**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-QSB**





( mark
      one )


**x**
            **Quarterly
                Report Pursuant to Section 13 or 15(d) of Securities Exchange Act
                of
                1934**





**For
      the quarterly period ended September 30, 2007**





**£**
            **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 **x**  No £





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





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 **x**










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
              25Item
                  6: Exhibits And Reports On Form 8-K
              25Signatures
              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 nine months ended September 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 SEPTEMBER 30,
                2007PAGE
            6
            UNAUDITED
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND
                NINE
                MONTHS ENDED SEPTEMBER 30, 2007 AND 2006PAGE
            7
            UNAUDITED
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS
                ENDED
                SEPTEMBER 30, 2007 AND 2006PAGE
            8
            UNAUDITED
                NOTES TO CONDENSED CONSOLIDATED FINANCIAL
                STATEMENTS


4


**VALENTEC
      SYSTEMS, INC. AND SUBSIDIARY**


**CONDENSED
      CONSOLIDATED BALANCE SHEET**


**AS
      OF SEPTEMBER 30, 2007**


**(Unaudited)**





**ASSETS****CURRENT
                ASSETS**Cash
            
            
            183,043Accounts
                receivable and in-process billings, net
            
            
            15,087,587Other
                Miscellaneous Receivables
            
            
            39,480Inventories,
                net
            
            
            429,827Prepaid
                and other expenses
            
            
            122,167Total
                Current Assets
            
            
            15,862,104**PROPERTY
                AND EQUIPMENT, NET**
            
            
            2,601,228**OTHER
                ASSETS**Deferred
                income tax
            
            
            92,513Contract
                development cost, net
            
            
            5,444,757Insurance
                Receivable
            
            
            249,850Deposits
            
            
            26,909Total
                Other Assets
            
            
            5,814,029**TOTAL
                ASSETS**
            
            
            24,277,361**LIABILITIES
                AND STOCKHOLDERS’ DEFICIT****CURRENT
                LIABILITIES**Accounts
                payable and accrued expenses
            
            
            9,369,520Accrued
                salaries and payroll withholding
            
            
            131,318Lines
                of credit
            
            
            12,808,343Deferred
                revenue
            
            
            1,367,044Notes
                Payable – Short Term
            
            
            708,040Notes
                Payable – Stockholders
            
            
            1,628,537Notes
                Payable – Related Party
            
            
            3,475,650Due
                to Related Party
            
            
            2,003,940Capital
                lease
            
            
            21,084Customer
                Deposits
            
            
            124,897Deferred
                income taxes payable
            
            
            475,240Total
                Current Liabilities
            
            
            32,113,613**LONG
                TERM LIABILITIES**Capital
                lease – long term
            
            
            296,231Total
                Long Term Liabilities
            
            
            296,231**TOTAL
                LIABILITIES**
            
            
            32,409,844**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
            
            
            3,220,425Accumulated
                Deficit
            
            
            (11,340,477
            )Less:
                Stockholder Advances
            
            
            (167,813
            )Total
                Stockholders’ Deficit
            
            
            (8,132,483
            )**TOTAL
                LIABILITIES AND STOCKHOLDERS’ DEFICIT**
            
            
            24,277,361





See
      accompanying notes to unaudited condensed consolidated financial
      statements.


5


**VALENTEC
      SYSTEMS, INC. AND SUBSIDIARY**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**FOR
      THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006**


**(Unaudited)**




**Three Months Ended September 30**
            
            **Nine Months Ended September 30****2007**
            
            **2006**
            
            **2007**
            
            **2006****REVENUES**Contract
                revenues
            
            $
            2,934,200
            
            $
            2,239,661
            
            $
            9,791,392
            
            $
            12,982,475**COST
                OF GOODS SOLD**
            
            
            2,570,366
            
            
            1,723,642
            
            
            8,536,448
            
            
            9,967,248**GROSS
                PROFIT**
            
            
            363,834
            
            
            516,019
            
            
            1,254,944
            
            
            3,015,227**OPERATING
                EXPENSES**Fringe
                benefit expenses
            
            
            53,626
            
            
            98,899
            
            
            169,745
            
            
            403,294Overhead
                expenses
            
            
            821,318
            
            
            689,722
            
            
            2,512,539
            
            
            2,637,338General
                and administrative
            
            
            1,227,859
            
            
            663,351
            
            
            2,483,306
            
            
            2,187,865Total
                Operating Expenses
            
            
            2,102,803
            
            
            1,451,972
            
            
            5,165,590
            
            
            5,228,497**INCOME/(LOSS)
                FROM OPERATIONS**
            
            
            (1,738,969
            )
            
