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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, 2006
 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.
  Delaware
    
    59-2332857(State or Other Jurisdiction of Incorporation
or Organization)
    
    (I.R.S. Employer Identification No.)
 2629 York AvenueMinden, LA 71055
    
    71055(Address of principal executive offices)
    
    (Zip code)
 (318) 382-4574
 (Issuers Telephone Number, Including Area Code)
 þ o
 o þ
  o þ




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Page NumberPart I Financial InformationItem 1. Financial Statements
    
    
    1Item 2: Managements Discussion And Analysis Or Plan Of Operation
    
    
    14Part II Other InformationItem 1: Legal Proceedings
    
    
    19Item 2: Unregistered Sales Of Equity Securities And Use Of Proceeds
    
    
    19Item 3: Defaults Upon Senior Securities
    
    
    19Item 4: Submission Of Matters To A Vote Of The Security Holders
    
    
    19Item 5: Other Information
    
    
    19Item 6: Exhibits And Reports On Form 8-K
    
    
    20Signatures
    
    
    21Exhibit 10.1
    
    
    10.1Exhibit 10.2
    
    
    10.2Exhibit 31.1
    
    
    31.1-1Exhibit 32.1
    
    
    32.1-1Addendum No. 2 to Master Factoring AgreementRockland Credit Finance Proposed Credit FacilityCertification Pursuant to Section 302Certification Pursuant to Section 906




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PART I
 FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS




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VALENTEC SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006




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VALENTEC SYSTEMS, INC. AND SUBSIDIARY
 CONTENTS
 PAGE
    
    
    1
    
    
    UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 2006PAGE
    
    
    2
    
    
    UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005PAGE
    
    
    3
    
    
    UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005PAGE
    
    
    4
    
    
    UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




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VALENTEC SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET  AS OF JUNE 30, 2006  (Unaudited)
 ASSETSCURRENT ASSETSCash
    
    
    205,771Accounts receivable and in-process billings, net
    
    
    15,637,964Inventories, net
    
    
    1,599,859Prepaid and other expenses
    
    
    173,695Total Current Assets
    
    
    17,617,289PROPERTY AND EQUIPMENT, NET
    
    
    1,485,138OTHER ASSETSAdvances  stockholder
    
    
    196,749Deferred income tax
    
    
    92,513Contract development cost, net
    
    
    6,037,661Deposits
    
    
    3,000Total Other Assets
    
    
    6,329,923TOTAL ASSETS
    
    
    25,432,350LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESAccounts payable and accrued expenses
    
    
    6,263,751Accrued salaries and payroll withholding
    
    
    266,392Lines of credit
    
    
    13,089,555Deferred revenue
    
    
    2,329,872Due to related party
    
    
    1,319,711Capital lease
    
    
    10,074Deferred income taxes payable
    
    
    475,241Total Current Liabilities
    
    
    23,754,596LONG TERM LIABILITIESNotes Payable  stockholders
    
    
    433,274Capital lease  long term
    
    
    71,749Total Long Term Liabilities
    
    
    505,023TOTAL LIABILITIES
    
    
    24,259,619COMMITMENTS AND CONTINGENCIES
    
    
    STOCKHOLDERS EQUITYPreferred stock, $0.01 par value, 10,000,000 authorized, none issued and outstanding
    
    
    Common stock, $0.01 par value, 260,000,000 shares authorized, 15,538,165 shares
issued and outstanding
    
    
    155,382Additional paid in capital
    
    
    3,152,662Retained earnings
    
    
    (1,487,601
    )Less deferred offering cost
    
    
    (647,712
    )Total Stockholders Equity
    
    
    1,172,731TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    
    25,432,350
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VALENTEC SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005REVENUESContract revenues
    
    $
    4,769,921
    
    
    $
    4,382,326
    
    
    $
    10,742,812
    
    
    $
    8,263,374COST OF GOODS SOLD
    
    
    4,222,136
    
    
    
    2,477,798
    
    
    
    8,243,607
    
    
    
    5,172,765GROSS PROFIT
    
    
    547,785
    
    
    
    1,904,528
    
    
    
    2,499,205
    
    
    
