**SECURITIES
AND EXCHANGE COMMISSION**
 WASHINGTON
DC 20549
 
 **FORM
10-KSB**
 
 (MARK
ONE)
 
 **x ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF**
 **1934.**
 
 **FOR
THE FISCAL YEAR ENDED DECEMBER 31, 200** **4** **** ****
 
 OR
 
 **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 000-09459*
 
 **NEW
CENTURY COMPANIES, INC.**
 
 (NAME OF
SMALL BUSINESS ISSUER IN ITS CHARTER)
 
 
 DELAWARE
    0610345787(STATE
      OR OTHER JURISDICTION OF INCORPORATION)
    (I.R.S.
      EMPLOYERIDENTIFICATION
      NO.)9835
      SANTA FE SPRINGS RD.SANTA
      FE SPRINGS, CA
    90670(ADDRESS
      OF PRINCIPAL EXECUTIVE OFFICES)
    (ZIP
      CODE)
  (562)
906-8455
 (ISSUER'S
TELEPHONE NUMBER, INCLUDING AREA CODE)
   **SECURITIES
REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:**
  NAME
      OF EACH EXCHANGETITLE
      OF EACH CLASS
    ON
      WHICH REGISTERED
 
  **SECURITIES
REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:**
 
 **COMMON
STOCK, PAR VALUE $0.10**
 (TITLE OF
CLASS)
 
 (TITLE OF
CLASS)
 
 
 
 Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained to the best of Company's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-SKB. |X|

State
issuer's revenue for its most recent fiscal year: $4,605,813.

The
aggregate market value of the voting and non-voting common equity held by
non-affiliates on March 31, 2005 was approximately 5,208,987 based on the
average bid and ask price on March 31, 2005. As of March 31, 2005 there were
7,292,321 shares of common stock issued and outstanding.

**ISSUERS
INVOLVED IN BANKRUPTCY PROCEEDINGS**
**DURING
THE PAST FIVE YEARS**

Check
whether the issuer has filed all documents and reports required to be filed by
Section 12, 13 or 15 (d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes |X| No |_|

Transitional
Small Business Disclosure Format (check one): Yes |_| No |X|

2

NEW
CENTURY COMPANIES, INC.
FORM
10-KSB
INDEX

PAGEPART
      IItem
      1.
    Description
      of Business
    4Item
      2.
    Description
      of Property
    7Item
      3.
    Legal
      Proceedings
    7Item
      4.
    Submission
      of Matters of a Vote of Security Holders
    7PART
      IIItem
      5.
    Market
      for Company's Common Equity and Related Stockholder
Matters
    7Item
      6.
    Management's
      Discussion and Analysis or Plan of Operations
    11Item
      7.
    Financial
      Statements
    14Item
      8.
    Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
    15Item
      8A.
    Controls
      and Procedures
    15Item
      8B.
    Other
      InformationPART
      IIIItem
      9.
    Directors
      and Executive Officers, Promoters and Control Persons; Compliance with
      Section 16(a) of the Exchange Act
    16Item
      10.
    Executive
      Compensation
    17Item
      11.
    Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
    19Item
      12.
    Certain
      Relationships and Related Transactions
    19Item
      13.
    Exhibits
    20Item
      14.
    Principal
      Accountant Fees and Services
    20Signatures
    
    21Financial
      Statements
    
    F-1

3


**PART
I**

**ITEM
1. DESCRIPTION OF BUSINESS.**

This
Annual Report on Form 10-KSB contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. These statements relate to future events or the
Company's future financial performance. The Company has attempted to identify
forward-looking statements by terminology including "anticipates," "believes,"
"expects," "can," "continue," "could," "estimates," "expects," "intends," "may,"
"plans," "potential," "predict," "should" or "will" or the negative of these
terms or other comparable terminology.

Although
the Company believes that the expectations reflected in the forward-looking
statements are reasonable, the Company cannot guarantee future results, levels
of activity, performance or achievements. The Company expectations are as of the
date this Form 10-KSB is filed, and the Company does not intend to update any of
the forward-looking statements after the date this Annual Report on Form 10-KSB
is filed to confirm these statements to actual results, unless required by law.

**OVERVIEW**

**Corporate
History and Operations**

The
common stock of New Century Companies, Inc. ("New Century" or the "Company")
(previously InternetMercado.Com) is quoted on the OTC Bulletin Board under the
symbol "NCNC". Prior to May 25, 2001, the Company was engaged in the business of
marketing services to other companies wanting to reach the Hispanic market.
However, due to difficulty in raising additional working capital to execute the
business plan, the Company ceased its operations and completed a reverse merger.

On May
25, 2001, the Company entered into a plan of Reorganization and Merger with New
Century Remanufacturing, Inc. Pursuant to the merger, all of the outstanding
shares of New Century Remanufacturing, Inc., a California corporation,
incorporated on March 12, 1996 ("NCR"), were exchanged for shares of the Company
on a 1 to 833.33 basis. The Company issued a total of 4,195,942 shares of common
stock issued and outstanding. Immediately after the merger, all then existing
officers and directors of the Company resigned and the management of NCR was
elected and appointed to such positions; thereby effecting a change of control.
Although NCR became a wholly-owned subsidiary of the Company following the
transaction, because the transaction resulted in a change of control, the
transaction was recorded as a "reverse merger" whereby NCR was considered to be
the accounting acquirer of the Company.

After the
reverse merger, the Company changed its name to New Century Companies, Inc. The
results of operations and the related financial statements are the results of
operations for NCR.

Since the
merger, the Company has been engaged in acquiring, re-manufacturing and selling
pre-owned Computer Numerically Controlled ("CNC") machine tools to manufacturing
customers. The Company provides rebuilt, retrofit and remanufacturing services
for numerous brands of machine tools. The remanufacturing of a machine tool,
typically consisting of replacing all components, realigning the machine, adding
updated CNC capability and electrical and mechanical enhancements, generally
takes two to four months to complete. Once completed, a remanufactured machine
is a "like new," state-of-the-art machine with a price ranging from $275,000 to
$1,000,000, which is approximately 40%-50% of the price of a new machine. The
Company manufactures original equipment, CNC large turning lathes and
attachments under the trade name Century Turn. In turn, NCR is principally
engaged in acquiring, remanufacturing and selling pre-owned CNC machine tools to
manufacturing customers across the United States of America.

CNC
machines use commands from onboard computers to control the movements of cutting
tools and rotation speeds of the parts being produced. Computer controls enable
operators to program operations such as part rotation, tooling selection and
tooling movement for specific parts and then store the programs in memory for
future use. The machines are able to produce parts while left unattended.
Because of this ability, as well as superior speed of operation, a CNC machine
is able to produce the same amount of work as several manually controlled
machines, as well as reduce the number of operators required; generating higher
profits with less re-work and scrap. Since the introduction of CNC tooling
machines, continual advances in computer control technology have allowed for
easier programming and additional machine capabilities.

4

A
vertical turning machine permits the production of larger, heavier and more
oddly shaped parts on a machine, which uses less floor space when compared to
the traditional horizontal turning machine because the spindle and cam are
aligned on a vertical plane, with the spindle on the bottom.

The
primary industry segments in which NCR machines are utilized to make component
parts are in aerospace, power generation turbines, military, component parts for
the energy sector for natural gas and oil exploration and medical fields. The
Company sells the products in the United States, Canada and Mexico.

Over the
last four years, the Company has designed and developed a large horizontal CNC
turning lathe with productivity features new to the metalworking industry. The
Company has applied for a patent for the Century Turn Lathe. The Company
believes that a potential market for the Century Turn Lathe, in addition to the
markets mentioned above, is aircraft landing gear.

**INDUSTRY
OVERVIEW**

We
provide our manufactured and remanufactured machines as part of the machine tool
industry. The machine tool industry worldwide is approximately a 30 billion
dollar business annually. The industry is sensitive to market conditions and
generally trends downward prior to poor economic conditions, and improves prior
to an improvement in economic conditions.

Our
machines are utilized in a wide variety of industry segments as follows:
aerospace, energy, valves, fittings, oil and gas, machinery and equipment, and
transportation. With the recent downturn in the aerospace industry, we have seen
an increase in orders from new industries such as defense and medical
industries.

**CUSTOMERS**

Each year
we have approximately 50% new customers and 50% repeat customers.

**SUPPLIERS**

Our three
largest suppliers are GE Fanic Automation, TCI Precision Metals and Sandvik
Coromat.

**MARKETING**

We market
our CNC turning lathes primarily through direct sales and independent
representatives throughout the United States. We also market our lathes through
advertising in industrial trade publications. We have recently engaged the
services of three independent sales representatives who have had a key impact on
the amount of direct sales.

We market
our CNC vertical boring mills by advertising in regional and national trade
publications and distribute product literature explaining the differences
between used and remanufactured machinery.

**BUSINESS
STRATEGY AND MARKET DEVELOPMENT**

Our
business strategy is to capitalize on the opportunities for growth in our core
businesses by increasing our penetration of existing markets through
acquisitions and expanding into new markets by introducing new products and
services.

5
**SEASONALITY**

Our
business is subject to certain seasonal fluctuations in sales, with a pattern of
net sales being lower in the second fiscal quarter, due to plant closings in the
summer months and vacations. The market for machine tools is also sensitive to
economic conditions, production capacity utilization and the general level of
business confidence.

**COMPETITION**

The
market for remanufacturing services for the machine tools is competitive, with
competition from numerous independent rebuild suppliers with various sales and
resource levels. We believe that we have a competitive advantage because we
employ skilled personnel who have been trained for and have experience with
these products. Principal competitive factors for our products and services are
proprietary technology, customer service, technical support, delivery and price.

**SOURCES
AND AVAILABILITY OF RAW MATERIALS**

Our
products are manufactured from various raw materials, including cast iron, sheet
metal, bar steel and bearings. Although our operations are highly integrated, we
purchase a number of components from outside suppliers, including the computer
and electronic components for our CNC turning lathes. There are multiple
suppliers for virtually all of our raw material and components and we have not
experienced a supply interruption.

**RESEARCH
AND DEVELOPMENT**

Our
ongoing research and development program involves creating new products and
modifying existing products to meet market demands and redesigning existing
products to reduce the cost of manufacturing. The research and development
department is staffed with experienced design engineers. The cost of research
and development, all of which has been charged to operations, amounted to
approximately $1,500,000 over the last three years.

**PATENTS
AND TRADEMARKS**

The
Company has applied for patents, trademarks and copyrights relating to its
manufactured products. However, the Company's business generally is not
dependent upon the protection of any patent, patent application or patent
license agreement, or group thereof, and would not be materially affected by the
expiration thereof.

**EMPLOYEES**

At
December 31, 2004, we had 26 full-time employees. The Company believes its
relationships with its employees are good. The Company's employees are not
represented by a collective bargaining organization and the Company has not
experienced a work stoppage.

**ENVIRONMENTAL
MATTERS**

The
industry in which we compete is subject to environmental laws and regulations
concerning emissions to the air, discharges to waterways, and the generation,
handling, storage, transportation, treatment and disposal of waste materials.
These laws and regulations are constantly evolving and we cannot predict
accurately the effect they will have on our business in the future. It is our
policy to comply with all applicable environmental, health and safety laws and
regulations. In many instances, the regulations have not been finalized. Even
where regulations have been adopted, they are subject to varying and conflicting
interpretations and implementation. In some cases, compliance can only be
achieved by capital expenditures. We cannot accurately predict what capital
expenditures, if any, may be required. We believe that our operations are in
compliance with all applicable laws and regulations relating to environmental
matters.

