these various transactions as deferred offering costs, which were written
      off on December 31, 2006.





The
      Company is indebted under notes payable to two stockholders of the Company.
      Since 2005, the two stockholders have waived their right to interest under
      the
      notes and the Company recorded an in-kind contribution in the amount of $21,006
      for the six months ended June 30, 2007. (See Note 9)





Under
      the
      2006 Equity Incentive Plan (the “2006 Plan”), the Board of Directors of the
      Company may grant stock options, stock appreciation rights or restricted stock
      to its employees, officers and other key persons employed or retained by the
      Company and any non-employee director, consultant, vendor or other individual
      having a business relationship with the Company to purchase up to 2,000,000
      shares of common stock. Options are granted at various times and vest over
      various periods.





O n
      January
      15, 2007, the Board of Directors of the Company granted a total of 1,000,000
      options to purchase shares of the Company’s common stock under the Company’s
      2006 Equity Incentive Plan. The options were granted to several key management
      employees of the Company and are vested at a rate of 25% per year over 4 years
      at an exercise price of $0.18 per share. .
      The
      fair value of options at the date of grant is estimated using the Black-Scholes
      option pricing model. The assumptions made in calculating the fair values of
      options are as follows:





For the six
                months endedJune 30, 2007Expected
                term (in years)
            
            
            4Expected
                volatility
            
            
            240
            %Expected
                dividend yield
            
            
            0
            %Risk-free
                interest rate
            
            
            4.5
            %





13





A
      summary
      of the status of the Company’s stock options as of June 30, 2007 and the changes
      during the period ended is presented below:




Weighted
                Average Fixed Options
            
            Shares
            
            Exercise PriceOutstanding
                at beginning of year
            
            
            1,000,000
            
            $
            0.154Issued
            
            
            1,000,000
            
            
            0.180Cancelled
            
            
            —
            
            
            —Outstanding
                at June 30, 2007
            
            
            2,000,000
            
            $
            0.165Exercisable
                at June 30, 2007
            
            
            1,000,000Weighted
                average exercise price of options granted at June 30, 2007
            
            $
            0.165





Exercise
                Price
            
            **Number**
              **Outstanding**
              **at June 30, 2007**
            
            **Weighted**
              **Average**
              **Remaining**
              **Contractual Life**
            
            **Weighted**
              **Average**
              **Exercise Price**
            
            **Number**
              **Exercisable at**
              **June 30, 2007**
            
            **Weighted**
              **Average**
              **Exercise Price**$0.25
            
            
            600,000
            
            
            7.5
            
            $
            0.25
            
            
            1,000,000
            
            $
            0.25$0.01
            
            
            400,000
            
            
            7.5
            
            $
            0.01
            
            
            400,000
            
            $
            0.01$0.18
            
            
            1,000,000
            
            
            4.0
            
            $
            0.18
            
            
            -0-
            
            $
            0.18





The
      cost
      of the Stock Options during the six months ending June 30, 2007 was
      $14,050.




**NOTE
              11**
            **WARRANTS
                AND OPTIONS**





On
      August
      19, 2005,the Company issued 600,000 warrants to members of the Board of
      Directors for services to Purchase Common Stock at an exercise price of $0.25
      per share. The warrants were valued based on the Black-Scholes option pricing
      model with the following assumptions: dividend yield of 0%, term of 2 years,
      volatility of 130% and risk-free interest rate of 4.05%. The Warrants became
      exercisable immediately and expire on August 19, 2008.





Pursuant
      to the Stock Purchase and Share Exchange agreement between Valentec Systems
      and
      Valentec Operating, 200,000 warrants were issued to Montgomery Equity Partners
      at an exercise price of $0.01 per share that expired on April 28,
      2007.





Pursuant
      to the SEDA Agreement between Cornell Capital Partners and Valentec Systems,
      200,000 warrants were issued to Cornell Capital Partners at an exercise price
      of
      $0.01 per share. The fair value of $26,458 is recorded as deferred offering
      costs and will be amortized upon receipt of the SEDA funding that expired on
      April 28, 2007.





O n
      January
      15, 2007, the Board of Directors of the Company granted a total of 1,000,000
      options to purchase shares of the Company ’ s
      common
      stock under the Company ’ s
      2006
      Equity Incentive Plan.  The
      options were granted to several key management employees of the Company and
      are
      vested at a rate of 25% per year over 4 years at an exercise price of $0.18
      per
      share. The
      options were valued based on the Black-Scholes option pricing. (See Note
      10)




In
      connection with their service as directors, Mr. Yarborough and Mr. Cianciolo,
      who were appointed in March 2007 as members of our Board of Directors, will
      receive Valentec ’ s
      standard non-employee director cash and equity compensation in accordance with
      the form of engagement letter approved by Valentec ’ s
      Board
      of Directors, including an annual grant of option to purchase up to 10,000
      shares of Common Stock of Valentec under its 2006 Stock Incentive Plan as long
      as the director holds such office in Valentec, subject to approval by the Board.
      The shares subject to this option will vest in four equal annual installments
      upon the completion of each year of board service measured from the grant
      date.





**NOTE
              12**
            **PROFIT
                SHARING PLAN**




The
      Company has adopted a qualified 401(k) Profit Sharing Plan for all present
      and
      future eligible employees. The Company matches employee contributions, $0.50
      cents for every dollar, up to 3% of salaries and may contribute a discretionary
      amount annually as determined by the Board of Directors. The contribution is
      limited to the maximum contribution allowed under the Internal Revenue Service
      regulations, which is presently 15% of their gross annual earnings limited
      to
      $7,000, as indexed for inflation. Employees vest 100% in all salary reduction
      contributions. The Company’s matching and discretionary contributions vest 100%
      after two years of service. The Company contributed $12,920 and $23,850 as
      of
      June 30, 2007 and 2006, respectively, as a match to employees and did not make
      any annual discretionary contributions for either period .