            (935,953
            )
            
            (3,910,646
            )
            
            (2,213,270
            )**OTHER
                INCOME (EXPENSE)**Interest
                income
            
            
            1,039
            
            
            1,161
            
            
            1,597
            
            
            1,208Miscellaneous
            
            
            421
            
            
            373
            
            
            77,907
            
            
            7,798Interest
                expense
            
            
            (781,384
            )
            
            (566,734
            )
            
            (2,115,818
            )
            
            (1,393,418
            )Casualty
                Loss - Fire
            
            
            -
            
            
            (415,310
            )
            
            -
            
            
            (415,310
            )Total
                Other Income (Expense)
            
            
            (779,924
            )
            
            (980,510
            )
            
            (2,036,314
            )
            
            (1,799,722
            )**NET
                INCOME (LOSS) BEFORE INCOME TAXES**
            
            
            (2,518,893
            )
            
            (1,916,463
            )
            
            (5,946,960
            )
            
            (4,012,992
            )Provision
                for Income Taxes
            
            
            -
            
            
            5,488
            
            
            -
            
            
            5,488**NET
                INCOME (LOSS)**
            
            
            (2,518,893
            )
            
            (1,921,951
            )
            $
            (5,946,960
            )
            $
            (4,018,480
            )Net
                income (loss) per share — basic and diluted
            
            
            (.16
            )
            
            (.12
            )
            $
            (.38
            )
            $
            (.35
            )Weighted
                Average Shares (Basic and Diluted)
            
            
            15,538,165
            
            
            15,538,165
            
            
            15,538,165
            
            
            11,343,235





See
      accompanying notes to unaudited condensed consolidated financial
      statements.


6


**VALENTEC
      SYSTEMS, INC. AND SUBSIDIARY**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**FOR
      THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2007 AND
      2006**


**(Unaudited)**





Nine
                Months
            
            Nine
                MonthsEnded
            
            EndedSeptember 30, 2007
            
            September 30, 2006**CASH
                FLOWS FROM OPERATING ACTIVITIES:****Net
                income (Loss)**
            
            $
            (5,946,960
            )
            $
            (4,018,480
            )**Adjustments
                to reconcile net income (loss) to net cash provided by (used in)
                operating
                activities:**Depreciation
                and amortization
            
            
            778,257
            
            
            619,920In-kind
                contribution, interest
            
            
            29,838
            
            
            24,695Stock
                Option Expense
            
            
            19,905
            
            
            -Bad
                Debt for AR Write-off
            
            
            600,230
            
            
            -Loss
                on Fire
            
            
            -
            
            
            (127,064
            )Changes
                in operating assets and liabilities:(Increase)
                decrease in:Accounts
                receivable and in-process billings
            
            
            1,681,795
            
            
            (2,181,162
            )Inventory
            
            
            (15,898
            )
            
            174,654Prepaid
                expense
            
            
            (31,784
            )
            
            42,534Increase
                (decrease) in:Accounts
                payable, related party and accrued expenses
            
            
            872,786
            
            
            1,418,510Due
                to related party
            
            
            535,258
            
            
            415,758Deferred
                income taxes
            
            
            -
            
            
            -Customer
                Deposits
            
            
            5,027
            
            
            -Accrued
                Expenses and Interest
            
            
            320,725
            
            
            (186,197
            )Deferred
                revenue
            
            
            (59,554
            )
            
            (1,109,991
            )Net
                Cash Provided By (Used In) Operating Activities
            
            
            (1,210,375
            )
            
            (4,926,823
            )**CASH
                FLOWS FROM INVESTING ACTIVITIES:**Purchase
                of property and equipment
            
            
            (1,097,074
            )
            
            (183,887
            )Net
                Cash Used In Investing Activities
            
            
            (1,097,074
            )
            
            (183,887
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES:**Cash
                Overdraft
            
            
            -
            
            
            5,703Repayment
                of Capital Leases
            
            
            (31,734
            )
            