6
**AVAILABLE
INFORMATION**

The
Company files annual reports on Form 10-KSB, quarterly reports on Form 10-QSB,
current reports on Form 8-K and proxy and information statements and amendments
to reports files or furnished pursuant to Sections 13(a) and 15(d) of the
Security Exchange Act of 1934, as amended. The public may read and copy this
materials at the SEC`s Public Reference Room at 450 Fifth St. NW, Washington, DC
20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintain a
website (HTTP://WWW.SEC.GOV) that contains reports, proxy and information
statements and other information regarding the Company and other companies that
file materials with the SEC electronically.

**ITEM
2. DESCRIPTION OF PROPERTY.**

We lease
our headquarters in Santa Fe Springs, California, which expires in 2006, and
conduct our operations at such facilities. We believe that our facilities are in
good condition and provide adequate capacity to meet our needs for the
foreseeable future.

The
following table sets forth certain information relating to the Company's
principal facilities:


LOCATION
    
    PRINCIPAL
      USES
    
    APPROX
      SQ. FT.9835
      Santa Fe Springs Rd.Santa
      Fe Springs, CA 90670
    
    Manufacturing
    
    44,000

**ITEM
3. LEGAL PROCEEDINGS.**

The
Company may be involved from time to time in various claims, lawsuits, disputes
with third parties, actions involving allegations of discrimination or breach of
contract actions incidental in the normal course of business operations. The
Company is currently not involved in any such litigation or any pending legal
proceedings that management believes could have a material adverse effect on the
Company's financial position or results of operations.

**ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**

There
were no matters submitted to security holder for the quarter ended December 31,
2004.

**PART
II**

**ITEM
5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.**

Our
common stock trades on the NASDAQ Over-The-Counter Bulletin Board under the
symbol "NCNC". The following table sets forth the high and low bid prices for
the shares of common stock as reported on the Over-The-Counter Bulletin Board
for each quarterly period of the last two fiscal years. The bid prices listed
below represent prices, adjusted for stock splits, between dealers without
adjustments for retail markups, breakdowns or commissions and may not represent
actual transactions.

7
**For
Year Ended December 31, 2004**

Quarter
      Ended
    
    **HIGH**
    
    **LOW**December
      31
    
    $
    0.29
    
    
    0.06September
      30
    
    
    0.32
    
    
    0.15June
      30
    
    
    0.65
    
    
    0.18March
      31
    
    
    0.85
    
    
    0.40

****
**For
Year Ended December 31, 2003**

Quarter
      Ended
    
    **HIGH**
    
    **LOW**December
      31
    
    $
    0.83
    
    
    0.69September
      30
    
    
    0.34
    
    
    0.31June
      30
    
    
    0.62
    
    
    0.56March
      31
    
    
    0.98
    
    
    0.89



We have
not declared any cash dividends on our common stock since inception. Declaration
of dividends with respect to the common stock is at the discretion of the Board
of Directors. Any determination to pay dividends will depend upon the financial
condition, capital requirements, results of operations and other factors deemed
relevant by the Board of Directors.

At
December 31, 2004 we had 352 holders of record of our common stock representing
approximately 1,200 individual participants. This figure does not include
beneficial holders or common stockholder's nominee co-trust name, as we cannot
accurately estimate the number of these beneficial holders.

The
transfer agent and registrar for our common stock is U.S. Stock Transfer located
in Los Angeles.

**PENNY
STOCK**

Until the
Company's shares qualify for inclusion in the NASDAQ system, the public trading,
if any, of the Company's common stock will be on the OTC Bulletin Board. As a
result, an investor may find it more difficult to dispose of, or to obtain
accurate quotations as to the price of, the common stock offered. The Company's
common stock is subject to provisions of Section 15(g) and Rule 15g-9 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), commonly
referred to as the "penny stock rule." Section 15(g) sets forth certain
requirements for transactions in penny stocks, and Rule 15g-9(d) incorporates
the definition of "penny stock" that is found in Rule 3a51-1 of the Exchange
Act. The SEC generally defines "penny stock" to be any equity security that has
a market price less than $5.00 per share, subject to certain exceptions. If the
Company's common stock is deemed to be a penny stock, trading in the shares will
be subject to additional sales practice requirements on broker-dealers who sell
penny stock to persons other than established customers and accredited
investors. "Accredited investors" are persons with assets in excess of
$1,000,000 or annual income exceeding $200,000 or $300,000 together with their
spouse. For transactions covered by these rules, broker-dealers must make a
special suitability determination for the purchase of such security and must
have the purchaser's written consent to the transaction prior to the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
rules require the delivery, prior to the first transaction, of a risk disclosure
document, prepared by the SEC, relating to the penny stock market. A
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, and current quotations for the
securities. Finally, monthly statements must be sent disclosing recent price
information for the penny stocks held in an account and information on the
limited market in penny stocks. Consequently, these rules may restrict the
ability of a broker-dealer to trade and/or maintain a market in the Company's
common stock and may affect the ability of the Company's shareholders to sell
their shares.

**RECENT
SALES OF UNREGISTERED SECURITIES**

**PREFERRED
STOCK**

During
the year ended December 31, 2004, the Company issued a PPM in which the Company
offered to eligible investors, as defined, a maximum of 30,000 shares of Series
D Preferred Stock (“Series D”), with a required minimum offering of 1,000 shares
of Series D to be sold at $25 per share. During the year ended December 31, 2004
and pursuant to the PPM, the Company sold 23,640 shares of Series D to eligible
investors for proceeds totaling $521,000, net of $30,000 paid to the
broker/dealer and $40,000 of accounts payable which were exchanged for shares.
Such offering costs were included as an offset to additional paid-in capital.
Since the related conversion rate is 50:1, the effective conversion rate of
$0.50 resulted in a deemed dividend of $153,660, which was included in
accumulated deficit. The deemed dividend is also reflected as an increase in the
net loss available to common shareholders. Additionally, the broker/dealer was
granted Three-Year Placement Warrants, as defined in the PPM, with a cashless
exercise feature to purchase 25,000 shares of the Company’s common stock at
prices ranging from $0.50 to $1.00. No expense was recorded related to the
granting of such warrants as they were considered an offering cost. The warrants
vested immediately and expire in February 2007.

In
September 2004, holders of the Company's Preferred C converted 2,820 shares into
47,000 shares of common stock.

8
**COMMON
STOCK**

In
January 2004, the Company issued 150,000 shares of restricted common stock
valued at $105,000 (estimated based on the market price on the date of grant) to
a consultant for services to be rendered during 2004. In March 2004, due to some
disagreements between the consultant and the Company in relation to the
services, the Company requested the cancellation of the shares. In December
2004, the Company and the consultant reached an agreement, and the shares were
reissued. The $105,000 value of the transaction, based on the value on the
measurement date in January 2003 (above), was recorded as consulting expense
during the year ended December 31, 2004.

In March
2004, the Company issued 100,000 shares of restricted common stock value at
$50,000 (estimated based on the market price on the date of grant) to a
consulting firm for services rendered in relation to corporate finance and
investor relations. Such amount was recorded as consulting expense during the
year ended December 31, 2004.

In
December 2004, the Company issued 100,000 shares of restricted common stock
valued at $10,000 (estimated based on the market price on the date of grant) to
a consultant for services to be rendered through May 2005. The Company recorded
the entire value to deferred consulting fees and is amortizing the amount to
consulting expense over the period of service. As of December 31, 2004, the
total unamortized consulting fees approximated $8,300, which is recorded as an
increase to stockholders equity (deficit).


**STOCK
OPTIONS AND WARRANTS**

Under the
terms of the Company's Incentive Stock Option Plan ("ISOP"), options to purchase
an aggregate of 1,000,000 shares of common stock may be issued to key employees,
as defined. The exercise price of any option may not be less than the fair
market value of the shares on the date of grant. No options granted may be
exercisable more than 10 years after the date of grant. The options granted
generally vest evenly over a one-year period, beginning from the date of grant.

Under the
terms of the Company's non-statutory stock option plan ("NSSO"), options to
purchase an aggregate of 1,350,000 shares of common stock may be issued to
non-employees for services rendered. These options are non-assignable and
non-transferable, are exercisable over a five-year period from the date of
grant, and vest on the date of grant.

During
the year ended December 31, 2004, the Company did not grant any stock options or
warrants.

9

The
following is a status of the stock options and warrants outstanding at December
31, 2004 and the changes during the two years then ended:


Year
      EndedDecember 31,2004
    
    
    Year
      EndedDecember 31,2003Options
      andWarrants
    
    
    WeightedAverage
      Price
    
    
    Options
      andWarrants
    
    
    WeightedAverage
      PriceOutstanding,
      beginning of year
    
    
    1,821,583
    
    $
    2.34
    
    
    741,583
    
    $
    8.06Granted
    
    
    -
    
    
    -
    
    
    1,530,000
    
    
    0.36Exercised
    
    
    -
    
    
    -Cancelled/Terminated
    
    
    (135,000
    )
    
    (9.54
    )
    
    (450,000
    )
    
    (5.06
    )Outstanding
      and exercisable, end of year
    
    
    1,686,583
    
    $
    1.77
    
    
    1,821,583
    
    $
    2.34Weighted
      average fair value of optionsgranted
    
    
    
    
    $
    -
    
    
    
    
    $
    0.17

10
The
following table summarizes information related to stock options outstanding at
December 31, 2004:


EQUITY
      COMPENSATION PLAN INFORMATION

NUMBER
      OF SECURITIESREMAINING
      AVAILABLE FORNUMBER
      OF SECURITIES TO BE
    
    WEIGHTED-AVERAGE
    
    FUTURE
      ISSUANCE UNDERISSUED
      UPON EXERCISE OF
    
    EXERCISE
      PRICE OF
    
    EQUITY
      COMPENSATION PLANSOUTSTANDING
      OPTIONS,
    
    OUTSTANDING
      OPTIONS,
    
    (EXCLUDING
      SECURITIES REFLECTEDWARRANTS
      AND RIGHTS
    
    WARRANTS
      AND RIGHTS
    
    IN
      COLUMN(A))(A)
    
    (B)
    
    (C)Equity
      compensation plans approved by security holders
    
    
    1,656,583
    
    
    
    1.78
    
    
    
    11,753,616Equity
      compensation plans not approved by security holders
    
    
    30,000
    
    
    
    1.12
    
    
    
    33,600Total
    
    
    1,686,583
    
    
    
    --
    
    
    
    11,787,216


From time
to time, the Companiy issues warrants to employees and to third parties pursuant
to various agreements, which are not pre-approved by the shareholders.

**ITEM
6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.**

The
following discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto appearing elsewhere in
this Form 10-KSB. Certain statements contained herein that are not related to
historical results, including, without limitation, statements regarding the
Company's business strategy and objectives, future financial position,
expectations about pending litigation and estimated cost savings, are
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Securities Exchange Act") and involve risks and uncertainties. Although the
Company believes that the assumptions on which these forward-looking statements
are based are reasonable, there can be no assurance that such assumptions will
prove to be accurate and actual results could differ materially from those
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, regulatory
policies, competition from other similar businesses, and market and general
policies, competition from other similar businesses, and market and general
economic factors. All forward-looking statements contained in this Form 10-KSB
are qualified in their entirety by this statement.