14




**NOTE
                13**
              **RELATED
                  PARTY**
 
 The
        Company’s principal stockholders also have interest in other companies whose
        operations are similar to those of the Company. The Company purchases and
        sells
        materials and services to these entities. Following is a summary of transactions
        and balances with affiliates for the periods ending June 30, 2007 and June
        30,
        2006:
 
 **June
                  30, 2007**
              
              **June
                  30, 2006**Sales
                  to affiliates
              
              $
              4,752,097
              
              $
              8,174,230Due
                  from affiliates (included in advances - stockholders in accompanying
                  balance sheet)
              
              $
              204,293
              
              $
              196,749Due
                  to related party
              
              $
              1,842,941
              
              $
              1,319,711Notes
                  Payable to related party
              
              $
              3,104,964
              
              $
              -Notes
                  Payable to Stockholders
              
              $
              1,454,129
              
              $
              433,274Advance
                  payment on a contract – related party
              
              $
              1,026,803
              
              $
              2,329,872
 
 For
        the
        six month period ending June 30, 2007, accrued and paid consulting and
        management fees of $212,000 and $0 respectively, to a related party, who
        is also
        a principal stockholder and director of the Company. For the six month period
        ending June 30, 2006, accrued and paid consulting and management fees were
        $212,000 and $30,000, respectively
 
 The
        Company accrued and paid consulting fees to TSC Consulting Services which
        is
        owned by a related party and a member of the Board of Directors. For the
        period
        ending June 30, 2007 and 2006, the consulting fees paid were $0 and $45,405,
        respectively.
 
 **NOTE
                14**
              **CONTRACT
                  STATUS**
 
 The
        Company has provided products and services to the government under fixed
        price
        contracts. In these types of contracts, prices are not subject to any adjustment
        on the basis of costs incurred to perform the required work under the technical
        data package (TDP). The award of any negotiated contract in excess of $100,000
        ($500,000 for Department of Defense, National Aeronautics and Space
        Administration and Coast Guard) with certain exemptions as provided by
        regulation, requires certification by the contractor that cost and pricing
        data
        used to negotiate the final price is current, accurate and complete. This
        certification entitles the government to a price adjustment, including profit
        or
        fee, of any significant amount by which the price was increased because of
        defective data. The Company is also restricted in the amount it can bill
        under
        each contract until it has passed its first article (inspection) test. That
        limit is 10% of the contract amount. The Company, in the normal course of
        business, periodically reviews its cost estimates on all contracts. In the
        opinion of management, the potential for any price adjustment on open contracts
        is remote and, if adjusted, would not have a material effect on the Company’s
        financial position or results of operations for the period.
 
 **Backlog**  **-** The
        Company has authorized contracts on hand for which work is in progress at
        June
        30, 2007 and 2006 approximately as follows:
 
 **June
                  30, 2007**
              
              **June
                  30, 2006**Total
                  contract price of initial contract awards including exercised options
                  and
                  approved change orders (modifications)
              
              $
              51,879,341
              
              $
              35,524,906Completed
                  to date
              
              
              36,439,904
              
              
              10,276,374Authorized
                  backlog
              
              $
              15,439,437*
              
              $
              25,248,532*
 ____________
 *
              Included
                  in this amount is $10,437,880 and $22,343,031 for 2007 and 2006,
                  respectively, in authorized backlog from a related party (Soltam
                  Systems).
  **NOTE
                15**
              **COMMITMENTS
                  AND CONTINGENT
                  LIABILITIES**
 
 ***(A)
        Litigation***
 
 Prior
        to
        the expiration of the facilities management agreement with the Louisiana
        National Guard, certain employees involved in plant security duty were members
        of the International Guard Unit of America (I.G.U.A.) Local 81. With the
        expiration of the agreement and the resulting loss of employment, these
        employees filed a union membership grievance (December 28, 2004) with the
        Company, which has been turned over to the American Arbitration Association.
        The
        arbitration hearing was conducted on March 5, 2007 and on April 6, 2007 ruled
        in
        favor of Valentec Systems Inc.
  15
  Pursuant
        to a 1994 environmental class action settlement, Valentec Dayron Company
        (currently Valentec Operating Systems) along with Boise Cascade Company,
        Dictaphone Company, Harris Company, Martin Marietta Company, Medalist
        Industries, Inc and Rockwell International, Inc (herein Members) signed the
        Woodco Site Custody Account Agreement, dated October 5, 1994 as amended January
        28, 2005 which established the “Woodco Site Custody Account” for the purposes of
        disbursing funds necessary to satisfy the obligations of the Members. Valentec’s
        total current obligation for the next six years is $3,474.
 
 On
        August
        14, 2006, Valentec Systems, Inc. sustained a fire in its 40mm manufacturing
        facility. As a result of the fire, the Company experienced a loss of a
        significant amount of Machinery and Equipment, Inventory and Leasehold
        Improvements. The Company believed it had property insurance in the amount
        of
        $1,284,850. However in December 2006 the Company was notified by its Insurance
        Broker that the additional $249,850 in coverage requested and believed to
        be in
        place as of August 10, 2006; four days before the fire, had not been placed.
        The
        Broker claims they did not receive clear instructions as to when the additional
        coverage was to be made effective. Therefore on February 25, 2007, Valentec
        Systems, Inc filed suit against its agent for damages suffered in the amount
        of
        $249,850 plus legal costs. The Company believes it has sufficient documentation
        to assert and sustain its claims against the defendants and is therefore
        confident in our ability prevail in the litigation.
 
 Due
        to
        Cash Flow issues experienced as a result of the 40MM production line fire,
        Valentec has been named as a defendant is several lawsuits bought on by various
        Accounts Payable vendors who the Company owes funds. On June 25, 2007 Ashley
        Ward Inc was granted a Judgment in the amount of $16,793.28 in which a payment
        schedule has been agreed upon by both parties. On August 7, 2007 OMEGA Container
        was granted a Judgment in the amount of $42,726.97 in which both parties
        are
        currently discussing a payment schedule. On August 6, 2007 Valentec granted
        VyComp Production a Confession of Judgment after working our a repayment
        schedule in the amount of $800,136.35. Valentec is in the process of working
        with other vendors and their attorney’s to retire the outstanding balances owed
        to avoid further litigation and anticipates an amiable resolution over the
        next
        12 months.
 