    3,090,609OPERATING EXPENSESFringe benefit expenses
    
    
    155,156
    
    
    
    202,966
    
    
    
    304,397
    
    
    
    277,206Overhead expenses
    
    
    1,169,308
    
    
    
    584,020
    
    
    
    1,947,613
    
    
    
    1,124,748General and administrative
    
    
    769,628
    
    
    
    652,333
    
    
    
    1,524,505
    
    
    
    1,082,848Total Operating Expenses
    
    
    2,094,092
    
    
    
    1,439,319
    
    
    
    3,776,515
    
    
    
    2,484,802INCOME/(LOSS) FROM OPERATIONS
    
    
    (1,546,307
    )
    
    
    465,209
    
    
    
    (1,277,310
    )
    
    
    605,807OTHER INCOME (EXPENSE)Interest income
    
    
    412
    
    
    
    14,523
    
    
    
    1,087
    
    
    
    21,725Miscellaneous
    
    
    4,003
    
    
    
    54,050
    
    
    
    6,384
    
    
    
    (15,544
    )Interest expense
    
    
    (434,723
    )
    
    
    (76,750
    )
    
    
    (826,684
    )
    
    
    (108,008
    )Total Other Income (Expense)
    
    
    (430,308
    )
    
    
    (8,177
    )
    
    
    (819,213
    )
    
    
    (101,827
    )NET INCOME (LOSS) BEFORE INCOME TAXES
    
    
    (1,976,615
    )
    
    
    457,032
    
    
    
    (2,096,523
    )
    
    
    503,980Provision for Income Taxes
    
    
    
    
    
    
    (11,367
    )
    
    
    
    
    
    
    NET INCOME (LOSS)
    
    
    (1,976,615
    )
    
    
    445,665
    
    
    $
    (2,096,523
    )
    
    $
    503,980Net income (loss) per share  basic and diluted
    
    
    (.17
    )
    
    
    .07
    
    
    $
    (.23
    )
    
    
    .07Weighted Average Shares (Basic and Diluted)
    
    
    11,400,622
    
    
    
    6,997,072
    
    
    
    9,211,005
    
    
    
    6,997,072
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VALENTEC SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2006 AND 2005  (Unaudited)
 Six Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30, 2006
    
    
    June 30, 2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income (Loss)
    
    $
    (2,096,523
    )
    
    $
    503,980Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    455,393
    
    
    
    461,397In-kind contribution, interest
    
    
    15,685
    
    
    
    Changes in operating assets and liabilities:(Increase) decrease in:Accounts receivable and in-process billings
    
    
    (3,031,036
    )
    
    
    (4,853,701
    )Contract Development
    
    
    
    
    
    
    2,011,584Inventory
    
    
    174,654
    
    
    
    Prepaid expense
    
    
    (20,396
    )
    
    
    (647
    )Increase (decrease) in:Accounts payable
    
    
    1,441,335
    
    
    
    1,316,984Due to related party
    
    
    327,473
    
    
    
    Accrued expenses
    
    
    (26,758
    )Deferred income taxes
    
    
    
    
    
    
    (5,079
    )Deferred revenue
    
    
    (1,012,909
    )
    
    
    Net Cash Provided By (Used In) Operating Activities
    
    
    (3,773,082
    )
    
    
    (565,482
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (123,881
    )
    
    
    (26,069
    )Distribution to Parent
    
    
    
    
    
    
    (125,000
    )Net Cash Used In Investing Activities
    
    
    (123,881
    )
    
    
    (151,069
    )CASH FLOWS FROM FINANCING ACTIVITIES:Restricted cash
    
    
    
    
    
    
    1,327,468Note payable
    
    
    
    
    
    
    100,000Proceeds from line of credit
    
    
    4,025,934
    
    
    
    1,244,000Shareholder loan
    
    
    
    
    
    
    (658,239
    )Payments to capital lease
    
    
    (5,078
    )
    
    
    Net Cash Provided By Financing Activities
    
    
    4,020,856
    
    
    
    2,013,229NET INCREASE (DECREASE) IN CASH
    
    
    123,893
    
    
    
    1,296,678CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    81,878
    
    
    
