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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-QSB
  þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2006
 o
    
    Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to.
 Commission file number 0-11454
 VALENTEC SYSTEMS, INC.
  Delaware
    
    59-2332857(State or Other Jurisdiction of Incorporation
    
    (I.R.S. Employer Identification No.)or Organization)2629 York AvenueMinden, LA 71055
    
    71055(Address of principal executive offices)
    
    (Zip code)
 (318) 382-4574
 (Issuers Telephone Number, Including Area Code)
 þ o
 o þ
  o þ




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##### 



Page NumberPart I Financial InformationItem 1. Financial Statements
    
    
    3Item 2: Managements Discussion And Analysis Or Plan Of Operation
    
    
    16Part II Other InformationItem 1: Legal Proceedings
    
    
    22Item 2: Unregistered Sales Of Equity Securities And Use Of Proceeds
    
    
    22Item 3: Defaults Upon Senior Securities
    
    
    22Item 4: Submission Of Matters To A Vote Of The Security Holders
    
    
    22Item 5: Other Information
    
    
    22Item 6: Exhibits And Reports On Form 8-K
    
    
    23Signatures
    
    
    24Certification Pursuant to Section 302Certification Pursuant to Section 906
  2




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PART I
 FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
  3




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VALENTEC SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2006
 VALENTEC SYSTEMS, INC. AND SUBSIDIARY
 CONTENTS
 PAGE
    
    1
    
    UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2006PAGE
    
    2
    
    UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005PAGE
    
    3
    
    UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005PAGE
    
    4
    
    UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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VALENTEC SYSTEMS, INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED BALANCE SHEET
 AS OF SEPTEMBER 30, 2006
 (Unaudited)
 ASSETSCURRENT ASSETSAccounts receivable and in-process billings, net
    
    
    14,692,540Other Accounts Receivable  Related Parties
    
    
    95,550Inventories, net
    
    
    902,414Insurance Receivable
    
    
    1,400,000Prepaid and other expenses
    
    
    110,765Total Current Assets
    
    
    17,201,269PROPERTY AND EQUIPMENT, NET
    
    
    862,713OTHER ASSETSAdvances  stockholder
    
    
    196,749Deferred income tax
    
    
    92,513Contract development cost, net
    
    
    5,980,074Deposits
    
    
    3,000Total Other Assets
    
    
    6,272,336TOTAL ASSETS
    
    
    24,336,318LIABILITIES AND STOCKHOLDERS DEFICITCURRENT LIABILITIESCash Overdraft
    
    
    5,703Accounts payable and accrued expenses
    
    
    6,240,926Accrued salaries and payroll withholding
    
    
    106,953Lines of credit
    
    
    14,096,743Deferred revenue
    
    
    2,206,945Due to related party
    
    
    1,407,996Capital lease
    
    
    5,159Customer Deposits
    
    
    25,845Deferred income taxes payable
    
    
    475,241Total Current Liabilities
    
    
    24,571,511LONG TERM LIABILITIESNotes Payable  stockholders
    
    
    433,274Capital lease  long term
    
    
    71,749Total Long Term Liabilities
    
    
    505,023TOTAL LIABILITIES
    
    
    25,076,534COMMITMENTS AND CONTINGENCIES
    
    
    STOCKHOLDERS DEFICITPreferred 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
    
    
    3,161,672Retained earnings
    
    
    (3,409,558
    )Less deferred offering cost
    
    
    (647,712
    )Total Stockholders Deficit
    
    
    (740,216
    )TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT
    
    
    24,336,318
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VALENTEC SYSTEMS, INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005REVENUESContract revenues
    
    $
    2,239,661
    
    
    $
    4,122,228
    
    
    $
    12,982,475
    
    
    $
    12,385,602COST OF GOODS SOLD
    
    
    1,723,642
    
    
    
    2,208,656
    
    
    
    9,967,248
    
    
    
    7,381,421GROSS PROFIT
    
    
    516,019
    
    
    
    1,913,572
    
    
    
    3,015,227
    
    
    
    5,004,181OPERATING EXPENSESFringe benefit expenses
    
    
    98,899
    
    
    
    548,287
    
    
    
    403,294
    
    
    
    825,493Overhead expenses
    
    
    689,722
    
    
    
    298,835
    
    
    