**OVERVIEW**

The
earnings of New Century for the year ended 2004 were negative as a result of a
decrease in sales and increased losses on contracts, management's strategy of
continued investment in research and development of new projects and of the
corporate expenses related to compliance with the regulatory requirements of
being a public company. The goal of these expenditures was to position New
Century as a leading manufacturer and remanufacturer of large horizontal and
vertical turning machines. New Century has completed the majority of this
current development effort and expects limited resources to be devoted to this
area in the next fiscal year. The Company's current strategy is to expand its
customer sales base with its present line of machine products. However, the
Company is in need of significant debt and/or equity financing. There can be no
assurance that the Company can obtain such financing for the period ended
December 31, 2005.

11
**RESULTS
OF OPERATIONS FOR THE PERIOD ENDED DECEMBER 31, 2004 COMPARED TO DECEMBER 31,
2003.**

Revenues.
New Century generated revenues of $4,605,813 for the fiscal year ended December
31, 2004, which was a 33% decrease from $6,908,087 for the fiscal year ending
December 31, 2003. The decrease is the result of a deficiency in working capital
which has limited our ability to fulfill customer orders. Additionally, the
overall market for machine tools is cyclical, reflecting economic conditions,
production capacity utilization, changes in tax and fiscal policies, corporate
profitability and financial condition as well as the general level of business
confidence.

Gross
Profit. There was a 32% decrease in gross profit for the fiscal year ending
December 31, 2004, due to lower revenues. Gross profit (loss) was $(456,986),
compared to $(667,657) from the corresponding period in 2004. This decrease is a
general result of reduced labor and material costs due to the decrease in sales.

Net Loss
.. Net loss decreased to $1,423,359 for the fiscal year ended December 31, 2004
compared to a net loss of $2,937,616 for the fiscal year ended December 31,
2003. The decrease in net loss is primarily attributed to the fact that, in
2003, the Company recorded a loss on a deposit of $465,000, a $544,318 gain on
forgiveness of accounts payable from negotiations with vendors in 2004, and
increased cash flow problems which affected the Company’s ability to complete
timely the remanufacture and shipment of machines.

Interest
Expenses. Interest expense for the fiscal year ending December 31, 2004
decreased to $181,468, compared to $295,338 for the year ended December 31,
2003. The decrease of 39% is primarily the result of the repayment of a short
term loan of $900,000 during the first quarter of 2003.

**FINANCIAL
CONDITION, LIQUIDITY, CAPITAL RESOURCES**

Net cash
decreased during the fiscal year ended 2004 was $26,882. The net cash provided
by financing activities of $402,988 increased from $(459,223) cash used in
financing activities in the prior year. The $862,211 cash provided by financing
activities increase is primarily due to repayment of $900,000 of notes payable
during 2003 and the issuance of preferred stock for net proceeds totaling
$521,000 during 2004.The cash
used in investing activities decreased from $(10,407) to $(1,396), due to
reducing purchases of property and equipment. The Company plans to continue to
rely upon external financing sources to meet the cash requirement of its ongoing
operations. Management is currently seeking to raise additional funding in the
form of subordinated debt and equity financing. However, there is no guarantee
that the Company will raise sufficient capital to execute its business plan. To
the extent that the Company is unable to raise sufficient capital, the Company's
business plan will be required to be substantially modified and its operations
curtailed. The Company's auditors have issued their report which contains an
explanatory paragraph as to the Company's ability to continue as a going
concern.

The
Company is currently addressing its liquidity issue by the following actions:

o The
Company continues its aggressive program for selling inventory that has been
produced or is currently in production.
o The
Company continues to implement plans to further reduce operating costs.
o The
Company is continually seeking investment capital through the public and private
markets.

However,
there is no guarantee that any of these strategies will enable the Company to
meet its obligations for the foreseeable future.

12
**INFLATION
AND CHANGING PRICES**

The
Company does not foresee any adverse effects on its earnings as a result of
inflation or changing prices.

**OFF-BALANCE
SHEET ARRANGEMENTS**

We have
no off-balance sheet arrangements, as defined in Regulation S-B Section 303.

**GOING
CONCERN**

The
Company's independent registered public accounting firm has stated in its report
included in this Form 10-KSB, that the Company has incurred recurring operating
losses, has a working capital deficit and a significant accumulated deficit.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern.

**CRITICAL
ACCOUNTING POLICIES**

The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States of America
requires management to make judgments, assumptions and estimates that affect the
amounts reported in the our consolidated financial statements and the
accompanying notes. The amounts of assets and liabilities reported on our
balance sheet and the amounts of revenues and expenses reported for each of our
fiscal periods are affected by estimates and assumptions, which are used for,
but not limited to, the accounting for revenue recognition, accounts receivable,
doubtful accounts and inventories. Actual results could differ from these
estimates. The following critical accounting policies are significantly affected
by judgments, assumptions and estimates used in the preparation of the financial
statements:

**Revenue
Recognition**

Service
revenues are billed and recognized in the period the services are rendered.

The
Company accounts for shipping and handling fees and costs in accordance with
EITF 00-10 "Accounting for Shipping and Handling Fees and Costs." Such fees and
costs incurred by the Company are immaterial to the operations of the Company.

In
accordance with SFAS 48, "Revenue Recognition when Right of Return Exists,"
revenue is recorded net of an estimate of markdowns, price concessions and
warranty costs. Such reserve is based on management's evaluation of historical
experience, current industry trends and estimated costs.

In
December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101 ("SAB 101"), "Revenue Recognition,", as amended and superseded by
SAB 104, which outlines the basic criteria that must be met to recognize revenue
and provides guidance for presentation of revenue and for disclosure related to
revenue recognition policies in financial statements filed with the Securities
and Exchange Commission. Management believes that the Company's revenue
recognition policy for services and product sales conforms to SAB 104. The
Company recognizes revenue of long-term contracts pursuant to SOP 81-1.

**Method
of Accounting for Long-Term Contracts**

The
Company uses the percentage-of-completion method of accounting to account for
long-term contracts and, therefore, takes into account the cost, estimated
earnings and revenue to date on fixed-fee contracts not yet completed. The
percentage-of-completion method is used because management considers total cost
to be the best available measure of progress on the contracts. Because of
inherent uncertainties in estimating costs, it is at least reasonably possible
that the estimates used will change within the near term.

The
amount of revenue recognized at the statement date is the portion of the total
contract price that the cost expended to date bears to the anticipated final
cost, based on current estimates of cost to complete. It is not related to the
progress billings to customers. Contract costs include all materials, direct
labor, machinery, subcontract costs and allocations of indirect overhead.

13
Because
long-term contracts may extend over a period of time, changes in job
performance, changes in job conditions and revisions of estimates of cost and
earnings during the course of the work are reflected in the accounting period in
which the facts that require the revision become known. At the time a loss on a
contract becomes known, the entire amount of the estimated ultimate loss is
recognized in the consolidated financial statements.

Contracts
that are substantially complete are considered closed for consolidated financial
statement purposes. Revenue earned on contracts in progress in excess of
billings (under billings) is classified as a current asset. Amounts billed in
excess of revenue earned (overbillings) are classified as a current liability.

**Estimates**

Critical
estimates made by management are, among others, deferred tax asset valuation
allowances, realization of inventories, collectibility of contracts receivable
and the estimating of costs for long-term construction contracts. Actual results
could materially differ from those estimates.

**Other
Significant Accounting Policies**

Other
significant accounting policies not involving the same level of measurement
uncertainties as those discussed above, are nevertheless important to an
understanding of the financial statements. The policies related to consolidation
and loss contingencies require difficult judgments on complex matters that are
often subject to multiple sources of authoritative guidance. Certain of these
matters are among topics currently under reexamination by accounting standards
setters and regulators. Although no specific conclusions reached by these
standards setters appear likely to cause a material change in our accounting
policies, outcomes cannot be predicted with confidence. Also see Note 1 of Notes
to Consolidated Financial Statements, Organization and Summary of Significant
Accounting Policies, which discusses accounting policies that must be selected
by management when there are acceptable alternatives.

**ITEM
7. FINANCIAL STATEMENTS.**

The
Financial Statements of the Company are set forth at the end of this document
hereof.

14
**PART
III**

**ITEM
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.**

None.

**ITEM
8A. EVALUATION OF CONTROLS AND PROCEDURES**

**EVALUATION
OF CONTROLS AND PROCEDURES**

Under the
supervision and with the participation of our management, including our Chief
Executive Officer ("CEO") and Chief Financial Officer ("CFO"), we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act as of
a date (the "Evaluation Date") within 90 days prior to filing the Company's
December 31, 2004 Form 10-KSB. Based upon that evaluation, the CEO and CFO
concluded that, as of December 31, 2004, our disclosure controls and procedures
were not effective in timely alerting management to the material information
relating to us (or our consolidated subsidiary) required to be included in our
periodic filings with the SEC.

**CHANGES
IN CONTROLS AND PROCEDURES**

There
were no significant changes made in our internal controls over financial
reporting during the quarter ended December 31, 2004 that have materially
affected or are reasonably likely to materially affect these controls. Thus, no
corrective actions with regard to significant deficiencies or material
weaknesses were necessary.

**LIMITATIONS
ON THE EFFECTIVENESS OF INTERNAL CONTROL**

The
Company's management, including the CEO, does not expect that our disclosure
controls and procedures or our internal control over financial reporting will
necessarily prevent all fraud and material errors. An internal control system,
no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
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. Because of the inherent limitations on all internal control systems, no
evaluation of controls can provide absolute assurance 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.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, and/or by management override of
the control. The design of any system of internal control is also based in part
upon 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. Over time, controls may become inadequate
because of changes in circumstances, and/or the degree of compliance with the
policies and procedures may deteriorate. Because of the inherent limitations in
a cost-effective internal control system, financial reporting misstatements due
to error or fraud may occur and not be detected on a timely basis.

**ITEM 8B. OTHER INFORMATION**

None.

15
**ITEM
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT.**

The
following table and text sets forth the names and ages of all directors and
executive officers of the Company and the key management personnel as of
December 31, 2004. The Board of Directors of the Company is comprised of only
one class. All of the directors will serve until the next annual meeting of
stockholders and until their successors are elected and qualified, or until
their earlier death, retirement, resignation or removal. Executive officers
serve at the discretion of the Board of Directors, and are appointed to serve
until the first Board of Directors meeting following the annual meeting of
stockholders. Also provided is a brief description of the business experience of
each director and executive officer and the key management personnel during the
past five years and an indication of directorships held by each director in
other companies subject to the reporting requirements under the Federal
securities laws.

NAME
    AGE
    POSITIONDavid
      Duquette
    59
    Chairman
      of the Board, President and DirectorJosef
      Czikmantori
    50
    Secretary
      and Director


DAVID
DUQUETTE. Mr. Duquette has served as the Chairman of the Board, President and
Director of the Company since May 25, 2001. Mr. Duquette has been in the CNC
Machine Tool Manufacturing and Remanufacturing business since 1967. From 1962 to
1965, he studied Electrical Engineering at the University of Wisconsin. Mr.
Duquette founded New Century Remanufacturing in 1996. Prior to that year, he
managed Orange Coast Rebuilding for approximately 8 years. Mr. Duquette was
President of U.S. Machine Tools from 1969 to 1985.

JOSEF
CZIKMANTORI. Mr. Czikmantori has served as Secretary and Director of the Company
since May 25, 2001. Mr. Czikmantori was born in Romania. He completed 3 years of
Technical College in Romania and then worked for United Machine Tool, which
manufactured metal cutting machinery. He joined Mr. David Duquette at Orange
Coast Machine Tools. He is a co-founder of New Century Remanufacturing.