 On
        June
        29, 2007, Valentec Systems Inc received a Demand Letter from the State of
        Louisiana in the amount of $7,419,164 for the estimated cleanup and rebuilding
        costs of the facilities lost in the August 14, 2006 fire. Valentec was given
        thirty days to forward payment before any litigation would be pursued. Valentec
        has responded to the State’s payment demand through our attorney citing Section
        9(b) of our Lease in affect at the time of the fire. Section 9(b) is a Hold
        Harmless clause releasing Valentec Systems from any and all responsibility
        relative to any damages to the Lease facility above the stated $50,000 limit,
        which Valentec Systems has already paid. Valentec believes the payment demand
        is
        without merit and should any litigation be filed we believe we would prevail
        in
        our claims.
 
 There
        is
        no other litigation or outstanding claims by or against the
        Company.
 
 ***(B)
        Employment Agreement***
 
 The
        Company entered into a two year employment agreement with Robert A. Zummo,
        CEO,
        effective as of January 1, 2006 with automatic one-year extensions. The Company
        agrees to pay Mr. Zummo a base salary of $520,000, and benefits such as an
        annual car allowance of approximately $7,734, reimbursement of telephone
        expenses, health, dental and life insurance as set forth in the employment
        agreement. The
        Board of Directors resolved that upon
        consummation of the transaction with MAST Technology Inc., Mr. Zummo’s
        annual base salary shall be $320,000. Effective June 1, 2007, as part of
        a cost
        reduction effort, Mr. Zummo voluntarily agreed to reduce his annual salary
        by
        $10,000 per month to a base salary of $400,000.
 
 ***(C)
        Capital Lease***
 
 As
        of
        June 30, 2007, the Company has six capital leases. The leases are for
        manufacturing equipment in the amount of $350,879 and lease for computer
        equipment in the amount of $12,102. All leases are secured by the related
        assets
        and allow the company to purchase the assets at the end of the lease for
        $1. The
        effective interest rate on all leases range between 8.61% and 8.99%. with
        total
        monthly lease payments of $7,563.
  16
 
 **NOTE
                16**
              **CONCENTRATIONS**
 
 ***(A)
        Revenue and Receivables***
 
 The
        Company’s operations are dependent on governmental funding of defense and
        ammunition projects. Significant changes in the level of government funding
        of
        these projects could have a favorable or unfavorable impact on the operating
        results of the Company. During the six months ended June 30, 2007 and 2006,
        the
        Company had two customers which made up 29.0% and 69.2% of total sales in
        2007
        and 21.4% and 76.1% in 2006, US Army and the Israeli Department of Defense
        (through a related party located in Israel).
 
 ***(B)
        Suppliers***
 
 The
        Company is dependent upon a number of major suppliers. If a major supplier
        were
        to cease doing business, the Company could be adversely affected to the extent
        the supplier could not be replaced. The Company is dependent on some sole
        source
        suppliers. As of June 30, 2007 and 2006, no one supplier represented more
        than
        10% of purchases.
 
 ***(C)
        Materials***
 
 If
        a
        critical supplier had operational problems or ceased making material available
        to the Company, operations could be adversely affected. In some cases, materials
        are supplied by sole source vendors, for which the Company does not have
        a
        replacement vendor.
 
 ***(D)
        Foreign Operations***
 
 The
        Company sells to various foreign customers. The sales to one foreign customer
        for the six months ending June 30, 2007 and 2006 were 69.2% and 76.1%.
        Significant changes in the level of government funding of these projects
        could
        have a favorable or unfavorable impact on the operating results of the
        Company.
 
 **NOTE
                17**
              **GOING
                  CONCERN**
 
 As
        reflected in the accompanying consolidated financial statements, the Company
        has
        a working capital deficiency of $13,904,264 and a net loss of $3,428,067
        for the
        six months ended June 30, 2007. The Company currently does not have enough
        cash
        to continue operations for twelve months, which raises substantial doubt
        about
        our ability to continue as a going concern. However, management continues
        to
        make significant cost reductions to improve cash flow and working capital.
        The
        Company is in the process of evaluating and developing further Overhead and
        General and Administrative cost reductions to be implemented throughout the
        remainder of 2007. The plan is to return the Company to profitability and
        significantly reduce the overall outstanding lines of credit within the next
        twelve to eighteen months with cash from operations on previously executed
        contracts and thereby reducing their debt servicing burden. The Company is
        also
        considering a number of alternative financing arrangements that could provide
        a
        capital structure that would enable the Company to more efficiently manage
        its
        internal growth plans as well as providing funds for strategic acquisitions.
        Management believes that actions presently being taken will provide the
        opportunity for the Company to continue as a going concern and remain a viable
        Company.
 
 **NOTE
                18**
              **SUBSEQUENT
                  EVENTS**
 
 On
        January 22, 2007, the
        Company filed a Current Report on Form 8-K announcing it
        entered into a binding term sheet to acquire all of the outstanding capital
        stock of MAST Technology, Inc., a Missouri based company hereinafter referred
        to
        as MAST. On May 31, 2007, the Company filed a Current Report on Form 8-K
        announcing an extension to the MAST acquisition to allow 210 Days from the
        original announcement date of January 22, 2007 to execute the transaction.
        As of
        the date of this report, the transaction structure has yet to be formally
        determined.
  17
 
 **ITEM
        2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
        OPERATION**
 
 ***FORWARD-LOOKING
        STATEMENTS***
 
 *Information
        included or incorporated by reference in this filing may*  *contain
        forward-looking statements. This information may involve known
        and*  *unknown
        risks, uncertainties and other factors which may cause our
        actual*  *results,
        performance or achievements of the Company to be materially
        different*  *from
        the future results, performance or achievements expressed or implied
        by*  *any
        forward-looking statements. Forward-looking statements, which
        involve*  *assumptions
        and describe our future plans, strategies and expectations, are*  *generally
        identifiable by use of the words “may”, “should”, “expect”,*  *“anticipate”,
        “estimate”, “believe”, “intend”, or “project”, or the negative
        of*  *these
        words or other variations on these words or comparable
        terminology.*
 