    262,195CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    205,771
    
    
    $
    1,558,873SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for interest
    
    $
    826,041
    
    
    $
    79,034Cash paid for income taxes
    
    $
    
    
    
    $
    SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING:During March 2006 the Company acquired fixed assets under
capital leases totaling $86,901During June 2006 the Company
converted $188,753 of accounts payable to 755,015 shares of
Common Stock
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VALENTEC SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2006  (Unaudited)
 NOTE 1
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION(A) OrganizationValentec 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.On May 27, 2005, Valentec Systems, Inc. consummated an agreement with Valentec Operating Corp,
pursuant to which Valentec Operating Corp. exchanged all of its 100 shares then issued and
outstanding shares of common stock for 5,423,130 shares or approximately 78% of the common
stock of Valentec Systems, Inc. As a result of the agreement, the transaction was treated for
accounting purposes as a recapitalization by the accounting acquirer Valentec Operating Corp.Accordingly, the financial statements include the following:
 (1)
    
    The balance sheet consists of the net assets of the acquirer at historical cost and
the net assets of the acquiree at historical cost.(2)
    
    The statement of operations includes the operations of the acquirer for the periods
presented and the operations of the acquiree from the date of the merger.
 Valentec Systems, Inc. and its wholly owned subsidiary Valentec Operating Corp are hereafter
collectively referred to as (the Company).(B) Use of EstimatesThe 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 2006 and 2005 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 EquivalentsFor 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.As of June 30, 2006, the Company had $102,901 in excess of federally insured limits.(D) Principles of ConsolidationThe 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.
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VALENTEC SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2006  (Unaudited)
 (E) Inventory
  (F) Property and Equipment
  (G) Contract Revenue
    (H) Fair Value of Financial Instruments
  (I) Earnings (Loss) Per Share
  (J) Segment Information
  Six months ended June 30, 2006
 Systems
    
    Energetic
    
    Metal Parts
    
    TotalRevenues
    
    $
    8,174,230
    
    
    $
    2,318,670
    
    
    $
    249,912
    
    
    $
    10,742,812Gross Profit
    
    
    2,860,352
    
    
    
    (498,943
    )
    
    
    137,796
    
    
    
    2,499,205Order Backlog
    
    
    19,390,941
    
    
    
    2,121,233
    
    
    
    822,321
    
    
    
    22,334,495
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VALENTEC SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2006  (Unaudited)
 Six months ended June 30, 2005
 Metal
    
    FacilitySystems
    
    Energetic
    
    Parts
    
    Management
    
    TotalRevenues
    
    $
    3,464,144
    
    
    $
    4,302,191
    
    
    $
    85,578
    
    
    $
    411,461
    
    
    $
    8,263,374Gross Profit
    
    
    906,055
    
    
    
    2,053,024
    
    
    
    85,567
    
    
    
    45,963
    
    
    
    3,090,609Order Backlog
    
    
    32,894,437
    
    
    
    4,016,761
    
    
    
    1,883,922
    
    
    
    
    
    
    
    38,795,120
 (K) Long-Lived Assets
  (L) Reclassification
  (M) Income Taxes
  (N)
Stock Option Policy
  (O) Recent Accounting Pronouncements
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VALENTEC SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2006  (Unaudited)
 NOTE 2
    
    ACCOUNTS RECEIVABLE AND IN-PROCESS BILLINGSAccounts 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, 2006 were:
 Billed
    
    $
    2,806,677Unbilled
    
    
    12,840,69115,647,368Less: Allowance for doubtful accounts
    
    
    (9,404
    )Total
    
    $
    15,637,964
 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, 2006 was $1,773,589 which is included
in billed receivables, and unbilled receivables of $3,118,492.Billed accounts receivable also includes $811,534 from a foreign government, the Department of
Defense, Israel. Also, in billed accounts receivable is $72,000 from the Royal Saudi Navy,
Saudi Arabia. Unbilled accounts receivable for foreign governments, both Israel and Saudi
Arabia is $9,678,565 at June 30, 2006.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, 2006 and 2005.
 NOTE 3
    