    2,637,338
    
    
    
    1,423,583General and administrative
    
    
    663,351
    
    
    
    786,843
    
    
    
    2,187,865
    
    
    
    1,869,691Total Operating Expenses
    
    
    1,451,972
    
    
    
    1,633,965
    
    
    
    5,228,497
    
    
    
    4,118,767INCOME/(LOSS) FROM OPERATIONS
    
    
    (935,953
    )
    
    
    279,607
    
    
    
    (2,213,270
    )
    
    
    885,414OTHER INCOME (EXPENSE)Interest income
    
    
    1,161
    
    
    
    5,844
    
    
    
    1,208
    
    
    
    27,569Miscellaneous
    
    
    373
    
    
    
    (4,796
    )
    
    
    7,798
    
    
    
    (20,340
    )Interest expense
    
    
    (566,734
    )
    
    
    (93,916
    )
    
    
    (1,393,418
    )
    
    
    (201,924
    )Casualty Loss  Fire
    
    
    (415,310
    )
    
    
    
    
    
    
    (415,310
    )
    
    
    Total Other Income (Expense)
    
    
    (980,510
    )
    
    
    (92,868
    )
    
    
    (1,799,722
    )
    
    
    (194,695
    )NET INCOME (LOSS) BEFORE INCOME TAXES
    
    
    (1,916,463
    )
    
    
    186,739
    
    
    
    (4,012,992
    )
    
    
    690,719Provision for Income Taxes
    
    
    5,488
    
    
    
    
    
    
    
    5,488
    
    
    
    NET INCOME (LOSS)
    
    
    (1,921,951
    )
    
    
    186,739
    
    
    $
    (4,018,480
    )
    
    $
    690,719Net income (loss) per share  basic and diluted
    
    
    (.12
    )
    
    
    .03
    
    
    $
    (.35
    )
    
    
    .09Weighted Average Shares (Basic and Diluted)
    
    
    15,538,165
    
    
    
    6,997,072
    
    
    
    11,343,235
    
    
    
    6,997,072
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VALENTEC SYSTEMS, INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2006 AND 2005
 (Unaudited)
 Nine Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30, 2006
    
    
    September 30, 2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income (Loss)
    
    $
    (4,018,480
    )
    
    $
    690,719Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:Depreciation and amortization
    
    
    619,920
    
    
    
    701,664In-kind contribution, interest
    
    
    24,695
    
    
    
    Loss on Fire
    
    
    (127,064
    )
    
    
    Changes in operating assets and liabilities:(Increase) decrease in:Accounts receivable and in-process billings
    
    
    (2,181,162
    )
    
    
    (6,129,440
    )Other Accounts Receivable
    
    
    Contract Development
    
    
    
    
    
    
    1,327,468Inventory
    
    
    174,654
    
    
    
    (553,688
    )Income Tax Receivable
    
    
    
    
    
    
    (1,207,905
    )Prepaid expense
    
    
    42,534
    
    
    
    (55,447
    )Other Assets
    
    
    
    
    
    
    (5,079
    )Increase (decrease) in:Accounts payable
    
    
    1,418,510
    
    
    
    958,576Due to related party
    
    
    415,758
    
    
    
    (158,239
    )Accrued expenses
    
    
    (186,197
    )
    
    
    77,632Customer Deposits
    
    
    
    
    
    
    2,331,129Deferred revenue
    
    
    (1,109,991
    )
    
    
    Net Cash Provided By (Used In) Operating Activities
    
    
    (4,926,823
    )
    
    
    (2,022,610
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (183,887
    )
    
    
    (342,840
    )Distribution to Parent
    
    
    
    
    
    
    (354,089
    )Net Cash Used In Investing Activities
    
    
    (183,887
    )
    
    
    (696,929
    )CASH FLOWS FROM FINANCING ACTIVITIES:Cash Over Draft
    
    
    5,703
    
    
    
    Additional Paid In Capital
    
    
    
    
    
    
    (100,000
    )Note payable
    
    
    
    
    
    
    100,000Proceeds from line of credit
    
    
    5,033,122
    
    
    
    4,743,436Shareholder loan
    
    
    
    
    
    
    (1,168,909
    )Payments to capital lease
    
    
    (9,993
    )
    
    
    Net Cash Provided By Financing Activities
    
    
    5,028,832
    
    
    