 *This
        filing contains forward-looking statements, including
        statements*  *regarding,
        among other things, (a) our projected sales and profitability,
        (b)*  *our
        growth strategies, (c) anticipated trends in our industry, (d) our
        future*  *financing
        plans and (e) our anticipated needs for working capital. These*  *statements
        may be found under “Management’s Discussion and Analysis or Plan
        of*  *Operations”
        and “Business”, as well as in this filing generally. Actual
        events*  *or
        results may differ materially from those discussed in
        forward-looking*  *statements
        as a result of various factors, including, without limitation,
        the*  *risks
        outlined under “Risk Factors” and matters described in this
        filing*  *generally.
        In light of these risks and uncertainties, there can be no
        assurance*  *that
        the forward-looking statements contained in this filing will in
        fact*  *occur.*
 
 ***OVERVIEW***
 
 Valentec
        Systems, Inc. is a proven supplier of conventional ammunition, pyrotechnic
        and
        related defense products, including systems management and integration programs.
        Valentec operates three (3) production lines:
 
 t
              **Systems
                  Management/Integration**segment consists of 120mm Mortar Weapon System with Electronic
                  Fire
                  Control and mortar ammunition consisting of 120mm, 81mm and 60mm.
                  The
                  Company will pursue contracts from foreign governments for vehicle
                  integration and mortar ammunition.
 t
              **Energetic
                  Manufacturing**segment consists of 40mm flares and simulators. Valentec is a producer
                  of
                  various flares and simulators with multiple end uses, such as
                  illumination, signaling and training purposes to simulate a battlefield
                  environment. The Company will pursue contracts from the US
                  Army.
 t
              **Metal
                  Parts Manufacturing**segment consists of 105mm Spiral Wrapped Cartridge Cases which
                  are used by
                  the U.S. Armed forces in battlefield. The Company is currently
                  marketing
                  this product with foreign governments and is also actively fulfilling
                  a
                  contract with U S Army. The Company will pursue additional contracts
                  with
                  U S government.
  Energetic
        Manufacturing accounted for 30.7% of the gross revenue, the Systems
        Management/Systems Integration accounted for 69.3% and Metal Parts Manufacturing
        accounting for 0% as of the six months ending June 30, 2007. The backlog
        at June
        30, 2007 was Energetic Manufacturing $5,121,756, (32.9%), Systems/Management
        Systems Integration $10,437,880, (67.1%) and Metal Parts Manufacturing $0,
        (0.0%) for a total of $15,559,636.
 
 Valentec
        plans to make investments in bids and proposal activity that, if successful,
        will significantly increase backlog, future sales and future profits. We
        intend
        to bid on new US Army systems ammunition requirements as well as new energetic
        and metal parts requirements. We also intend to make investments in automation
        equipment for energetic production that will improve efficiencies and future
        profits.
 
 The
        Company continues to evaluate potential acquisitions that could bring value
        to
        Valentec in terms of increased revenue, profits, cost savings, management
        talent
        and diversification.
 
 There
        were a number of events during Q2 that require discussion, as
        follows:
 
 **40MM
        Production Facility**
 
 On
        August
        14, Valentec experienced a small detonation in an unattended (by personnel)
        granulation process at its Louisiana facility. This detonation occurred in
        a
        facility that had concrete walls and was self-contained, however, the resulting
        fire completely destroyed 75,000 square feet of space at this manufacturing
        facility, completely eliminating our existing 40mm flare capability. We were
        leasing this facility from the State of Louisiana by Valentec and had obtained
        the required insurance coverage. Currently, we are engaged
        in ongoing discussions with the State of Louisiana concerning the responsibility
        for rebuilding of this 65-year old facility and for debris removal because
        some
        of the original construction material contains small amounts of asbestos.
        Valentec contends that the insurance coverage as required by the lease was
        in
        place and that such insurance should cover any liability on the part of
        Valentec.
  18
 
 With
        regards to the asbestos issue, Valentec believes that the asbestos removal
        and
        abatement is the responsibility of the property owner, the State of Louisiana.
        On June 29, 2007, The State of Louisiana formally issued a letter asserting
        a
        claim demanding $7.5 million in clean-up and rebuilding compensation as a
        result
        of the August 14, 2006 fire. Valentec has responded to the State of Louisiana
        citing section 9 subsection b of the Lease, in affect at the time of the
        fire,
        that provides a hold harmless clause thereby releasing Valentec from any
        and all
        responsibility above the stated $50,000 that was paid by the initial
        cleanup.
 
 As
        a
        result of the fire, the 40mm manufacturing facility was destroyed, and
        consequently, we lost the capability to meet our contract. Current contract
        revenue deferred was approximately $1,768,754. In an effort to avoid similar
        losses from work-related accidents, Valentec over the last seven months,
        has
        constructed a state of the art manufacturing facility utilizing portable
        and
        semi-portable metal buildings that segregate the various processes into smaller
        unconnected components. The rationale being that in the event of a future
        unplanned destructive incident, the facilities are isolated and a single
        incident would not disrupt or destroy the entire manufacturing complex. It
        also
        provides the ability to quickly resume operations because of the modular
        infrastructure configuration. On April 10, 2007, Valentec successfully passed
        our FAT (First Article Test) and resumed full production of the facility
        and
        delivered our first 20,000 units to our prime contractor in late May
        2007.
 
 On
        April
        5, 2007 Valentec received a add-on order for approximately 106,000 M583A1
        White
        Star Parachute for $3.2 M. Valentec also was awarded on July 25, 2007 a 16,000
        unit M992 IR Star Parachute contract for a value of $900,000.
 
 **System
        Contract**
  On
        February 7, 2007, Valentec received a Systems Vehicle contract from the
        Government of Israel for a value of $3.6M. This contract requires the system
        integration of the Keshet Mortar Gun System into Keshet modified
        Vehicle.
  The
        two
        major Keshet contracts and the Ammunition procurement activity have been
        approved by the Government of Israel for accelerated production and delivery.
        Valentec’s sub-tier supplier production problems have been resolved. Valentec
        now enjoys a mature sub-tier supplier base which allows for expedient production
        on any future programs. We expect to see these programs completed by the
        end of 2007.
 