            (9,993
            )Proceeds
                from Customer Deposits
            
            
            99,053
            
            
            -Proceeds
                from Notes Payable
            
            
            200,000Proceeds
                from Stockholder Advances
            
            
            28,936
            
            
            -Proceeds
                from issuance of common stock
            
            
            -
            
            
            85,411Proceeds
                from Notes Payable from Related Party
            
            
            2,275,000
            
            
            -Proceeds
                / (Repayment) of Line of Credit
            
            
            (231,192
            )
            
            5,033,122Net
                Cash Provided By Financing Activities
            
            
            2,340,063
            
            
            5,028,832NET
                INCREASE (DECREASE) IN CASH
            
            
            32,614
            
            
            (81,878
            )CASH
                AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
            
            
            150,429
            
            
            81,878CASH
                AND CASH EQUIVALENTS AT END OF PERIOD
            
            $
            183,043
            
            $
            -0-Cash
                paid for interest
            
            $
            2,103,190
            
            $
            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 NINE MONTH PERIOD ENDED SEPTEMBER 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.





***(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.


8


***(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 ten 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 September 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 September 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.





**Nine
      months ended September 30, 2007**





**Systems**
            
            **Energetic**
            
            **Metal Parts**
            
            **Total**Revenues
            
            $
            5,887,926
            
            $
            3,903,466
            
            $
            -
            
            $
            9,791,392Gross
                Profit
            
            
            352,996
            
            
            1,704,575
            
            
            (802,627
            )
            
            1,254,944Order
                Backlog
            
            
            6,802,049
            
            
            4,263,302
            
            
            -
            
            
            11,065,351





***(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.


9


***(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.





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.




10


**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 September 30,
      2007 were:





Billed
            
            $
            2,851,859Unbilled
            
            
            12,235,728Total
            
            $
            15,087,587





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 September 30, 2007 was $3,583,145, which
      is included in billed receivables of $276,919 and unbilled receivables of
      $3,306,226. Currently there is an ongoing Request for Equitable Adjustment
      (REA)
      dispute with the U.S. Army in the amount of $780,438, which is included in
      the
      unbilled receivables to the U.S. Government. During the nine months ended
      September 30, 2007, the Company recorded a provision for doubtful accounts
      for
      uncollected unbilled receivables of $600,230.





Billed
      accounts receivable also includes $2,552,331 from a foreign government, the
      Department of Defense, Israel. Unbilled accounts receivable for foreign
      governments, Israel, is $8,926,699 at September 30, 2007.





Billed
      accounts receivable also includes $22,609 from commercial contracts and unbilled
      accounts receivable from commercial accounts is $2,803 at September 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 $600,230 and $-0- for
      the
      nine months ended September 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 September 30, 2007 consist of:





Finished
                goods
            
            $
            429,827





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


11





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




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





Furniture
                and fixtures
            
            $
            106,351Machinery
                and equipment
            
            
            2,551,151Leasehold
                improvements
            
            
            1,706,1444,363,646Less
                accumulated depreciation
            
            
            (1,762,418
            )$
            2,601,228





Depreciation
      expense was $381,104 and $322,875 for the nine month periods ended September
      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
            
            
            (1,330,183
            )$
            5,444,757





Total
      amortization expense for the nine months ending September 30, 2007 and 2006,
      is
      $397,153 and $297,044, 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 September 30, 2007 — 6.82% per annum). The line of
      credit is secured by a letter of credit from a stockholder. At September 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 7.75% per annum. The line of credit is secured by a letter of credit from
      a
      stockholder. At September 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 September 30, 2007 - 9.75%). 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 September
      30,
      2007 was $10,000,000, based on 70% of in-process receivables and 90% of billed
      accounts receivable. At September 30, 2007, $8,378,343 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 September 30, 2007 - 21.325%) 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 September 30, 2007, the
      loan had not been paid off and had an outstanding balance of $507,164. Valentec
      Systems Inc was in technical default of this loan. However the lender has not
      called the note and Valentec Systems is attempting to secure a loan through
      a
      majority stockholder to pay the loan off.


12





On
      September 14, 2007, the Company became indebted under a notes payable to Robert
      H. Goldsborough, Jr., a sole individual, in the amount of $100,000. The note
      bears a fixed interest rate of 10%, 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 March 31, 2008. As of September 30, 2007, the outstanding
      balance is $100,438.





On
      September 14, 2007, the Company became indebted under a notes payable to Eugene
      and Carol Eberet., joint tenants, in the amount of $100,,000. The note bears
      a
      fixed interest rate of 10%, 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 March 31, 2008. As of September 30, 2007, the outstanding balance
      is
      $100,438.