    INVENTORYInventory is stated at the lower of cost or market value using the average cost method.
Inventories at June 30, 2006 consist of:
 Raw materials
    
    $
    697,445Finished goods
    
    
    902,414$
    1,599,859
 The Company reviews its inventory for impairment, and as of June 30, 2006 and 2005 there were none.
 NOTE 4
    
    PROPERTY AND EQUIPMENTThe following is a summary of property and equipment at June 30, 2006:
 Furniture and fixtures
    
    $
    97,010Machinery and equipment
    
    
    2,572,544Leasehold improvements
    
    
    451,1323,120,686Less accumulated depreciation
    
    
    (1,635,548
    )$
    1,485,138
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VALENTEC SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2006  (Unaudited)
 Depreciation expense was $215,936 and $179,110 for the six month periods ended June 30, 2006
and 2005, respectively.NOTE 5
    
    DEVELOPMENT COSTSThe Company incurred development cost associated with the development of three 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
    
    
    (737,279
    )$
    6,037,661
 Total amortization expense for the six months ending June 30, 2006 and 2005, is $239,457 and
$282,287, respectively.NOTE 6
    
    NOTE PAYABLE  LINE OF CREDITThe line of credit from Bank One in the amount of $2,000,000 accrues interest at a rate of
Prime less 0.75% (at June 30, 2006  7.25% per annum). The line of credit is secured by a
letter of credit from a related company and personal property of a stockholder. At June 30,
2006, $1,999,546 was outstanding under this line.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, 2006  6.69% per annum). The line of credit is secured by a
letter of credit from a stockholder. At June 30, 2006 $3,930,000 was outstanding under this
line. This line of credit was increased from $3,000,000 at December 31, 2005 to $4,000,000 at
March 31, 2006.The line of credit from Bank Leumi in the amount of $500,000 accrues interest at a rate of
6.94% per annum. The line of credit is secured by a letter of credit from a stockholder. At
June 30, 2006, $500,000 was outstanding under this line.The line of credit from Rockland Credit Finance has a facility limit of $7,500,000 accruing
interest at 1% per month on outstanding balances plus Prime plus 2% per annum (at June 30,
2006  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 amounts available under the line
vary based on the total billed and unbilled accounts receivable. The total available as of
June 30, 2006 was $7,500,000 based on 60% of in-process receivables and 85% of accounts
receivable. At June 30, 2006, $6,660,009 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.NOTE 7
    
    NOTE PAYABLE  STOCKHOLDERSThe 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 7.93% as of June 30,
2006. The stockholders waived their rights to interest under the notes and the Company
recorded an in-kind contribution in the
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VALENTEC SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2006  (Unaudited)
 amount of $15,685 at June 30, 2006. The notes are due on December 31, 2007 and have an
outstanding balance of $433,274 as of June 30, 2006.NOTE 8
    
    EQUITYOn June 6, 2005, Valentec Operating became a wholly-owned subsidiary of Valentec Systems. The
stockholders of Valentec Operating exchanged 100% of their stock for 5,423,130 shares of
common stock in Valentec Systems. The stockholders of Valentec Operating own approximately
85% of Valentec Systems after 7,786,090 additional shares of common stock were issued on April
14, 2006, upon completion of the
amendment to the articles of incorporation increasing the number of shares authorized.The capital stock of the Company was increased to 260,000,000 shares, with 250,000,000
authorized shares of common stock and 10,000,000 authorized shares of preferred stock.
Committed new shares were distributed under various agreements as follows: each of Armament
Systems and Global Systems received 3,893,045 shares of common stock under the Stock Purchase
and Share Exchange agreement, Mr. Papiri received 70,000 shares of common stock as a finders
fee under the Stock Purchase and Share Exchange agreement and Knightsbridge Securities
received 685,015 shares of common stock under the SEDA financing
agreement.The Company also 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 or its surviving 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.NOTE 9
    
    WARRANTSOn 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 expire 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 expire on April 28, 2007.NOTE 10
    
    PROFIT SHARING PLANThe 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
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VALENTEC SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2006
(Unaudited)
  NOTE 11 RELATED PARTY
  June 30, 2006
    