Directors
receive no compensation for serving on the Board of Directors, but are
reimbursed for out-of-pocket expenses, if any, incurred in attending the board
meetings.

**FAMILY
RELATIONSHIPS.**

There are
no family relationships between or among the directors, executive officers or
persons nominated or charged by the Company to become directors or executive
officers.

**INVOLVEMENT
IN LEGAL PROCEEDINGS.**

To the
best of the Company's knowledge, during the past five years, none of the
following occurred with respect to a present or former director or executive
officer of the Company: (1) any bankruptcy petition filed by or against any
business of which such person was a general partner or executive officer either
at the time of the bankruptcy or within two years prior to that time; (2) any
conviction in a criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor offenses); (3) being
subject to any order, judgment or decree, not subsequently reversed, suspended
or vacated, of any court of any competent jurisdiction, permanently or
temporarily enjoining, barring, suspending or otherwise limiting his involvement
in any type of business, securities or banking activities; and (4) being found
by a court of competent jurisdiction (in a civil action), the SEC or the
Commodities Futures Trading Commission to have violated a federal or state
securities or commodities law, and the judgment has not been reversed, suspended
or vacated.

SECTION
16(A) BENEFICIAL OWNERSHIP COMPLIANCE.

16
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's
executive officers and directors and persons who own more than 10% of a
registered class of the Company's equity securities to file with the Securities
and Exchange Commission initial statements of beneficial ownership, reports of
changes in ownership and annual reports concerning their ownership of common
stock and other equity securities of the Company, on Forms 3, 4 and 5,
respectively. Executive officers, directors and greater than 10% shareholders
are required by Commission regulations to furnish the Company with copies of all
Section 16(a) reports they file. To the best of the Company's knowledge (based
solely upon a review of the Forms 3, 4 and 5 filed), no officer, director or 10%
beneficial shareholder failed to file on a timely basis for the fiscal year
ended December 31, 2004 any reports required by Section 16(a) of the Securities
Exchange Act of 1934, as amended.

**CODE
OF ETHICS**
For the
years ended December 31, 2004 and 2003, the Company did not have formal written
values and ethical standards. However, the Company’s management does communicate
values and ethical standards during Company wide meetings. Such standards will
be outlined in the human resource manual to be completed before the end of 2005.

**AUDIT
COMMITTEE FINANCIAL EXPERT**
The
Company does not have an audit committee. Since our securities are not currently
listed on or with a national securities exchange or national securities
association, we are not required to have an independent audit committee.
Therefore, the Company has not designated an audit committee financial expert.
The Company currently is in the process of identifying independent audit
committee members, including a financial expert to serve on our audit committee
and we expect to continue this process in 2005. Because of our size, we do not
have an audit committee, compensation committee or nominating commitee.

**STOCKHOLDER
COMMUNICATIONS**
Stockholders
interested in communicating directly with the Board of Directors, or specified
individual directors, my write to us at 9835 Santa Fe Springs Rd., Santa Fe
Springs, CA 90670. Mr. David Duquette will review all such correspondence and
will regularly forward to the Board copies of all such correspondence that deals
with the functions of the Board.

**ITEM
10. EXECUTIVE COMPENSATION.**

The
following Summary Compensation Table sets forth the compensation earned by the
Company's Chief Executive Officer and the other most highly compensated
executive officer(s) who were serving as such as of December 31, 2004, whose
aggregate compensation for the 2004 fiscal year exceeded $100,000 for services
rendered in all capacity for that fiscal year.


ANNUAL
      COMPENSATION
    
    LONG-TERM
      COMPENSATIONAWARDS
    
    PAYOUTSSECURITIESOTHER
    
    RESTRICTED
    
    UNDERLYINGANNUAL
    
    STOCK
      AWARD (S)
    
    OPTIONS/
    
    LTIP
    
    ALL
      OTHERNAME
      AND
    
    
    SALARY
    
    BONUS
    
    COMPENSATION
    
    ($)
    
    SARS
    
    PAYOUTS
    
    COMPEN-PRINCIPAL
      POSITION
    YEAR
    
    ($)
    
    ($)
    
    ($)
    
    (F)
    
    (#)
    
    ($)
    
    SATION
      ($)(A)
    (B)
    
    (C)
    
    (D)
    
    (E)
    
    S
    
    (G)
    
    (H)
    
    (I)David
      Duquette, Chairman of the Board, President
    2002
    
    $
      193,800
    
    --
    
    --
    
    --
    
    --
    
    --
    
    --David
      Duquette, Chairman of the Board, President and Director
    2003
    
    $
      127,200
    
    --
    
    --
    
    --
    
    400,000
    
    --
    
    --David
      Duquette, Chairman of the Board, President and Director
    2004
    
    $
      180,00017


OPTIONS/SAR
GRANTS IN FISCAL YEAR 2003
Number
      of
    Percent
      of totalsecurities
    options/SARsunderlying
    granted
      tooptions/SARs
    employees
      in fiscal
    Exercise
      or baseName
    granted
      (#)
    year
    price
      ($/Share)
    Expiration
      dateDavid
      Duquette, CEO
    400,000
    0%
    $0.25
    9/12/08Josef
      Czikmantori, Director
    150,000
    0%
    $0.25
    9/12/08


**AGGREGATED
OPTION EXERCISE IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES**

The
following table sets forth information concerning exercises of stock options
during the year ended December 31, 2004, by each of the Named Executive Officers
and the value of in-the-money unexercised options at December 31, 2004.

SHARESACQUIRED
      ON
    VALUE
    NUMBER
      OF SECURITIESEXERCISE
    REALIZED
    UNDERLYING
      UNEXERCISED
    VALUE
      OF UNEXERCISED IN-THENAME
    (#)
    ($)
      (1)
    OPTIONS
      AT FISCAL YEAR END
    MONEY
      OPTIONS AT FISCAL YEAR ENDEXERCISABLE/UNEXERCISABLE
      (#)
    EXERCISABLE/UNEXERCISABLE
      ($) (2)David
      Duquette, CEO
    400,000
      / 0
    $0.00
    400,000
      / 0
    16,000
      / 0Josef
      Czikmantori, Director
    150,000
      / 0
    $0.00
    150,000
      / 0
    6,000
      / 0

(1) Value
realized is based on estimated fair market value of Common Stock on the date of
exercise minus the exercise price.

(2) Value
is based on estimated fair market value of Common Stock as of December 31, 2004
($0.29) minus the exercise price.

None of
our Named Executive Officers exercised any of their options during 2004.

**LONG-TERM
INCENTIVE PLANS**

As of
December 31, 2004 there is no long-term incentive plan.

18
**ITEM
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.**

The
following table sets forth the number of shares of common stock beneficially
owned as of December 31, 2004 by (i) those persons or groups known to the
Company who will beneficially own more than 5% of the Company's common stock;
(ii) each director and director nominee; (iii) each executive officer whose
compensation exceeded $100,000 in the fiscal year ended December 31, 2004; and,
(iv) all directors and executive officers as a group. The information is
determined in accordance with Rule 13(d)-3 promulgated under the Exchange Act
based upon information furnished by persons listed or contained in filings made
by them with the Securities and Exchange Commission by information provided by
such persons directly to the Company. Except as indicated below, the
stockholders listed possess sole voting and investment power with respect to
their shares.


PERCENTAGE
      OFNAME
      OF BENEFICIAL OWNER
    NO.
      OF SHARES
    OWNERSHIP
      (I)David
      Duquette (1)
    1,433,334
    
    20%Josef
      Czikmantori (2)
    650,000
    
    9%Officers
      and Directors as a Group (2 persons)
    2,083,334
    
    29%


Based on
7,292,265 shares outstanding. Common stock subject to options or warrants that
are currently exercisable or exercisable within 60 days of December 31, 2004 are
deemed to be outstanding and to be beneficially owned by the holder thereof for
the purpose of computing the percentage ownership of such person but are not
treated as outstanding for the purpose of computing the percentage ownership of
any other person.

(1)
Includes options to purchase 400,000 shares (ISOP).

(2)
Includes options to purchase 150,000 shares (ISOP).

**ITEM
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.**

**NOTES
RECEIVABLE FROM STOCKHOLDERS**

As of
December 31, 2004, the Company had loans to two stockholders totaling $485,924,
including accrued interest, which were made prior to enforcement of the
Sarbanes-Oxley Act of 2002. The loans accrue interest at 6% and are due on
demand. The Company has reclassified the notes receivable from stockholders to
stockholders' equity (deficit) as such amounts have not been repaid during the
current year. The stockholders have shown the ability to repay the loans and
intend on repaying such amounts in the future. For each of the years ended
December 31, 2004 and 2003, total interest income from notes receivable from
stockholders' approximated $20,000.

19
****
**Exhibit 13. EXHIBITS.**
****
**EXHIBITNUMBER**
    **DESCRIPTION**2.1
    Share
      Exchange Agreement dated as of December 18, 2000. Incorporated herein by
      reference from the Company's filing on Form 8-K filed on August 23, 2000.3.1
    Certificate
      of Incorporation as filed with the Delaware Secretary of State, as
      amended. ncorporated by reference to Exhibit 2.1 to Company's Registration
      Statement on Form C-18, filed on August 14, 1980. I S3.2
    Certificate
      of Amendment to the Certificate of Incorporation as filed with the
      Delaware Secretary of State. Incorporated by reference to 8-K filed June
      4, 2003.3.2
    Bylaws.
      Incorporated by reference to Exhibit 2.2 to the Registration Statement on
      Form S-18, filed on August 14, 1980.10.1
    Agreement
      and Plan of Merger, dated as of May 25, 2003, by and among
      Internetmercado.com, Inc., New Century Remanufacturing, Inc., New Century
      Acquisition Corporation, David Duquette and Josef Czikmantori;
      Incorporated by reference to the Exhibit 2.1 of the 8-K filed June 4,
      2003.21.1
    Subsidiaries
      of the Company.31.1
    Certification
      required by Rule 13a-14(a) or rule 15d-14(d) and under Section 302 of the
      Sarbanes-Oxley act of 2002.31.2
    Certification
      required by Rule 13a-14(a) or rule 15d-14(d) and under Section 906 of the
      arbanes-Oxley act of 2002. C S [GRAPHIC
OMITTED]

**ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**

The
following table presents fees for professional services rendered by Squar,
Milner, Reehl & Williamson LLP ("Squar Milner") for the annual audit of our
consolidated financial statements as of and for the years ended December 31,
2004, and 2003 and fees billed for other services rendered by Squar Milner
during such years:

For the
Years Ended December 31,

2004
    
    2003Audit
      Fees
    
    $
    54,000
    
    $
    54,000Audit
      Related Fees
    
    
    -
    
    
    -Tax
      Fees
    
    $
    7,500
    
    $
    7,500All
      Other Fees
    
    
    -
    
    $
    27,000(1
    )$
    61,500
    
    $
    88,500

(1) Such
billings were in connection with Form SB-2, which was not filed during the year
ended December 31, 2003.

**POLICY
ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT SERVICES OF
INDEPENDENT AUDITOR**

The
Company does not have an audit committee. Therefore, the Board of Directors is
responsible for pre-approving all audit and permitted non-audit services to be
performed for us by our independent auditors. The Board of Directors
pre-approved all services rendered by our independent auditors.

20
**SIGNATURES**

In
accordance with Section 13 or 15(d) of the Exchange Act, the Company caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.