**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 September 30, 2007. Since 2005, the two stockholders have waived
      their right to interest under the notes. For the nine months ending September
      30, 2007, the Company has recorded an in-kind contribution in the amount of
      $29,838. The notes are due on demand and have an outstanding balance of $433,274
      as of September 30, 2007.





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 September 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 September 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 September 30, 2007, the outstanding balance is $1,062,404.





On
      April
      17, 2007, the Company became indebted under a notes payable to a stockholder,
      through a related Company, 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 September 30, 2007, the outstanding balance is
      $2,136,438.





On
      August
      16, 2007, the Company became indebted under a notes payable to a stockholder
      in
      the amount of $98,000. The note bears a fixed interest rate of 8.25%, 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 November 15, 2007.
      As of September 30, 2007, the outstanding balance is $98,997.





On
      September 10, 2007, the Company became indebted under a notes payable to a
      stockholder in the amount of $75,000. The note bears a fixed interest rate
      of
      10%, 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 December
      10, 2007. As of September 30, 2007, the outstanding balance is
      $75,411.





On
      September 18, 2007, the Company became indebted under a notes payable to a
      stockholder, through a related Company, Mikal LTD, a wholly owned Company of
      the
      Stockholder, in the amount of $275,000. 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 demand.
      As
      of September 30, 2007, the outstanding balance is $276,808.





**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.


13




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 $29,838
      for the nine months ended September 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 nine
              months ended
                September 30,
              2007Expected
                term (in years)
            
            
            4Expected
                volatility
            
            
            240
            %Expected
                dividend yield
            
            
            0
            %Risk-free
                interest rate
            
            
            4.5
            %





A
      summary
      of the status of the Company’s stock options as of September 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 September 30, 2007
            
            
            2,000,000
            
            $
            0.165Exercisable
                at September 30, 2007
            
            
            1,000,000Weighted
                average exercise price of options granted as of September 30, 2007
            
            $
            0.18





Exercise
                Price
            
            **Number
                Outstanding at
                September 30, 2007**
            
            **Weighted**
              **Average
                Remaining**
              **Contractual Life**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Number
                Exercisable at September 30, 2007**
            
            **Weighted
                Average**
              **Exercise**
              **Price**$0.25
            
            
            600,000
            
            
            7.5
            
            $
            0.25
            
            
            600,000
            
            $
            0.25$0.01
            
            
            400,000
            
            
            7.5
            
            $
            0.01
            
            
            400,000
            
            $
            0.01$0.18
            
            
            1,000,000
            
            
            4.0
            
            $
            0.18
            
            
            -0-
            
            $
            0.182,000,000
            
            
            
            
            
            
            
            
            1,000,000





The
      cost
      of the Stock Options during the nine months ending September 30, 2007 was
      $19,905.





**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.


14





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 $20,255 and $34,543 during
      the nine months ending September 30, 2007 and 2006, respectively, as a match
      to
      employees and did not make any annual discretionary contributions for either
      period .





**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 September 30, 2007 and
      2006:





**September 30**
              **2007**
            
            **September 30**
              **2006**Sales
                to affiliates
            
            $
            5,887,926
            
            $
            9,655,230Due
                from affiliates (included in advances - stockholders in accompanying
                balance sheet)
            
            $
            -
            
            $
            196,749Due
                to related party
            
            $
            2,003,940
            
            $
            1,407,996Notes
                Payable to related party
            
            $
            3,476,650
            
            $
            -Notes
                Payable to Stockholders
            
            $
            1,628,537
            
            $
            433,274Advance
                payment balance on a contract - related party
            
            $
            1,467,045
            
            $
            2,206,945





For
      the
      nine month period ending September 30, 2007, accrued and paid consulting,
      management and guarantee fees of $513,759 and $0 respectively, to a related
      party, who is also a principal stockholder and director of the Company. For
      the
      nine month period ending September 30, 2006, accrued and paid consulting,
      management and guarantee fees were $419,474 and $27,000,
      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 September 30, 2007 and 2006, the consulting fees paid were $0 and
        $54,104, respectively.