    June 30, 2005Sales to affiliates
    
    $
    8,174,230
    
    
    $
    1,380,105Due from affiliates (included in advances -
stockholders in accompanying balance sheet)
    
    $
    196,749
    
    
    $
    196,749Due to related party
    
    $
    1,319,711
    
    
    $
    852,150Advance payment on a contract  related party
    
    $
    2,329,872
    
    
    $
    2,453,788
   NOTE 12 CONTRACT STATUS
  Backlog -
 Total contract price of initial contract awards including
exercised options and approved change orders (modifications)
    
    $
    33,144,964Completed to date
    
    
    10,742,812Authorized backlog
    
    $
    22,334,495
    *
 
 *
    
    Included in this amount is $19,390,941 in authorized backlog from a related party (Soltam
Systems). 10




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VALENTEC SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2006
(Unaudited)
 NOTE 13 COMMITMENTS AND CONTINGENT LIABILITIES
 (A) Litigation
    (B) Employment Agreement
  (C) Capital Lease
   Year ending December 31,
    
    Capital Leases2006
    
    $
    11,2232007
    
    
    22,0552008
    
    
    22,0552009
    
    
    22,0552010
    
    
    18,5002011
    
    $
    5,718Total minimum lease payments
    
    $
    101,606Less amounts representing interest
    
    
    (19,783
    )Present value of net minimum capital lease payments
    
    $
    81,823Less current portion of capital lease obligations
    
    
    (10,074
    )Capital lease obligations less current portion
    
    $
    71,749
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VALENTEC SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2006
(Unaudited)
 NOTE 14 CONCENTRATIONS
  (A) Revenue and Receivables
  (B) Suppliers
  (C) Materials
  (D) Foreign Operations
  NOTE 15 GOING CONCERN
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VALENTEC SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2006
(Unaudited)
  NOTE 16 SUBSEQUENT EVENTS
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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
   ̈
    
    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. ̈
    
    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 U. S. Army. ̈
    
    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 the U. S. Army. The Company will pursue additional contracts with U. S. governments.
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RESULTS OF OPERATION
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LIQUIDITY AND CAPITAL RESOURCES
       RECENT ACCOUNTING PRONOUNCEMENTS
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OFF-BALANCE SHEET ARRANGEMENTS
  CRITICAL ACCOUNTING POLICIES
   
    
    Revenue recognition via the percentage of completion method
 Revenue Recognition via the Percentage of Completion Method.
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ITEM 3. CONTROLS AND PROCEDURES
 (a) Evaluation of Disclosure Controls and Procedures:
  (b) Changes In Internal Controls Over Financial Reporting
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PART II
 
 ITEM 1. LEGAL PROCEEDINGS
    
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 None.
 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 None.
 
 ITEM 5. OTHER INFORMATION
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ITEM 6. EXHIBITS AND REPORTS ON FORM 10-QSB
  Exhibit No
    
    Description
    
    Location10.1
    
    Adendum No. 2 to Master Factoring Agreement
with Rockland Credit Finance.
    
    Provided herewith10.2
    
    Rockland Credit Finance Proposed Credit Facility for Valentec Systems, Inc.
    
    Provided herewith31.1
    
    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 herewith32.1
    
    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 10, 2006, the Company filed a Form 8-K reporting the Written Consent
obtained by the Company on February 15, 2006, from the holders of a majority of the
outstanding voting power of its common stock. The Company further reported the
Definitive Information Statement and that on April 10, 2006, Valentec Systems, Inc.,
a Delaware corporation and wholly-owned subsidiary of the Company, filed an
amendment to its Certificate of Incorporation with the Delaware Secretary of State
to change its name from Valentec Systems, Inc. to Valentec Operating Corp.On June, 2006, a Form 8-K was filed to report that the common stock of the Company
began trading on the Nasdaq-operated Over-the-Counter Bulletin Board (OTCBB), when
the market opened on Friday, June 30, 2006.
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SIGNATURES
  VALENTEC SYSTEMS, INC.August 14, 2006
    By:

/s/ Robert A. ZummoRobert A. ZummoChief Executive Officer and
Principal Accounting Officer 21