NEW CENTURY COMPANIES,
      INC.Date: April 15, 2005
    By:
    /s/ DAVID
  DUQUETTEDavid
      DuquetteChairman, President and
      Director
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Company and in the capacities and on the
dates indicated.

****Date: April 15, 2005
    By:
    /s/ DAVID
  DUQUETTEDavid
      DuquetteChairman, President and
      Director

****Date: April 15, 2005
    By:
    /s/ JOSEF
    CZIKMANTORIJosef
      CzikmantoriSecretary and
Director

21

**NEW CENTURY COMPANIES, INC.**
**AND SUBSIDIARY**

**CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2004 AND 2003**




**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

Report
      of Independent Registered Public Accounting Firm
    F-1Consolidated
      Balance Sheet
    F-2Consolidated
      Statements of Operations
    F-3Consolidated
      Statements of Stockholders’ Equity (Deficit)
    F-4Consolidated
      Statements of Cash Flows
    F-5Notes
      to Consolidated Financial Statements
    F-6

****
**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM**


To the Board of Directors and StockholdersNew Century
Companies, Inc. and Subsidiary

We have audited the accompanying consolidated balance sheet of New
Century Companies, Inc. and Subsidiary (the "Company") as of December 31, 2004,
and the related consolidated statements of operations, stockholders’ equity
(deficit) and cash flows for each of the two years in the period ended December
31, 2004. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of New
Century Companies, Inc. and Subsidiary as of December 31, 2004, and the results
of their operations and their cash flows for each of the two years in the period
ended December 31, 2004 in conformity with accounting principles generally
accepted in the United States of America.

The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note 1 to the consolidated financial statements, the Company has
negative working capital of approximately $3,317,000, an accumulated deficit of
approximately $7,472,000, recurring losses from operations and is in default on
certain notes payable. These factors, among others, raise substantial doubt
about the Company’s ability to continue as a going concern. Management’s plans
regarding these matters are also described in Note 1. The accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.


/s/ SQUAR, MILNER, REEHL & WILLIAMSON, LLP

April 7, 2005
Newport Beach, California


****
****
**NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY**
**CONSOLIDATED
BALANCE SHEET
**December
31, 2004****
**ASSETS****Current
      Assets**Cash
    
    $
    129,087Contracts
      receivable, net
    
    
    2,867Inventories,
      net
    
    
    980,242Costs
      in excess of billings on uncompleted contracts
    
    
    251,832Other
      current assets
    
    
    1,560Total
      current assets
    
    
    1,365,588**Property
      and Equipment, net**
    
    
    330,951$
    1,696,539**LIABILITIES
      AND STOCKHOLDERS' DEFICIT****Current
      Liabilities**Accounts
      payable and accrued expenses
    
    $
    2,144,665Dividends
      payable
    
    
    409,575Billings
      in excess of costs on uncompleted contracts
    
    
    760,386Notes
      payable
    
    
    1,295,816Capital
      lease obligations
    
    
    72,379Total
      current liabilities
    
    
    4,682,821**Commitments
      and Contingencies****Stockholders'
      Deficit**Cumulative,
      convertible, Series B preferred stock, $1 par value15,000,000
      shares authorized; no shares issued and outstanding
    
    
    -Cumulative,
      convertible, Series C preferred stock, $1 par value75,000
      shares authorized; 60,780 shares issued and outstanding(liquidation
      preference of $1,870,000)
    
    
    60,780Cumulative,
      convertible, Series D preferred stock, $25 par value75,000
      shares authorized; 23,640 shares issued and outstanding(liquidation
      preference of $650,000)
    
    
    591,000Common
      stock, $0.10 par value, 50,000,000 shares authorized;7,292,265
      shares issued and outstanding
    
    
    729,227Subscriptions
      receivable
    
    
    (462,500
    )Notes
      receivable from stockholders
    
    
    (485,924
    )Deferred
      consulting fees
    
    
    (8,333
    )Additional
      paid-in capital
    
    
    4,060,974Accumulated
      deficit
    
    
    (7,471,506
    )Total
      stockholders' deficit
    
    
    (2,986,282
    )$
    1,696,539

*Page
      F-2*
    *See
      accompanying notes to the consolidated financial
      statements.*
****
****
**NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY**
**CONSOLIDATED
STATEMENTS OF OPERATIONS
**For
the Years Ended December 31, 2004 and
2003****
**2004**
    
    
    **2003****CONTRACT
      REVENUES**
    
    $
    4,605,813
    
    $
    6,908,087**COST
      OF CONTRACTS**
    
    
    5,062,799
    
    
    7,575,744**GROSS
      PROFIT (LOSS)**
    
    
    (456,986
    )
    
    (667,657
    )**OPERATING
      EXPENSES**Consulting
      and other compensation
    
    
    319,700
    
    
    490,783Salaries
      and related
    
    
    245,688
    
    
    290,396Selling,
      general and administrative
    
    
    764,055
    
    
    1,223,242**TOTAL
      OPERATING EXPENSES**
    
    
    1,329,443
    
    
    2,004,421**OPERATING
      LOSS**
    
    
    (1,786,429
    )
    
    (2,672,078
    )**OTHER
      INCOME (EXPENSE)**Interest
      expense
    
    
    (181,468
    )
    
    (295,338
    )Interest
      income
    
    
    1,020
    
    
    32,267Gain
      on forgiveness of accounts payable
    
    
    544,318
    
    
    -**TOTAL
      OTHER INCOME (EXPENSE)**
    
    
    363,870
    
    
    (263,071
    )**LOSS
      BEFORE PROVISION FOR****INCOME
      TAXES**
    
    
    (1,422,559
    )
    
    (2,935,149
    )**PROVISION
      FOR INCOME TAXES**
    
    
    800
    
    
    2,467**NET
      LOSS**
    
    $
    (1,423,359
    )
    $
    (2,937,616
    )**NET
      LOSS APPLICABLE TO COMMON STOCKHOLDERS**
    
    $
    (1,791,594
    )
    $
    (3,074,866
    )******Basic and diluted net loss available to common
      stockholders**per common
      share****
    
    $
    (0.25
    )
    $
    (0.42
    )**********Basic and diluted weighted average common
      shares**outstanding****
    
    
    7,038,209
    
    
    7,355,214

*Page
      F-3*
    *See
      accompanying notes to the consolidated financial
      statements.*



****
**NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY**
**CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)**
**For
the Years Ended December 31, 2004 and 2003**
**Preferred**
    
    ****Preferred****
    
    **Preferred**
    
    
    
    **Additional**
    
    ****Notes**Receivable**
    
    **Deferred**
    
    
    
    
    
    ****Total**Stockholders'****Stock,
      Series B**
    
    **Stock,
      Series C**
    
    **Stock,
      Series D**
    
    **Common
      Stock**
    
    **Paid
      In**
    
    **From**
    
    **Consulting**
    
    **Subscriptions**
    
    **(Accumulated**
    
    **Equity****Shares**
    
    **Amount**
    
    **Shares**
    
    **Amount**
    
    **Shares**
    
    **Amount**
    
    **Shares**
    
    **Amount**
    
    **Capital**
    
    **Stockholders**
    
    **Fees**
    
    **Receivable**
    
    **Deficit)**
    
    **(Deficit)****Balance,
      January 1, 2003**
    
    
    -
    
    $
    -
    
    
    46,200
    
    $
    46,200
    
    
    -
    
    $
    -
    
    
    5,770,550
    
    $
    577,055
    
    $
    3,587,216
    
    $
    -
    
    $
    (55,833
    )
    $
    (462,500
    )
    $
    (2,605,046
    )
    $
    1,087,092Isssuance
      of common stock for services rendered
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    400,000
    
    
    40,000
    
    
    95,000
    
    
    -
    
    
    (35,438
    )
    
    -
    
    
    -
    
    
    99,562Isssuance
      of common stock and preferred stock for services rendered
    
    
    -
    
    
    -
    
    
    31,800
    
    
    31,800
    
    
    -
    
    
    -
    
    
    319,989
    
    
    31,999
    
    
    114,701
    
    
    -
    
    
    (74,375
    )
    
    -
    
    
    -
    
    
    104,125Amortization
      of deferred consulting fees
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    55,833
    
    
    -
    
    
    -
    
    
    55,833Warrants
      issued in connection with notes payable
    
    
    -
    
    
    
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    17,350
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    17,350Reclassification
      of loan to stockholder
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (466,159
    )
    
    -
    
    
    -
    
    
    -
    
    
    (466,159
    )Issuance
      of common stock as penalty for non-registration
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    100,000
    
    
    10,000
    
    
    11,000
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    21,000Issuance
      of common stock related to reconciliation to reverse
merger
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    64,720
    
    
    6,472
    
    
    (6,472
    )
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -Issuance
      of common stock in connection with the conversionof preferred
      stock
    
    
    -
    
    
    -
    
    
    (14,400
    )
    
    (14,400
    )
    
    -
    
    
    -
    
    
    240,006
    
    
    24,001
    
    
    (9,601
    )
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -Accumulated
      dividends on preferred stock
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (137,250
    )
    
    (137,250
    )Net
      loss
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (2,937,616
    )
    
    (2,937,616
    )**Balance,
      December 31, 2003**
    
    -
    
    
    -
    
    
    63,600
    
    
    63,600
    
    
    -
    
    
    -
    
    
    6,895,265
    
    
    689,527
    
    
    3,809,194
    
    
    (466,159
    )
    
    (109,813
    )
    
    (462,500
    )
    
    (5,679,912
    )
    
    (2,156,063
    )Issuance
      of convertible preferred stock at a discount
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    23,640
    
    
    591,000
    
    
    -
    
    
    -
    
    
    123,660
    
    
    -
    
    
    -
    
    
    -
    
    
    (153,660
    )
    
    561,000Isssuance
      of common stock for services rendered
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    350,000
    
    
    35,000
    
    
    130,000
    
    
    -
    
    
    (10,000
    )
    
    -
    
    
    -
    
    
    155,000Amortization
      of deferred consulting fees
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    111,480
    
    
    -
    
    
    -
    
    
    111,480Issuance
      of common stock in connection with the conversionof preferred
      stock
    
    
    -
    
    
    -
    
    
    (2,820
    )
    
    (2,820
    )
    
    -
    
    
    -
    
    
    47,000
    
    
    4,700
    
    
    (1,880
    )
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -Accumulated
      dividends on preferred stock
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (214,575
    )
    
    (214,575
    )Interest
      on notes receivable from stockholders
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (19,765
    )
    
    -
    
    
    -
    
    
    -
    
    
    (19,765
    )Net
      loss
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (1,423,359
    )
    
    (1,423,359
    )**Balance,
      December 31, 2004**
    
    -
    
    $
    -
    
    
    60,780
    
    $
    60,780
    
    
    23,640
    
    $
    591,000
    
    
    7,292,265
    
    $
    729,227
    
    $
    4,060,974
    
    $
    (485,924
    )
    $
    (8,333
    )
    $
    (462,500
    )
    $
    (7,471,506
    )
    $
    (2,986,282
    )

*Page
      F-4*
    *See
      accompanying notes to the consolidated financial
      statements.*


****

**NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY**
**CONSOLIDATED
STATEMENTS OF CASH FLOWS
**FOR
THE YEARS ENDED DECEMBER 31, 2004 AND
2003****
**2004**
    
    **2003**Cash
      flows from operating activities:Net
      loss
    
    $
    (1,423,359
    )
    $
    (2,937,616
    )Adjustments
      to reconcile net loss to net cash (used
      in) provided by operating activities:Depreciation
      and amortization of property and equipment
    