15





**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
      September 30, 2007 and 2006 approximately as follows:





**September 30,**
              **2007**
            
            **September 30,**
              **2006**Total
                contract price of initial contract awards including exercised options
                and
                approved change orders (modifications)
            
            $
            50,273,341
            
            $
            51,423,414Completed
                to date
            
            
            39,213,688
            
            
            28,731,687Authorized
                backlog
            
            $
            11,059,653*
            
            $
            22,691,727*


____________


*
            Included
                in this amount is $6,802,049 and $20,409,941 for 2007 and 2006,
                respectively, in authorized backlog from a related party (Soltam
                Systems).





**NOTE
      15**  **COMMITMENTS
      AND CONTINGENT LIABILITIES**





***(A)
      Litigation***





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.





On
      August
      13, 2007, litigation was filed by the State of Louisiana against Valentec
      Systems Inc and its insurance companies in the amount of $7,419,164 for the
      rebuilding costs of the facilities, estimated cost of general cleanup and
      hazardous material, loss of income, etc due to the August 14, 2006 fire suffered
      at the Valentec 40MM production facility. Valentec has responded to the
      litigation by filing its own Reconvention Suit on November 15, 2007 against
      the
      State of Louisiana seeking estimated damages in the amount of $5,000,000.
      Valentec believes sufficient evidence exists that will support our Reconvention
      and therefore we believe we would prevail in our claims. Valentec also believes
      that if there is a settlement that the Company’s insurance coverage will be
      sufficient to cover any potential claim.


16




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 A total of eight (8) vendors
      have brought suit to date totaling $1,407,184. Valentec has made payment
      arrangements with many of these vendors and are in the process of working with
      the other vendors and/or their attorney’s to arrange payment arrangements and or
      settlement agreements of the outstanding balances owed to them in order to
      avoid
      further litigation. Valentec anticipates being able to reach amiable resolutions
      with many of these litigation issues over the next 12 months.





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. 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
      September 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.





**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 nine months ended September 30, 2007 and
      2006, the Company had two major customers that made up 38.2% and 60.1% of total
      sales in 2007 and 21.1% and 74.4% 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 September 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 nine months ending September 30, 2007 and 2006 were 60.1% and 74.4%.
      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.


17





**NOTE
      17  GOING CONCERN**





As
      reflected in the accompanying consolidated financial statements, the Company
      has
      a working capital deficiency of $16,251,509 and a net loss of $5,946,960 for
      the
      nine months ended September 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 continues to evaluate and develop 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
      November 17, 2007, MIKAL LTD, a related party, advanced Valentec Systems Inc
      $50,000





**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:





 ̈
            **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 US
                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 U S Army. The Company will pursue additional contracts
                with
                U S government.




Energetic
      Manufacturing accounted for 39.8% of the gross revenue, the Systems
      Management/Systems Integration accounted for 60.2% and Metal Parts Manufacturing
      accounting for 0% as of the nine months ending September 30, 2007. The backlog
      at September 30, 2007 was Energetic Manufacturing $4,263,302, (38.5%),
      Systems/Management Systems Integration $6,802,049, (61.5%) and Metal Parts
      Manufacturing $0, (0.0%) for a total of $11,065,351.


18


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 Q3 that require discussion, as
      follows:





**40MM
      Production Facility**





On
      August
      14, 2006, 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 litigation 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.





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. Contract revenue
      deferred was approximately $1,768,754. In an effort to avoid similar losses
      from
      work-related accidents, Valentec 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. The Company has attempted to increase the monthly
      production level.





On
      April
      5, 2007 Valentec received a add-on order for approximately 106,000 M583A1 White
      Star Parachute with a contract value of $3.2 million. Valentec also was awarded
      on July 25, 2007 a 16,000 unit M992 IR Star Parachute contract for a value
      of
      $894,000.





**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 .





In
      July,
      Valentec received notification from Soltam, a related party, that they desired
      to modify our contract with the Government of Israel on the existing $20M
      Ammunition contract On July 31, 2007, Valentec negotiated and agreed to a
      modification that reduced the scope of work of the contract and therefore
      reduced the total contract value from $20M to $17.5M.





**Spiral
      Wrap Cartridge Cases**





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. 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, 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 determined the lot had a technical
      design defect and accepted the lot in June 2007. However, due to the 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 completed and delivered the remainder of the Contract in early
      October. This contract was completed in September 2007.