    3,574,527NET INCREASE (DECREASE) IN CASH
    
    
    (81,878
    )
    
    
    854,988CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    81,878
    
    
    
    262,197CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    0
    
    
    $
    1,117,185SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for interest
    
    $
    826,041
    
    
    $
    201,924Cash paid for income taxes
    
    $
    
    
    
    $
    SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING:During March 2006 the Company acquired fixed assets under capital leases totaling $86,901During June 2006 the Company converted $188,753 of accounts payable to 755,015 shares of
Common Stock
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VALENTEC SYSTEMS, INC. AND SUBSIDIARY
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2006
 (Unaudited)
 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
 (A) Organization
     (1)
    
    The balance sheet consists of the net assets of the acquirer at historical
cost and the net assets of the acquiree at historical cost.(2)
    
    The statement of operations includes the operations of the acquirer for the
periods presented and the operations of the acquiree from the date of the merger.
  B) Basis of Presentation
   B) Use of Estimates
  (C) Cash and Cash Equivalents
  8




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(D) Principles of Consolidation
  (E) Inventory
  (F) Property and Equipment
  (G) Contract Revenue
    (H) Fair Value of Financial Instruments
  (I) Earnings (Loss) Per Share
  (J) Segment Information
  Nine months ended September 30, 2006
 Systems
    
    Energetic
    
    Metal Parts
    
    TotalRevenues
    
    $
    10,243,857
    
    
    $
    2,179,398
    
    
    $
    559,218
    
    
    $
    12,982,473Gross Profit
    
    
    3,674,319
    
    
    
    (767,343
    )
    
    
    108,249
    
    
    
    3,015,225Order Backlog
    
    
    20,409,941
    
    
    
    1,768,754
    
    
    
    599,136
    
    
    
    22,777,831
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(K) Long-Lived Assets
  (L) Reclassification
  (M) Income Taxes
  (N) Stock Option Policy
  (O) Recent Accounting Pronouncements
  NOTE
2 ACCOUNTS RECEIVABLE AND IN-PROCESS BILLINGS
  Billed
    
    $
    2,315,842Unbilled
    
    
    12,376,698Total
    
    $
    14,692,540
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NOTE
3 INVENTORY
  Finished goods
    
    $
    902,414
  NOTE
4 PROPERTY AND EQUIPMENT
  Furniture and fixtures
    
    $
    100,388Machinery and equipment
    
    
    1,896,200Leasehold improvements
    
    
    179,0652,175,653Less accumulated depreciation
    
    
    (1,312,940
    )$
    862,713
  NOTE 5 DEVELOPMENT COSTS
  Keshet  Systems Integration
    
    $
    3,026,140Ammunition Mortar Rounds (60,81,120 mm)
    
    
    854,10840mm
    
    
    2,894,6926,774,940Less development cost amortization
    
    
    (794,866
    )$
    5,980,074
  NOTE
6 NOTE PAYABLE  LINE OF CREDIT
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NOTE
7 NOTE PAYABLE  STOCKHOLDERS
  NOTE 8 EQUITY
    NOTE 9 WARRANTS
    NOTE 10 PROFIT SHARING PLAN
  12




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NOTE 11 RELATED PARTY
  September 30, 2006
    
    September 30, 2005Sales to affiliates
    
    $
    9,653,255
    
    
    $
    5,484,703Due from affiliates (included in advances -
stockholders in accompanying balance sheet)
    
    $
    196,749
    
    
    $
    196,749Due to related party
    
    $
    1,407,996
    
    
    $
    916,124Notes Payable to Stockholders
    
    $
    433,274
    
    
    $
    933,455Advance payment on a contract  related party
    
    $
    2,329,872
    
    
    $
    2,453,788
   NOTE 12 CONTRACT STATUS
  Backlog -
 Total contract price of initial contract awards including
exercised options and approved change orders
(modifications)
    
    $
    33,144,964Completed to date
    
    
    10,367,133Authorized backlog
    
    $
    22,777,831
    *
 
 *
    
    Included in this amount is $20,409,941 in authorized backlog from a related party (Soltam
Systems). NOTE 13 COMMITMENTS AND CONTINGENT LIABILITIES
 (A) Litigation
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(B) Employment Agreement
  (C) Capital Lease
  NOTE 14 CONCENTRATIONS
  (A) Revenue and Receivables
  (B) Suppliers
  14