 **SWCC**
 
 The
        Spiral Wrapped Cartridge Case (SWCC) project suffered multiple set-backs
        in the
        initial stages because of USG design flaws. Valentec was instrumental in
        resolving the design issues and in initiating production activities. We began
        manufacturing operations in late September and delivered the first lot on
        October 30, 2006. Valentec successfully delivered 2 lots totaling $1,065,652
        or
        35,528 units on November 10 and December 21, 2006. However, additional steel
        was
        required to complete the contract and was ordered and received in early March,
        2007. A lot was produced for ballistic acceptance on March 28, 2007. The
        lot
        presented an anomaly, which the US Government reviewed and accepted in June
        2007. Due to these delays and Material setbacks, the Spiral Wrap Cartridge
        Case
        Contract is projected to lose $93,222, of which $82,442 has already been
        recognized and an additional loss of $10,780 was accrued.
 In
        February 2007, the Company received an add-on order for another 22,500 Spiral
        Wrap Cartridge cases for a total of approximately $885,000. However, due
        to a
        technical design defect discovered in the Technical Data Package, the US
        government notified Valentec on June 18, 2007 that they had elected to Terminate
        for Convenience the February 2007 add-on order for the 22,500 Spiral Wrap
        Cartridge Cases. Valentec plans to accumulate the associated costs incurred
        as a
        result of the Termination of the Contract and file an REA with the government
        to
        recoup any and all costs.
 
 **Cost
        Reduction Plan**
 
 In
        early
        Q3 2006, the Company initiated a cost reduction plan, which was thoroughly
        evaluated, revised and re-evaluated and which identified approximately $2
        Million in annual reductions and was actively supported by all levels of
        management. Valentec has fully implemented this cost reduction plan and senior
        management is overseeing its continual implementation. These aggressive
        cut-backs coupled with intense cash management have helped sustain our ability
        to continue operations through 2006 and into 2007. The Company continues
        to
        review, evaluate and implement additional cost reductions in attempts to
        improve
        our profitability and sustain the Company’s operations forward through the
        remainder of 2007.
  19
  
 ***RESULTS
        OF OPERATION***
  Revenues
        for the six months ended June 30, 2007 were $6,857,273 compared to $10,272,874
        for the six months ended June 30, 2006, a decrease of $3,415,601 or 33.2%.
        Total
        gross margin for the six months ended June 30, 2007 was $1,020,312, (or 14.9%
        of
        total revenue) as compared to total gross margin for the comparative six
        months
        ended June 30, 2006 of $2,118,853 (or 20.6% of total revenue), which represents
        a decrease of 48.1%. The decrease in revenues is due to program delays
        experienced by Valentec’s subcontractors on the AMMO and Keshet Contacts as well
        as delays caused by the 40MM fire. The decrease in gross margin was due to
        expenses incurred on the Spiral Wrap Cartridge Contract where (1) expenses
        incurred at the beginning of the contract to correct design issues and (2)
        materials cost overruns incurred due to pricing increases above contract
        estimates. The Company views the decrease in gross margin as a temporary
        effect
        due to the completion of the Spiral Wrap Contract and the increased materials
        costs associated with that contract. The Company has a significant backlog
        of
        $15,559,636, which does not include customer options to renew or expand current
        contracts, which we believe are likely to be exercised. This backlog excludes
        the Company’s projection for future Foreign Military Sales (FMS). The Company is
        positioned to improve its results from operations in the balance of 2007
        and
        into 2008.
  Cost
        of
        goods sold during the six months ended June 30, 2007 was $5,836,961 compared
        to
        $8,154,021 for the six months ended June 30, 2006, a decrease of 28.4%. Total
        indirect cost (overhead and general and administrative) for the six months
        ended
        June 30, 2007 was $3,195,018 as compared to $3,774,726 for the six months
        ended
        June 30, 2006, a reduction of 15.4%. The decrease of cost of goods is a direct
        result of reduced revenues and the Spiral Wrap Cartridge Case material purchases
        on previously executed contract. Indirect, Overhead and General and
        Administrative expenses decreased overall due to expense reductions achieved
        primarily in the Indirect and General and Administrative area. The Company
        continues to review, evaluate and implement cost reductions in all areas
        of the
        operations, which we believe will help us reduce these expenses for the
        remainder of 2007 and forward into 2008.
  Other
        expense (interest expense less interest income and miscellaneous income)
        was
        $1,253,361 for the six months ended June 30, 2007 as compared to $818,570
        for
        the six months ended June 30, 2006. The increase in the Company’s interest
        expense is a result of (1) an increase of Lines of Credit used to finance
        current production (2) additional borrowings used to finance current contract
        production and (3) increase in the Prime Lending Rate index, which has increased
        from 7.00% to 8.25% since January 1, 2006.
  The
        Company had a net loss for the six months ended June 30, 2007 of ($3,428,067)
        compared to a net loss of ($2,474,443) for the six months ended June 30,
        2006.
        This was due primarily to three (3) factors; (1) an increase in interest
        and
        financing expenses to support the foreign military programs, (2) an increase
        in
        cost of goods sold as a result of resolving frustrated sub-tier supplier
        issues
        on specific contracts; and (3) delay in restarting of its 40mm manufacturing
        facility that was destroyed by fire on August 14, 2006. The Company is
        developing a Cost Reduction Plan to further reduce overhead and general and
        administrative expenses in order to offset the losses incurred on these.
  At
        June
        30, 2007 the Company had total assets of $26,483,383. This is a increase
        from
        total assets at June 30, 2006 of $25,432,350.
  ***LIQUIDITY
        AND CAPITAL RESOURCES***
  For
        the
        six months ended June 30, 2007, the Company had a positive cash flow from
        operations of $764,484 as compared to a negative cash flow from operations
        of
        $3,858,494 for the six months ended June 30, 2006. At June 30, 2007, the
        Company
        had outstanding borrowings (non-related party) of $11,930,739.
  The
        Company’s sources and uses of funds were as follows: (1) it received net cash of
        $764,484 from its operating activities in the six months ended June 30, 2007;
        (2) it used cash of $967,901 in investing activities in the six months ended
        June 30, 2007; and (3) $398,192 from its financing activities in the six
        months
        ended June 30, 2007, consisting primarily of additional borrowings from related
        parties. As of June 30, 2007, the Company had net working capital deficiency
        of
        $13,904,264.
  The
        Company is actively seeking financing alternatives for working capital, product
        development, marketing, and business opportunities that would enable the
        Company
        to more efficiently manage its rapid growth. In this regard, on April 28,
        2005,
        the Company entered into a Standby Equity Distribution Agreement (“SEDA”) with
        Cornell Capital Partners, L.P., (“Cornell”) whereby it can "put" to Cornell, for
        cash, up to $15 million in our common stock over a two-year period of time.
        Once
        accessed, this equity financing may increase the Company’s chances of succeeding
        in its growth plans. The Company may use the $15 million SEDA to support
        and
        fund expenditures for bids and proposals, capital equipment automation and
        acquisitions, as well as working capital growth.
        To make use of the SEDA, the Company must first increase its authorized capital
        and register additional shares for pubic sale. There can be no assurance
        that
        Valentec will be able to successfully increase its authorized capital and
        register additional shares for public sale. Moreover, in the event the Company
        is able to register additional shares, there can be no guarantee that Valentec
        will be able to successfully "put" shares under this Standby Equity Distribution
        Agreement, or at what level it will be able to "put” shares, since there are
        numerous conditions precedent for each "put" of shares to Cornell. Therefore,
        the Company continues to explore additional equity and debt financings,
        vendor-financing programs, letters of credit for manufacturing, leasing
        arrangements for its products, and equity participation for media purchases
        that
        will advertise its products. Also, the Company believes that marketing and
        consumer awareness is central to generating monthly revenues. The Company
        believes that its products may have greater appeal to foreign consumers due
        to
        quality, performance and price. When available, the Company expects to use
        the
        Cornell proceeds over a twenty-four (24) month period to support operations
        and
        expand its business.
  20
  The
        Company has entered into a Master Factoring Agreement with Rockland Credit
        Finance as an additional source of financing. A credit line of $10,000,000
        was
        established to provide additional working capital for the rapid growth the
        Company has experienced. The Company has used the additional funding for
        facilitization as well as for the purchase of additional equipment needed
        to
        support the increased backlog. At June 30, 2007, $6,547,290 was outstanding
        under this line of credit. Under the terms of the Agreement, Rockland Credit
        Finance has the option to increase the credit line to $15,000,000 if the
        Company
        has the collateral of accounts receivable and unbilled accounts receivable
        to
        support the increase. The use of funds would assist with the financing of
        the
        Company through the term of the Company’s long term contracts until the Company
        collects through the milestone payment schedules for its long term
        contracts.
 