19





**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.




***RESULTS
      OF OPERATION***




Revenues
      for the nine months ended September 30, 2007 were $9,791,392 compared to
      $12,982,475 for the nine months ended September 30, 2006, a decrease of
      $3,191,083 or 24.6%. Total gross margin for the nine months ended September
      30,
      2007 was $1,254,944 (or 12.8% of total revenue) as compared to total gross
      margin for the comparative nine months ended September 30, 2006 of $3,015,227
      (or 23.2% of total revenue), which represents a decrease of 58.4%. 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, (2) materials cost overruns incurred due to pricing
      increases above contract estimates and (3) early termination of the contract
      due
      to the defective TDP. 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 $11,065,351, 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 nine months ended September 30, 2007 was $8,536,448
      compared to $9,967,248 for the nine months ended September 30, 2006, a decrease
      of 14.4%. 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. Total indirect, overhead and general and administrative costs for
      the
      nine months ended September 30, 2007 was $5,165,590 as compared to $5,228,497
      for the nine months ended September 30, 2006, a reduction of 1.2%. The reduction
      in Indirect, Overhead and General and Administrative costs were actually greater
      however a writedown of the M74 REA Claim by $600,230, from $1,380,668 to
      $780,438, as uncollectible eliminated much of the savings the Company had
      achieved during the nine months ending September 30, 2007. Indirect, Overhead
      and General and Administrative expenses continue to decrease 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
      $2,036,314 for the nine months ended September 30, 2007 as compared to
      $1,384,412 for the nine months ended September 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 since January 1, 2006 from 7.00% to 8.25%. Recently the
      Prime Lending Rate has been reduced and Valentec anticipates further reductions
      which will help reduce the interest expense going forward..




The
      Company had a net loss for the nine months ended September 30, 2007 of
      ($5,946,960) compared to a net loss of ($4,012,992) for the nine months ended
      September 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 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.


20




At
      September 30, 2007 the Company had total assets of $24,277,361. This is a
      decrease from total assets at September 30, 2006 of
      $25,897,648.




***LIQUIDITY
      AND CAPITAL RESOURCES***




For
      the
      nine months ended September 30, 2007, the Company had a negative cash flow
      from
      operations of ($1,210,375) as compared to a negative cash flow from operations
      of ($4,926,823) for the nine months ended September 30, 2006. At September
      30,
      2007, the Company had outstanding borrowings from non-related parties of
      $13,516,383.




The
      Company’s sources and uses of funds were as follows: (1) it used net cash of
      $1,210,375 from its operating activities in the nine months ended September
      30,
      2007; (2) it used cash of $1,097,074 in investing activities in the nine months
      ended September 30, 2007; and (3) it received $2,340,063 from its financing
      activities in the nine months ended September 30, 2007, consisting primarily
      of
      additional borrowings from related parties. As of September 30, 2007, the
      Company had net working capital deficiency of $16,251,509.




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.





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 September 30, 2007, $8,378,343 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 September 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 continues to evaluate 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.




21




***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 September 30, 2007, the
      Company does not have any off-balance sheet arrangements.





***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.




22




**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 September 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.





**(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**




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.





23





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.





On
      August
      13, 2007, litigation was filed by the State of Louisiana against Valentec
      Systems Inc and its insurance companies in the amount of $7,419,164 for the
      rebuilding costs of the facilities, estimated cost of general cleanup and
      hazardous material, loss of income, etc due to the August 14, 2006 fire suffered
      at the Valentec 40MM production facility. Valentec has responded to the
      litigation by filing its own Reconvention Suit on November 15, 2007 against
      the
      State of Louisiana seeking estimated damages in the amount of $5,000,000.
      Valentec believes sufficient evidence exists that will support our Reconvention
      and therefore 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 A total of eight (8) vendors
      have brought suit to date totaling $1,407,184. Valentec has made payment
      arrangements with several of these vendors and are in the process of working
      with the other vendors and / or their attorney’s to arrange payment arrangements
      and or settlement agreements of the outstanding balances owed to them in order
      to avoid further litigation. Valentec anticipates being able to amiable resolve
      many of theses litigation issues 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.




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**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
                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
      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.




On
      November 7, 2007, the
      Company filed a Current Report of Form 8-K announced that the state of Louisiana has filed suit against the company and
      its
      insurer, seeking recovery for damage to Camp Minden experienced in the August
      14, 2006 fire at Valentec Systems Inc. 40mm 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.**November
                19, 2007
            By:

      /s/Robert
        A. ZummoRobert
                A. Zummo
              Chief
                Executive Officer and
              Principal
                Accounting Officer





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