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(C) Materials
  (D) Foreign Operations
  NOTE 15 LOSS ON INVOLUNTARY CONVERSION DUE TO FIRE
  ASSET DESTROYED
    
    NET BOOK VALUEMachinery and Equipment
    
    $
    96,128Leasehold Improvements
    
    
    479,363Finished Goods and Work In Process Inventories
    
    
    1,170,213Clean-up
    
    
    69,606TOTAL
    
    $
    1,815,310Total Insurance Proceeds Due
    
    $
    1,400,000Insurance
Proceeds Received through November 17, 2006
    
    
    1,035,000Insurance Receivable at November 17, 2006
    
    $
    365,000Net Loss Due to Fire
    
    $
    415,310
 NOTE 16 GOING CONCERN
  NOTE 17 SUBSEQUENT EVENTS
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 FORWARD-LOOKING STATEMENTS
 Information included or incorporated by reference in this filing may contain forward-looking
statements. This information may involve known and unknown risks, uncertainties and other factors
which may cause our actual results, performance or achievements of the Company to be materially
different from the future results, performance or achievements expressed or implied by any
forward-looking statements. Forward-looking statements, which involve assumptions and describe our
future plans, strategies and expectations, are generally identifiable by use of the words may,
should, expect, anticipate, estimate, believe, intend, or project, or the negative of
these words or other variations on these words or comparable terminology.
 This filing contains forward-looking statements, including statements regarding, among other
things, (a) our projected sales and profitability, (b) our growth strategies, (c) anticipated
trends in our industry, (d) our future financing plans and (e) our anticipated needs for working
capital. These statements may be found under Managements Discussion and Analysis or Plan of
Operations and Business, as well as in this filing generally. Actual events or results may
differ materially from those discussed in forward-looking statements as a result of various
factors, including, without limitation, the risks outlined under Risk Factors and matters
described in this filing generally. In light of these risks and uncertainties, there can be no
assurance that the forward-looking statements contained in this filing will in fact occur.
 OVERVIEW
  w
    
    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.w
    
    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.w
    
    Metal Parts Manufacturing segment consists of 105mm Spiral Wrapped Cartridge
Cases which are used by the US 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 US government.
 16.8 78.9 4.3 $1,768,754 (7.8%) $20,409,941 (89.6%) $599,136, (2.6%) $22,777,831
    The Fire
  16




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System Contract
  SWCC
   Cost Reduction Plan
  RESULTS OF OPERATION
  17




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LIQUIDITY AND CAPITAL RESOURCES
 $4,926,823 $2,022,610
 $4,926,823 $183,887 $5,028,832 $ 7,370,242
  18




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RECENT ACCOUNTING PRONOUNCEMENTS
   OFF-BALANCE SHEET ARRANGEMENTS
  CRITICAL ACCOUNTING POLICIES
  19




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
    
    Revenue recognition via the percentage of completion method
 Revenue Recognition via the Percentage of Completion Method.
   20




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ITEM 3. CONTROLS AND PROCEDURES
 (a) Evaluation of Disclosure Controls and Procedures:
  (b) Changes In Internal Controls Over Financial Reporting
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PART II
 
 ITEM 1. LEGAL PROCEEDINGS
    
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 None.
 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 None.
 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 None
 
 ITEM 5. OTHER INFORMATION
 None.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 10-QSB
 (a) The following exhibits are filed as part of this filing:
 Exhibit No
    
    Description
    
    Location31.1
    
    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 June 30, 2006, the Company filed a Current Report on Form 8-K announcing that its
common stock began trading under the ticker symbol VSYN.OB on the Nasdaq-operated
Over-the-Counter Bulletin Board (OTCBB), when the market opened on Friday, June 30, 2006.
 On August 16, 2006, the Company filed a Current Report on Form 8-K announcing that it has
experienced on August 14, 2006 an explosive detonation in the manufacturing process plant.
A copy of the statement was attached to the Form 8-K .
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SIGNATURES
  VALENTEC SYSTEMS, INC.November 20, 2006
    By:
    /s/ Robert A. ZummoRobert A. ZummoChief Executive Officer and
Principal Accounting Officer 24