    
    276,302
    
    
    294,481Amortization
      of deferred consulting fees
    
    
    111,480
    
    
    55,833Gain
      on forgiveness of accounts payable
    
    
    544,318
    
    
    -Bad
      debt expense
    
    
    39,000
    
    
    -Inventory
      reserve
    
    
    186,352
    
    
    -Estimated fair market value of preferred and
      common stock issued
      for consulting services
    
    
    155,000
    
    
    203,687Estimated
      fair market value of common stock issued in connection with
      the deferral of the maturity of notes payable
    
    
    -
    
    
    21,000Estimated
      fair market value of warrants issued in connection with notes
      payable
    
    
    -
    
    
    17,350Interest
      income on notes receivable from stockholders
    
    
    (19,765
    )
    
    (19,765
    )Loss
      on disposal of fixed assets
    
    
    -
    
    
    34,046Loss
      of lease deposit
    
    
    -
    
    
    465,000Changes
      in operating assets and liabilities:Contracts
      receivable
    
    
    108,584
    
    
    941,729Inventories
    
    
    (9,651
    )
    
    563,111Costs
      in excess of billings on uncompleted contracts
    
    
    68,700
    
    
    33,081Other
      current assets
    
    
    24,131
    
    
    17,106Accounts
      payable and accrued expenses
    
    
    (682,338
    )
    
    347,990Billings
      in excess of costs on uncompleted contracts
    
    
    192,772
    
    
    508,290Net
      cash (used in) provided by operating activities
    
    
    (428,474
    )
    
    545,323Cash
      flows from investing activities:Purchases
      of property and equipment
    
    
    (1,396
    )
    
    (10,407
    )Net
      cash used in investing activities
    
    
    (1,396
    )
    
    (10,407
    )Cash
      flows from financing activities:Bank
      overdraft
    
    
    (124,558
    )
    
    34,261Proceeds
      from the issuance of notes payable
    
    
    80,816
    
    
    500,000Principal
      repayments on notes payable
    
    
    -
    
    
    (900,000
    )Principal
      repayments on obligations under capital lease
    
    
    (74,270
    )
    
    (93,484
    )Issuance
      of preferred stock, net of commissionsand offering costs
    
    
    521,000
    
    
    -Net
      cash provided by (used in) financing activities
    
    
    402,988
    
    
    (459,223
    )Net
      (decrease) increase in cash
    
    
    (26,882
    )
    
    75,693Cash
      at beginning of year
    
    
    155,969
    
    
    80,276Cash
      at end of year
    
    $
    129,087
    
    $
    155,969Supplemental
      disclosure of noncash investing and financing activities -Cumulative
      preferred dividends
    
    $
    214,575
    
    $
    57,750Conversion
      of preferred stock to common stock
    
    $
    4,700
    
    $
    14,400Preferred
      stock issued in lieu of accounts payable
    
    $
    40,000
    
    $
    -


*Page
      F-5*
    *See
      accompanying notes to the consolidated financial
      statements.*


****
****
**NEW CENTURY COMPANIES, INC. AND SUBSIDIARY**
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
**December 31, 2004**
**1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES**

***Organization and Nature of Operations***

New Century Companies, Inc. and Subsidiary (collectively, the
"Company"), a California corporation, was incorporated March 1996 and is located
in Southern California. The Company provides after-market services, including
rebuilding, retrofitting and remanufacturing of metal cutting machinery.

The Company currently sells its services by direct sales and
through a network of machinery dealers across the United States. Its customers
are generally medium to large sized manufacturing companies in various
industries where metal cutting is an integral part of their businesses. The
Company grants credit to its customers who are predominately located in the
western United States.

The Company trades on the Over-the-Counter Bulletin Board under
the symbol “NCNC.”

***Principles of Consolidation***

The consolidated financial statements include the accounts of New
Century Companies, Inc. and its wholly owned subsidiary, New Century
Remanufacturing (collectively, the “Company”). All significant intercompany
accounts and transactions have been eliminated in consolidation.

***Going Concern***

The accompanying consolidated financial statements have been
prepared assuming the Company will continue as a going concern, which
contemplates, among other things, the realization of assets and satisfaction of
liabilities in the normal course of business. As of December 31, 2004, the
Company has negative working capital of approximately $3,317,000, an accumulated
deficit of approximately $7,472,000, recurring losses from operations and is in
default on certain notes payable. These factors, among others, raise substantial
doubt about the Company's ability to continue as a going concern. The Company
intends to fund operations through anticipated increased sales and debt and
equity financing arrangements which management believes may be insufficient to
fund its capital expenditures, working capital and other cash requirements for
the year ending December 31, 2005. Therefore, the Company will be required to
seek additional funds to finance its long-term operations. The successful
outcome of future activities cannot be determined at this time and there is no
assurance that if achieved, the Company will have sufficient funds to execute
its intended business plan or generate positive operating results.

In response to these problems, management has taken the following
actions:

·
    The
      Company continues its aggressive program for selling
      inventory.
·
    The
      Company continues to implement plans to further reduce operating
      costs.
·
    The
      Company is seeking investment capital through the public and private
      markets.

The consolidated financial statements do not include any
adjustments related to recoverability and classification of assets carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.

*Page
F-6*

****
**NEW CENTURY COMPANIES, INC. AND SUBSIDIARY**
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
**December 31, 2004**
**1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES** (continued)

***Going Concern*** (continued)

During 2004 management negotiated with several vendors and was
able to obtain a fifty percent reduction in the amounts due to those specific
vendors. As a result, the accompanying consolidated statements of operations
include a gain on forgiveness of accounts payable totaling approximately
$544,000 for the year ended December 31, 2004.

***Concentrations of Credit Risks***

Cash is maintained at various financial institutions. The Federal
Deposit Insurance Corporation (“FDIC”) insures accounts at each financial
institution for up to $100,000. At times, cash may be in excess of the FDIC
insurance limit of $100,000. The Company’s uninsured bank balances at December
31, 2004 totaled approximately $200,000.

The Company sells products to customers throughout the United
States. The Company’s ability to collect receivables is affected by economic
fluctuations in the geographic areas served by the Company. Although the Company
does not obtain collateral with which to secure its contracts receivable,
management periodically reviews contracts receivable and assesses the financial
strength of its customers and, as a consequence, believes that the receivable
credit risk exposure could, at times, be material to the financial
statements.

During the year ended December 31, 2004, sales to two customers
approximated 19% of net sales. During the year ended December 31, 2003, sales to
three customers approximated 45% of net sales. As of December 31, 2004, 95% of
contracts receivable is over 90 days, and may be uncollectible. Accordingly,
contracts receivable are carried net of an allowance for losses totaling $39,000
at December 31, 2004.

***Risks and Uncertainties***

The Company operates in an industry that is subject to intense
competition. The Company's operations are subject to significant risks and
uncertainties including financial, operational, technological and other risks
associated with operating a business including the potential risk of business
failure.

***Use of Estimates in the Preparation of Financial
Statements***

The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
(“GAAP”) requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting periods. Significant
estimates made by management are, among others, deferred tax asset valuation
allowances, realization of inventories, collectibility of contracts receivable
and the estimation of costs for long-term construction contracts. Actual results
could materially differ from those estimates.
*Page
F-7*

****
**NEW CENTURY COMPANIES, INC. AND SUBSIDIARY**
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
**December 31, 2004**
**1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES** (continued)

***Cash and Cash Equivalents***

The Company considers all highly liquid fixed income investments
with maturities of three months or less at the time of acquisition, to be cash
equivalents. The Company had no cash equivalents at December 31, 2004.

***Inventories***

Inventories are stated at the lower of cost or net realizable
value. Cost is determined under the first-in, first-out method. Inventories
represent cost of work in process on units not yet under contract. Cost includes
all direct material and labor, machinery, subcontractors and allocations of
indirect overhead. Net realizable value is based on management's forecast for
sales of the Company's products or services in the ensuing years. The industry
in which the Company operates is characterized by technological advancement and
change. Should demand for the Company's products prove to be significantly less
than anticipated, the ultimate realizable value of the Company's inventories
could be substantially less than the amount shown in the accompanying
consolidated balance sheet. At December 31, 2004 and 2003, the Company had
inventory reserves approximating $486,000 and $300,000, respectively.

***Property and Equipment***

Property and equipment are recorded at cost and are depreciated
using the straight-line method over the estimated useful lives of the related
assets ranging from three to five years. Equipment under capital lease
obligations are depreciated over the shorter of the estimated useful life or the
term of the lease. Maintenance and repairs are charged to expense as incurred.
Significant renewals and betterments are capitalized. At the time of retirement
or other disposition of property and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
reflected in the consolidated statement of operations.
****
***Long-Lived Assets***

The Company accounts for long-lived asset impairments under
Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). Consistent
with prior guidance, SFAS No. 144 requires a three-step approach for recognizing
and measuring the impairment of assets to be held and used. The Company
recognizes impairment losses on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets’ carrying amounts. The
impairment loss is measured by comparing the fair value of the asset to its
carrying amount. Fair value is estimated based on discounted future cash flows.
Assets to be sold must be stated at the lower of the assets’ carrying amount or
fair value and depreciation is no longer recognized. The Company believes that
no impairment of property and equipment exists at December 31, 2004.

*Page
F-8*

****
**NEW CENTURY COMPANIES, INC. AND SUBSIDIARY**
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
**December 31, 2004**
**1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES** (continued)

***Revenue Recognition***

The Company’s revenues consist of contracts with vendors. The
Company uses the percentage-of-completion method of accounting to account for
long-term contracts and, therefore, takes into account the cost, estimated
earnings and revenue to date on fixed-fee contracts not yet completed. The
percentage-of-completion method is used because management considers total cost
to be the best available measure of progress on the contracts. Because of
inherent uncertainties in estimating costs, it is at least reasonably possible
that the estimates used will change within the near term.

In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin ("SAB") No. 101, *"Revenue Recognition,"*as amended and superseded by SAB No. 104, which outlines the basic criteria
that must be met to recognize revenue and provides guidance for presentation of
revenue and for disclosure related to revenue recognition policies in financial
statements filed with the SEC. Management believes that the Company's revenue
recognition policy conforms to SAB No. 104. The Company recognizes revenue of
contracts pursuant to SOP 81-1.

The amount of revenue recognized at the statement date is the
portion of the total contract price that the cost expended to date bears to the
anticipated final cost, based on current estimates of cost to complete. It is
not related to the progress billings to customers. Contract costs include all
materials, direct labor, machinery, subcontract costs and allocations of
indirect overhead.

Because contracts may extend over a period of time, changes in job
performance, changes in job conditions and revisions of estimates of cost and
earnings during the course of the work are reflected in the accounting period in
which the facts that require the revision become known. At the time a loss on a
contract becomes known, the entire amount of the estimated ultimate loss is
recognized in the consolidated financial statements.

Contracts that are substantially complete are considered closed
for consolidated financial statement purposes. Costs incurred and revenue earned
on contracts in progress in excess of billings (under billings) is classified as
a current asset. Amounts billed in excess of costs and revenue earned
(overbillings) are classified as a current liability.

The Company accounts for shipping and handling fees and costs in
accordance with Emerging Issues Task Force ("EITF") Issue No. 00-10
“*Accounting for Shipping and Handling Fees and Costs.”* Such fees and
costs incurred by the Company are immaterial to the operations of the
Company.