 In
        addition, the Company has other lines of credit of $4,500,000 in the aggregate.
        At June 30, 2007, $4,430,000 was outstanding under these lines of
        credit.
 
 The
        Company’s negative cash flow from operations and working capital deficiencies
        raise substantial doubt about our ability to continue as a going concern.
        Management is in the process of further restructuring of the Company’s finances
        in order to improve cash flow through significant cost reductions and improved
        manufacturing performance to address this situation. Now that all manufacturing
        facilities are fully operational, and in conjunction with significant cost
        reductions in overhead and general and administrative expenses, we expect
        to
        achieve continued improvement in cash flow through year end December 31,
        2007
        and into 2008. The Company currently does not have enough cash to sustain
        operations for twelve months. However, management believes the cost reductions
        that have been implemented will significantly improve cash flow and will
        give
        the Company the cash needed to continue operations. The Company plans to
        reduce
        its lines of credit substantially within the next twelve months with available
        operating cash generated from current backlog and thereby reducing its debt
        servicing burden.
  ***RECENT
        ACCOUNTING PRONOUNCEMENTS***
  In
        September 2006, the FASB issued SFAS No. 157, “ *Fair
        Value Measurements* ”.
        The
        objective of SFAS 157 is to increase consistency and comparability in fair
        value
        measurements and to expand disclosures about fair value measurements. SFAS
        157
        defines fair value, establishes a framework for measuring fair value in
        generally accepted accounting principles, and expands disclosures about fair
        value measurements. SFAS 157 applies under other accounting pronouncements
        that
        require or permit fair value measurements and does not require any new fair
        value measurements. The provisions of SFAS No. 157 are effective for fair
        value
        measurements made in fiscal years beginning after November 15, 2007. The
        adoption of this statement is not expected to have a material effect on the
        Company's future reported financial position or results of
        operations.
 
 In
        February 2007, the Financial Accounting Standards Board (FASB) issued SFAS
        No.
        159, “ *The
        Fair Value Option for Financial Assets and Financial Liabilities - Including
        an
        Amendment of FASB Statement No. 115* ”.
        This
        statement permits entities to choose to measure many financial instruments
        and
        certain other items at fair value. Most of the provisions of SFAS No. 159
        apply
        only to entities that elect the fair value option. However, the amendment
        to
        SFAS No. 115 “ *Accounting
        for Certain Investments in Debt and Equity Securities* ”
applies
        to all entities with available-for-sale and trading securities. SFAS No.
        159 is
        effective as of the beginning of an entity’s first fiscal year that begins after
        November 15, 2007. Early adoption is permitted as of the beginning of a fiscal
        year that begins on or before November 15, 2007, provided the entity also
        elects
        to apply the provision of SFAS No. 157, “ *Fair
        Value Measurements”.* The
        adoption of this statement is not expected to have a material effect on the
        Company's financial statements.
 
 ***OFF-BALANCE
        SHEET ARRANGEMENTS***
 
 As
        part
        of our ongoing business, the Company does not participate in transactions
        that
        generate relationships which would have been established for the purpose
        of
        facilitating off-balance sheet arrangements. As of June 30, 2007, the Company
        does not have any off-balance sheet arrangements.
  21
 
 ***CRITICAL
        ACCOUNTING POLICIES***
 
 The
        Company’s discussion and analysis of its financial condition and results of
        operations are based upon the Company’s condensed consolidated financial
        statements, which have been prepared in accordance with accounting principles
        generally accepted in the United States. The preparation of these financial
        statements requires the Company to make estimates and judgments that affect
        the
        reported amounts of assets, liabilities, sales and expenses, and related
        disclosure of contingent assets and liabilities. The Company re-evaluates
        its
        estimates on an on-going basis. The Company’s estimates are based on historical
        experience and on various other assumptions that are believed to be reasonable
        under the circumstances. Actual results may differ from these estimates under
        different assumptions or conditions.
 