In accordance with SFAS 48, “*Revenue Recognition when Right of
Return Exists,”* revenue is recorded net of an estimate of markdowns, price
concessions and warranty costs. Such reserve is based on management’s evaluation
of historical experience, current industry trends and estimated costs.

*Page
F-9*

****
**NEW CENTURY COMPANIES, INC. AND SUBSIDIARY**
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
**December 31, 2004**
**1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES** (continued)

***Warranty***

The Company provides a warranty on certain products sold.
Estimated future warranty obligations related to certain products and services
are provided by charges to operations in the period in which the related revenue
is recognized. At December 31, 2004, the warranty obligation was immaterial to
the accompanying consolidated balance sheet.

***Advertising***

The Company expenses the cost of advertising when incurred as
selling expense in the accompanying consolidated statements of operations.
Advertising expenses were approximately $84,000 and $64,000 for the years ended
December 31, 2004 and 2003, respectively.

***Research and Development Costs***

Research and development costs are expensed as incurred.

***Income Taxes***

Under SFAS 109, *"Accounting for Income Taxes,"* deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the consolidated financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. 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. A valuation allowance is
provided for significant deferred tax assets when it is more likely than not
that such assets will not be recovered.

***Basic and Diluted Loss Per Common Share***

Under SFAS 128, *“Earnings Per Share,”*basic earnings per
common share is computed by dividing income (loss) available to common
stockholders by the weighted-average number of common shares assumed to be
outstanding during the period of computation. Diluted earnings per share is
computed similar to basic earnings per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the additional
common shares were dilutive (under the treasury stock method, there were 179,000
and 940,000 additional potential common shares as of December 31, 2004 and 2003,
respectively). Because the Company has incurred net losses, basic and diluted
loss per share are the same since additional potential common shares would be
anti-dilutive (see Note 8).
*Page
F-10*

****
**NEW CENTURY COMPANIES, INC. AND SUBSIDIARY**
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
**December 31, 2004**
**1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES** (continued)

***Comprehensive Income***

SFAS 130, *“Reporting Comprehensive Income,”* establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. For the years ended
December 31, 2004 and 2003, the Company had no items of comprehensive
income.

***Segments of Business***

SFAS 131, *“Disclosures about Segments of an Enterprise and
Related Information,”* changes the way public companies report information
about segments of their business in their quarterly reports issued to
stockholders. It also requires entity-wide disclosures about the products and
services an entity provides, the material countries in which it holds assets and
reports revenues and its major customers. The Company currently operates in one
segment, as disclosed in the accompanying consolidated statements of operations.

***Stock Based Compensation***

The Company accounts for stock-based compensation issued to
employees using the intrinsic value based method as prescribed by Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock issued to
Employees." Under the intrinsic value based method, compensation expense is the
excess, if any, of the fair value of the stock at the grant date or other
measurement date over the amount an employee must pay to acquire the stock.
Compensation expense, if any, is recognized over the applicable service period,
which is usually the vesting period.

SFAS 123, "Accounting for Stock-Based Compensation," if fully
adopted, changes the method of accounting for employee stock-based compensation
plans to the fair value based method. For stock options and warrants, fair value
is determined using an option pricing model that takes into account the stock
price at the grant date, the exercise price, the expected life of the option or
warrant, stock volatility and the annual rate of quarterly dividends.
Compensation expense, if any, is recognized over the applicable service period,
which is usually the vesting period.

The adoption of the accounting methodology of SFAS 123 is optional
and the Company has elected to continue accounting for stock-based compensation
issued to employees using APB 25; however, pro forma disclosures, as the Company
adopted the cost recognition requirement under SFAS 123, are required to be
presented (see below). For stock-based compensation issued to non-employees, the
Company uses the fair value method of accounting under the provisions of SFAS
123.
*Page
F-11*

****
**NEW CENTURY COMPANIES, INC. AND SUBSIDIARY**
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
**December 31, 2004**
**1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES** (continued)

***Stock Based
Compensation*******(continued)

FASB Interpretation No. 44 ("FIN 44"), "Accounting for Certain
Transactions Involving Stock Compensation, an Interpretation of APB 25"
clarifies the application of APB 25 for (a) the definition of employee for
purpose of applying APB 25, (b) the criteria for determining whether a plan
qualifies as a non compensatory plan, (c) the accounting consequence for various
modifications to the terms of a previously fixed stock option or award and (d)
the accounting for an exchange of stock compensation awards in a business
combination. Management believes that the Company accounts for transactions
involving stock compensation in accordance with FIN 44.

SFAS 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure, an amendment of FASB Statement No. 123," provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this statement
amends the disclosure requirements of SFAS 123 to require prominent disclosures
in both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results.

At December 31, 2004, the Company has one stock-based employee
compensation plan and one stock-based non-employee compensation plan, which are
described more fully in Note 7. There was no employee stock-based compensation
cost recognized in net loss for fiscal years 2004 and 2003, respectively. The
following table illustrates the effect on net loss and loss per common share if
the Company had applied the fair value recognition provisions of SFAS 123, as
amended, to stock-based employee compensation.

2004
    
    2003Net
      loss applicable to common stockholders:As reported
    
    $
    (1,791,594
    )
    $
    (3,074,866
    )Deduct:
      Total stock-based employee compensation expense determined under fair
      value based method for all awards
    
    
    -
    
    
    (247,000
    )Pro forma
    
    $
    (1,791,594
    )
    $
    (3,321,866
    )Basic
      and diluted net loss per share:As reported
    
    $
    (0.25
    )
    $
    (0.42
    )Pro forma
    
    $
    (0.25
    )
    $
    (0.45
    )



*Page
F-12*

****
**NEW CENTURY COMPANIES, INC. AND SUBSIDIARY**
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
**December 31, 2004**
**1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES** (continued)

***Stock Based Compensation***
(continued)

The above pro forma effects of applying SFAS 123 are not
necessarily representative of the impact on reported net loss for future years
(see Significant Recent Accounting Pronouncements).

***Fair Value of Financial Instruments***

SFAS 107, *"Disclosures About Fair Value of Financial
Instruments,"* requires disclosure of fair value information about financial
instruments when it is practicable to estimate that value. The carrying amount
of the Company's cash, contracts receivable, inventories, accounts payable and
accrued expenses, capital lease obligations, and notes payable approximates
their estimated fair values due to the short-term maturities of those financial
instruments and because related interest rates offered to the Company
approximate current offered rates. The fair value of the notes receivable from
stockholders are not determinable as these transactions are with related
parties.

***Significant Recent Accounting Pronouncements***

In January 2003, the FASB issued FIN No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB 51." The primary objectives
of FIN No. 46 are to provide guidance on the identification of entities for
which control is achieved through means other than voting rights (variable
interest entities, or "VIEs") and how to determine when and which business
enterprise should consolidate the VIE. This new model for consolidation applies
to an entity for which either: (1) the equity investors do not have a
controlling financial interest; or (2) the equity investment at risk is
insufficient to finance that entity's activities without receiving additional
subordinated financial support from other parties. In addition, FIN No. 46
requires that both the primary beneficiary and all other enterprises with a
significant variable interest in a VIE make additional disclosures.

As amended in December 2003, the effective dates of FIN No. 46 for
public entities that are small business issuers, as defined ("SBIs"), are as
follows: (a) For interests in special-purpose entities ("SPEs"): periods ended
after December 15, 2003; and (b) For all other VIEs: periods ended after
December 15, 2004. The December 2003 amendment of FIN No. 46 also includes
transition provisions that govern how an SBI which previously adopted the
pronouncement (as it was originally issued) must account for consolidated VIEs.
Management has concluded that the Company does not have an interest in any SPEs,
and is evaluating the other effects of FIN No. 46 (as amended) on its future
consolidated financial statements.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs -
an amendment of ARB No. 43, Chapter 4,” which clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling costs and wasted
material. In Chapter 4 of ARB 43, paragraph 5 previously stated that “...under
some circumstances, items such as idle facility expense, excessive spoilage,
double freight, and re-handling costs may be so abnormal as to require treatment
as current

*Page
F-13*

****
**NEW CENTURY COMPANIES, INC. AND SUBSIDIARY**
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
**December 31, 2004**
****
****
**1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES** (continued)

***Significant Recent Accounting
Pronouncements*******(continued)

period charges....” SFAS No. 151 requires that such items be
recognized as current-period charges, regardless of whether they meet the
criterion of *so abnormal* (an undefined term). This pronouncement also
requires that allocation of fixed production overhead to the costs of conversion
be based on the normal capacity of the production facilities. SFAS No. 151 is
effective for inventory costs incurred in years beginning after June 15, 2005.
Management is evaluating the effect of this pronouncement, if any, on its future
financial statements.

In December 2004, the FASB issued SFAS No. 123-R, “Share-Based
Payment,” which requires that the compensation cost relating to share-based
payment transactions (including the cost of all employee stock options) be
recognized in the financial statements. That cost will be measured based on the
estimated fair value of the equity or liability instruments issued. SFAS No.
123-R covers a wide range of share-based compensation arrangements including
share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. SFAS No.123-R replaces
SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes
Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued
to Employees.” As originally issued, SFAS No. 123 established as preferable a
fair-value-based method of accounting for share-based payment transactions with
employees. However, that pronouncement permitted entities to continue applying
the intrinsic-value model of APB Opinion 25, provided that the financial
statements disclosed the pro forma net income or loss based on the preferable
fair-value method.

Small Business Issuers are required to apply SFAS No. 123-R in the
first interim or annual reporting period that begins after December 15, 2005.
Thus, the Company’s consolidated financial statements will reflect an expense
for (a) all share-based compensation arrangements granted on or after January 1,
2006 and for any such arrangements that are modified, cancelled, or repurchased
on or after that date, and (b) the portion of previous share-based awards for
which the requisite service has not been rendered as of that date, based on the
grant-date estimated fair value.

Other recent accounting pronouncements issued by the FASB
(including its Emerging Issues Task Force), the American Institute of Certified
Public Accountants, and the Securities and Exchange Commission did not or are
not believed by management to have a material impact on the Company's present or
future consolidated financial statements.


*Page
F-14*

****
**NEW CENTURY COMPANIES, INC. AND SUBSIDIARY**
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
**December 31, 2004**
**2. CONTRACTS IN PROGRESS**

Contracts in progress as of December 31, 2004 approximate:

Cumulative
      costs to date
    
    $
    5,859,000Cumulative
      gross profit to date
    
    
    4,873,000Cumulative
      revenue earned
    
    
    10,732,000Less
      progress billings to date
    
    
    (11,240,000)Net
      over billings
    
    $
    (508,000
    )

The following approximate amounts are included in the accompanying
consolidated balance sheet under these captions as of December 31, 2004:

Costs
      in excess of billings on uncompleted contracts
    
    $
    252,000Billings
      in excess of costs on uncompleted contracts
    
    
    (760,000
    )Net
      over billings
    
    $
    (508,000
    )


**3. PROPERTY AND EQUIPMENT**

Property and equipment approximate the following at December 31,
2004:
Machinery
      and equipment
    
    $
    1,089,000Computer
      equipment
    
    
    22,000Capital
      lease equipment
    
    
    271,000Leasehold
      improvements
    
    
    123,0001,505,000Less
      accumulated depreciation and amortization
    
    
    (1,174,000
    )$
    331,000


**4. RELATED PARTY TRANSACTIONS**

***Notes Receivable from Stockholders***

As of December 31, 2004, the Company had loans to two stockholders
approximating $503,750, including accrued interest. The loans accrue interest at
6% and are due on demand. The Company has included the notes receivable from
stockholders in stockholders’ equity (deficit) as such amounts have not been
repaid
*Page
F-15*

****
**NEW CENTURY COMPANIES, INC. AND SUBSIDIARY**
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
**December 31, 2004**

**4. RELATED PARTY TRANSACTIONS**(continued)

***Notes Receivable from Stockholders***(continued)

during the current year. For each of the years ended December 31,
2004 and 2003, total interest income from notes receivable from stockholders'
approximated $20,000.