 The
        Company believes the following are its critical accounting policies which
        affect
        its more significant judgments and estimates used in the preparation of its
        consolidated financial statements:
 
 ·
              Revenue
                  recognition via the percentage of completion
                  method
 
 **Revenue
        Recognition via the Percentage of Completion Method.** We
        believe our most critical accounting policies include revenue recognition
        and
        cost estimation on fixed price contracts for which we use the percentage
        of
        completion method of accounting.
 
 Under
        the
        percentage of completion method, revenue is recognized on these contracts
        as
        work progresses during the period, based on the amount of actual cost incurred
        during the period compared to total estimated cost to be incurred for the
        total
        contract (cost-to-cost method). Management reviews these estimates as work
        progresses and the effect of any change in cost estimates is reflected in
        cost
        of sales in the period in which the change is identified. If the contract
        is
        projected to create a loss, the loss accrued for and is charged to operations
        beginning in the period it first becomes known.
 
 Accounting
        for the profit on a contract requires (1) the total contract value, (2) the
        estimated total cost to complete, which is equal to the sum of the actual
        incurred costs to date on the contract and the estimated costs to complete
        the
        contract’s scope of work, and (3) the measurement of progress towards
        completion. The estimated profit or loss on a contact is equal to the difference
        between the contract value and the estimated total cost at completion.
        Adjustments to original estimates are often required as work progresses under
        a
        contract, as experience is gained and as more information is obtained, even
        though the scope of work required under the contract may not change, or if
        contract modifications occur. A number of internal and external factors affect
        our cost of sales estimates, including labor rates and efficiency variances,
        material usage variances, delivery schedules and testing requirements. While
        we
        believe that the systems and procedures used by the Company, coupled with
        the
        experience of the management team, provide a sound basis for our estimates,
        actual results will differ from management’s estimates. The complexity of the
        estimation process and issues related to the assumptions, risks and
        uncertainties inherent with the application of the percentage of completion
        method affect the amounts reported in our financial statements.
  **ITEM
        3. CONTROLS AND PROCEDURES**
  **(a)**  **Evaluation
        of Disclosure Controls and Procedures:**
  The
        Company’s chief executive officer, who is also the Company’s chief financial
        officer, has reviewed and evaluated the effectiveness of the Company’s
        disclosure controls and procedures (as defined in Rules 13a-15(e) and
        15d-15(e) under the Exchange Act) as of the end of the period covered by
        this
        annual report. Based on that review and evaluation, the chief executive officer
        has concluded that the Company’s current disclosure controls and procedures, as
        designed are sufficiently effective to ensure that such officer is provided
        with
        information relating to the Company required to be disclosed in the reports
        the
        Company files or submits under the Exchange Act and that such information
        is
        recorded, processed, summarized and reported in a timely manner. However
        due to
        recent changes in responsible financial reporting personnel and insufficient
        training in the last fiscal year, the implementation of said internal controls
        were felt to have been weakened to cause concerns as to their effectiveness.
        The
        Company’s chief executive officer has however noted during the last six months
        ending June 30, 2007, significant improvement of responsible financial reporting
        personnel to gain sufficient assurances they will be able to identify and
        correct such issues in the future .
  22
 
 **(b)**
              **Changes
                  In Internal Controls Over Financial
                  Reporting**
 
 In
        connection with the evaluation of the Company’s internal controls during the
        Company’s last fiscal year, the Company’s Principal Executive Officer and
        Principal Accounting Officer have determined that due to changes in financial
        reporting personnel and inadequate training, the Company’s internal controls
        over financial reporting have weakened and is reasonably likely to materially
        effect the Company’s internal controls over financial reporting. A plan has been
        enacted to ensure adequate training of financial reporting personnel and
        improvement has been noted in resolving any potential internal control
        weaknesses that may arise in the future.
  **(c)**
              ***Inherent
                  Limitations on Effectiveness of
                  Controls***
 
 The
        Company’s management does not expect that its disclosure controls or its
        internal control over financial reporting will prevent or detect all error
        and
        all fraud. A control system, no matter how well designed and operated, can
        provide only reasonable, not absolute, assurance that the control system’s
        objectives will be met. The design of a control system must reflect the fact
        that there are resource constraints, and the benefits of controls must be
        considered relative to their costs. Further, because of the inherent limitations
        in all control systems, no evaluation of controls can provide absolute assurance
        that misstatements due to error or fraud will not occur or that all control
        issues and instances of fraud, if any, within the Company have been detected.
        These inherent limitations include the realities that judgments in decision
        making can be faulty and that breakdowns can occur because of simple error
        or
        mistake. Controls can also be circumvented by the individual acts of some
        persons, by collusion of two or more people, or management override of the
        controls. The design of any system of controls is based in part on certain
        assumptions about the likelihood of future events, and there can be no assurance
        that any design will succeed in achieving its stated goals under all potential
        future conditions. Projections of any evaluation of controls effectiveness
        to
        future periods are subject to risks. Over time, controls may become inadequate
        because of changes in conditions or deterioration in the degree of compliance
        with policies or procedures.
   **PART
        II**
  **ITEM
        1. LEGAL PROCEEDINGS**
  On
        December 28, 2004, former employees of the Company, who were members of the
        International Guard Union of America I.G.U.A. Local 81, filed a union membership
        grievance. The grievance alleges violation of the collective bargaining
        agreement in that Valentec did not provide severance pay upon the termination
        of
        the guards. In total, the grievance asks for approximately $30,000 in
        termination pay to be distributed among the affected guards. The dispute
        has
        been turned over to the American Arbitration Association. We believe that
        the
        claim is without merit and any ruling by the American Arbitration Association
        would have minimum impact on earnings. The arbitration hearing was conducted
        on
        March 5, 2007 and on April 6, 2007 ruled in favor of Valentec Systems
        Inc.
 
 Pursuant
        to a 1994 environmental class action settlement, Valentec Dayron Corporation
        (currently Valentec Systems, Inc.) along with Boise Cascade Corporation,
        Dictaphone Corporation, Harris Corporation, Martin Marietta Corporation,
        Medalist Industries, Inc and Rockwell International, Inc (herein Members)
        signed
        the Woodco Site Custody Account Agreement, dated October 5, 1994 as amended
        January 28, 2005 which established the “Woodco Site Custody Account” for the
        purposes of disbursing funds necessary to satisfy the obligations of the
        Members. Valentec’s current obligation is $1,158 per year for ten years from the
        date of the Amendment above.
 
 On
        August
        14, 2006, Valentec Systems, Inc. sustained a fire in its 40mm manufacturing
        facility. As a result of the fire, the Company experienced a loss of a
        significant amount of Machinery and Equipment, Inventory and Leasehold
        Improvements. The Company believed it had property insurance in the amount
        of
        $1,284,850. However in December 2006 the Company was notified its Insurance
        Broker that the additional $249,850 in coverage requested and believed to
        be in
        place as of August 10, four days before the fire, had not been placed. The
        Broker claims they did not receive clear instructions as to when the additional
        coverage was to be made effective. Therefore on February 25, 2007, Valentec
        Systems, Inc filed suit against Moreman, Moore and Company, Inc and its agent
        Bryan Willis for damages suffered in the amount of $249,850 plus legal costs.
        The Company believes it has sufficient documentation to assert and sustain
        its
        claims against the defendants and is therefore confident in our ability prevail
        in the litigation.
  23
 
 On
        June
        29, 2007, Valentec Systems Inc received a Demand Letter from the State of
        Louisiana in the amount of $7,419,164 for the estimated cleanup and rebuilding
        costs of the facilities lost in the August 14, 2006 fire. Valentec was given
        thirty days to forward payment before any litigation would be pursued. Valentec
        has responded to the State’s payment demand through our attorney citing Section
        9(b) of our Lease in affect at the time of the fire. Section 9(b) is a Hold
        Harmless clause releasing Valentec Systems from any and all responsibility
        relative to any damages to the Lease facility above the stated $50,000 limit,
        which Valentec Systems has already paid. Valentec believes the payment demand
        is
        without merit and should any litigation be filed we believe we would prevail
        in
        our claims.
  Due
        to
        Cash Flow issues experienced as a result of the 40MM production line fire,
        Valentec has been named as a defendant is several lawsuits bought on by various
        Accounts Payable vendors who the Company owes funds. On June 25, 2007 Ashley
        Ward Inc was granted a Judgment in the amount of $16,793.28 in which a payment
        schedule has been agreed upon by both parties. On August 7, 2007 OMEGA Container
        was granted a Judgment in the amount of $42,726.97 in which both parties
        are
        currently discussing a payment schedule. On August 6, 2007 Valentec granted
        VyComp Production a Confession of Judgment after working out a payment schedule
        in the amount of $800,136.35. Valentec is in the process of working with
        other
        vendors and their attorney’s to retire the outstanding balances owed to avoid
        further litigation and anticipates an amiable resolution over the next 12
        months.
 
 There
        is
        no other litigation or outstanding claims by or against the Company other
        than
        disputes arising in the ordinary course of business
  **ITEM
        2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
        PROCEEDS**
  **None.**
   **ITEM
        3. DEFAULTS UPON SENIOR SECURITIES**
  None.
   **ITEM
        4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**
  On
        January 7, 2007 Valentec obtained the written consent, in lieu of a meeting
        of stockholders of the company, from the holders of a majority of the
        outstanding voting power of the company’s common stock (the “Common Stock”),
        approving the recommendation of the board of directors of the company to
        (i) adopt the 2006 Equity Incentive Plan for the benefit of the employees,
        consultants and directors of the company and of any affiliate thereof (the
        “Plan”), and (ii) to reserve 2,000,000 shares of Common Stock designated
        for allocation under the Plan.
  **ITEM
        5. OTHER INFORMATION**
  **None.**
   **ITEM
        6. EXHIBITS AND REPORTS ON FORM** **10-QSB**
  **(a)**  **The
        following exhibits are filed as part of this filing:**
  **Exhibit
                  No**
              
              **Description**
              
              **Location**31.1
              
              Certification
                  by Chief Executive Officer and Principal Accounting Officer pursuant
                  to 15
                  U.S.C. Section 7241, as adopted pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002
              
              Provided
                  herewith
  24
 
 **Exhibit
                  No**
              
              **Description**
              
              **Location**32.1
              
              Certification
                  by Chief Executive Officer and Principal Accounting Officer pursuant
                  to 18
                  U.S.C. Section 1350, as adopted pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002
              
              Provided
                  herewith
 
  (b)
              Reports
                  of Form 8-K
  On
        April
        12, 2007, the Company filed a Current Report on Form 8-K announcing that
        it has
        received $3.1 million in new orders to produce its 40mm White Star Parachute
        flares for the U.S. Army.
  On
        April
        18, 2007, the Company filed a Current Report on Form 8-K announcing that
        it has
        completed the ‘’First Article’’ milestone on its five-year, Indefinite
        Delivery/Indefinite Quantity (ID/IQ) M583, 40mm ammunition contract from
        the
        U.S. Army. The ‘’First Article’’ test events produced a performance rate of 99%
        for the M583, 40mm ammunitions. As a result, the U.S. Army has officially
        approved full-scale production, which will occur at the Company’s new facility
        in Minden, LA.
  On
        May
        31, 2007, the Company filed a Current Report on Form 8-K announcing that
        it has
        signed on May 11, 2007 a 90-day extension agreement during which the definitive
        agreements to acquire MAST Technology may be executed.
  On
        June
        4, 2007, the Company filed a Current Report on Form 8-K announcing that it
        has
        filed for two provisional patents related to the Company’s Spiral Wrap Cartridge
        Case (SWCC) product portfolio.
  On
        July
        30, 2007, the Company filed a Current Report on Form 8-K announcing that
        it has
        received a $900,000 new order to produce 40mm M992 Infrared (IR) parachute
        flares for the U.S. Army.
 
 On
        August
        3, 2007, the Company filed a Current Report of Form 8-K announcing the
        completion and dedication of its new 40mm energetic production
        facility.
  **SIGNATURES**
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, as amended, the
        Registrant has duly caused this Report to be signed in its behalf by the
        undersigned, thereunto duly authorized.
  **VALENTEC
                SYSTEMS, INC.**August
                  17, 2007
              By:
              /s/Robert
                  A. ZummoRobert
                  A. Zummo
                Chief
                  Executive Officer and
                Principal
                  Accounting Officer
  25