**5. NOTES PAYABLE**

During the year ended December 31, 2001, the Company entered into
an unsecured note payable (“Note A”) with a third party for $250,000. Note A
accrues interest at a fixed rate of 18% per annum and matured in December 2003,
as amended (see Note 7). Note A is personally guaranteed by a stockholder and is
in default at December 31, 2004. At December 31, 2004, the total outstanding
principal balance on Note A was $250,000.

During the year ended December 31, 2001, the Company entered into
a note payable (“Note B”) with a third party for $215,000. Note B accrues
interest at a fixed rate of 15% per annum and matured in March 2002. Note B is
secured by certain assets of the Company, as defined, and is in default at
December 31, 2004. At December 31, 2004, the total outstanding principal balance
on Note B was $215,000.

In January 2003, the Company entered into a note payable agreement
(“Note C”) with two individuals in the amount of $500,000 with an interest rate
of 11% per annum, which matured in April 2003 and is in default at December 31,
2004. The note was issued with a discount of $45,000, which the Company
amortized to interest expense in the accompanying consolidated statement of
operation for 2003. In connection with Note C, the Company issued warrants to
purchase 25,000 shares of common stock. Note C is secured by certain assets of
the Company. At December 31, 2004, the total outstanding principal balance on
Note C was $500,000.

In December 2002, the Company entered into a note payable
agreement (“Note D”) with two individuals in the amount of $250,000 with an
interest rate of 11% per annum, which matured in February 2003. The note was
issued with a discount of $15,000, which the Company amortized to interest
expense in the accompanying consolidated statement of operations for 2003. In
connection with Note D, the Company issued warrants to purchase 5,000 shares of
common stock related to the extension of the maturity date of Note D to April
2004. At December 31, 2004, Note D was in default and had a total outstanding
principal balance of $250,000.

During November 2004, the Company borrowed $80,816 on two notes
payable (“Note E”) to one individual. Note E in unsecured, matured in January
2005, has an interest rate of 6% and is currently in default. At December 31,
2004 the total outstanding principal balance on Note E was $80,816.



*Page
F-16*

****
**NEW CENTURY COMPANIES, INC. AND SUBSIDIARY**
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
**December 31, 2004**
**6. INCOME TAXES**

During fiscal 2004 and 2003, the provision for taxes
(substantially all deferred) differs from the amounts computed by applying the
U.S. Federal income tax rate of 34% to income before provision for taxes as a
result of the following:

**2004**
    
    **2003**Computed
      “expected” tax (benefit) expense
    
    $
    (484,000
    )
    $
    (998,000
    )Addition
      to (reduction) in income taxes resulting from:State
      income taxes, net of federal benefit
    
    
    (57,000
    )
    
    (171,000
    )Change
      in deferred tax asset valuation allowance
    
    
    533,000
    
    
    1,140,000Non-deductible
      expenses
    
    
    8,800
    
    
    31,467$
    800
    
    $
    2,467


The effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 31, 2004 are
presented below:

Deferred
      tax assets:Tax
      net operating loss carryforwards
    
    $
    4,194,000Accrued
      inventory reserve
    
    
    194,000Accrued
      expenses
    
    
    19,000Total
      gross deferred tax asset
    
    
    4,407,000Less
      valuation allowance
    
    
    (4,407,000
    )Total
      net deferred tax asset
    
    $
    -

The valuation allowance increased by $533,000 and $1,140,000
during the years ended December 31, 2004 and 2003, respectively. The current
provision for income taxes for the years ended December 31, 2004 and 2003 is not
significant and due primarily to certain state taxes.

At December 31, 2004, the Company had net tax operating loss
carryforwards of approximately $10,961,000 and $7,794,000 available to offset
future taxable federal and state income, respectively. If not utilized to offset
future taxable income, the federal and state carryforwards will expire in
various years through 2024 and 2014, respectively. In the event the Company were
to experience a greater than 50% change in ownership as defined in Section 382
of the Internal Revenue Code, the utilization of the Company’s tax net operating
loss carryforwards could be severely restricted.

*Page
F-17*

****
**NEW CENTURY COMPANIES, INC. AND SUBSIDIARY**
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
**December 31, 2004**
**7. EQUITY TRANSACTIONS**

***Preferred Stock***

The Company has authorized 15,000,000 shares of cumulative,
convertible Series B Preferred Stock (“Series B”) with a par value of $1 per
share. The Series B has a mandatory cumulative dividend of $1.25 per share,
which is payable on a semi-annual basis, and convertible into 1.67 shares of the
Company’s common stock, does not have any voting rights, and has liquidation
preferences, as defined. As of December 31, 2001, in accordance with the
conversion terms of the Series B, 95,023 shares of the common stock remained
unissued and committed, which the Company has reclassified to common stock
during the year ended December 31, 2002 because the stock had constructively
been issued.

In March 2002, the Board of Directors authorized 75,000 shares of
5% cumulative, convertible Series C Preferred Stock (“Series C”) with a par
value of $1 per share. The Series C has a mandatory cumulative dividend of $1.25
per share, which is payable on a semi-annual basis in June and December each
year to holders of record on November 30 and May 31, does not have any voting
rights and has liquidation preferences, as defined. Each share of Series C is
convertible at the option of the holder into 16.667 shares of the Company’s
common stock.

During the year ended December 31, 2002, the Company completed a
Private Placement Memorandum (“PPM”) in which the Company offered to eligible
investors, as defined, a maximum of 60,000 shares of Series C, with a required
minimum offering of 30,000 shares of Series C to be sold at $25 per share.
During fiscal 2002 and pursuant to the PPM, the Company sold 44,000 shares of
Series C to eligible investors for proceeds of $956,605 (net of commissions and
offering costs of $143,395). In addition, the Company issued 2,200 shares of
Series C and 40,000 restricted shares of common stock (see below) to the
placement agent for services provided in connection with the PPM.

The Series C issued in fiscal 2002 was issued with a beneficial
conversion feature as the issuance date trading value of the Company’s common
stock was greater than the conversion price. Accordingly, the Company has
recorded a deemed dividend to the Series C shareholders of $308,029. As of
December 31, 2004, the Company had a total of $63,600 shares of Series C issued
and outstanding, with accumulated dividends totaling $195,000, which is recorded
in the accompanying consolidated balance sheet.

In September 2003, the Company issued 31,800 shares of series C,
valued at approximately $111,000 (based on the estimated fair market value on
the date of grant) to consultants for services to be rendered through March
2004. The Company has expensed approximately $46,000 and $65,000 during the
years ended December 31, 2004 and 2003, respectively, related to such issuance.

During the year ended December 31, 2003, certain holders of Series
C converted 14,400 shares into 240,006 shares of common stock.

In September 2004, the Company issued 47,000 shares of restricted
common stock upon conversion of 2,820 shares of Series C at a conversion rate of
16.667.

*Page
F-18*

****
**NEW CENTURY COMPANIES, INC. AND SUBSIDIARY**
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
**December 31, 2004**
**7. EQUITY TRANSACTIONS** (continued)

***Preferred Stock*** (continued)

During the year ended December 31, 2004, the Company issued a PPM
in which the Company offered to eligible investors, as defined, a maximum of
30,000 shares of Series D Preferred Stock (“Series D”), with a required minimum
offering of 1,000 shares of Series D to be sold at $25 per share. During the
year ended December 31, 2004 and pursuant to the PPM, the Company issued 23,640
shares of Series D to eligible investors for proceeds totaling $521,000, net of
$30,000 paid to the broker/dealer and $40,000 of accounts payable which were
exchanged for shares. Such offering costs were included as an offset to
additional paid-in capital in the accompanying consolidated financial
statements. Since the related conversion rate is 50:1, the effective conversion
rate of $0.50 resulted in a deemed dividend of $153,660, which was included in
accumulated deficit. The deemed dividend is also reflected as an increase in the
net loss attributable to common shareholders (see Note 8). Additionally, the
broker/dealer was granted Three-Year Placement Warrants, as defined in the PPM,
with a cashless exercise feature to purchase 25,000 shares of the Company’s
common stock at prices ranging from $0.50 to $1.00. No expense was recorded
related to the granting of such warrants as they were considered an offering
cost. The warrants vested immediately and expire in February 2007.

***Common Stock***

During the year ended December 31, 2001, the Company received a
$87,500 subscription receivable from a member of the Board of Directors in
exchange for shares of the Company’s restricted common stock. The subscription
receivable bears interest at an annual rate of 6%. Principal and any unpaid
interest were due on October 6, 2001. As of December 31, 2004, the subscription
receivable remains unpaid.

During the year ended December 31, 2002, the Company received two
subscriptions receivable totaling $375,000 in exchange for 250,000 restricted
shares of common stock. The receivables bear interest at an annual rate of 5%.
Principal and any unpaid interest on both subscriptions receivable were due on
August 22, 2003, and are in default as of December 31, 2004. The Company is
currently in negotiations related to the outstanding principal balance. The
related accrued interest receivable and interest income are insignificant to the
consolidated financial statements.

During the year ended December 31, 2003, the Company amortized
$55,833 of deferred consulting fees to consulting expense in the accompanying
consolidated statements of operations, which was related to the issuance of
restricted shares of common stock during the year ended December 31, 2002 to
three consulting firms for services rendered in relation to corporate
finance.

During the year ended December 31, 2003, the Company issued
719,918 shares of restricted common stock valued at $202,500 (estimated based on
the market price on the date of grant) to consultants for services to be
rendered through September 2004. The Company recorded the entire value to
deferred consulting fees and amortized the amount to consulting expense over the
periods of service. During the years ended December 31, 2004 and 2003,
approximately $138,000 and $64,000, respectively, was amortized to consulting
expense.

*Page
F-19*
****
******
**NEW CENTURY COMPANIES, INC. AND SUBSIDIARY**
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
**December 31, 2004****
****
****
**7. EQUITY TRANSACTIONS** (continued)

***Common Stock*** (continued)

During the year ended December 31, 2003, the Company issued
100,000 shares of restricted common stock to a shareholder as penalty for not
registering shares previously issued under Form SB-2 in a timely manner. The
common stock was valued at $21,000 (estimated based on the market price on the
date of grant).

During the year ended December 31, 2003, the Company issued 64,720
shares of restricted common stock in reconciliation with the reverse merger in
2001.

In January 2004, the Company issued 150,000 shares of restricted
common stock valued at $105,000 (estimated based on the market price on the date
of grant) to a consultant for services rendered during 2004. In March 2004, due
to some disagreements between the consultant and the Company in relation to the
services, the Company requested the cancellation of the shares. In December
2004, the Company and the consultant reached an agreement, and the shares were
reissued. The $105,000 value of the transaction, based on the value on the
measurement date in January 2004 (above), was recorded as consulting expense
during the year ended December 31, 2004.

In March 2004, the Company issued 100,000 shares of restricted
common stock value at $50,000 (estimated based on the market price on the date
of grant) to a consulting firm for services rendered in relation to corporate
finance and investor relations. Such amount was recorded as consulting expense
during the year ended December 31, 2004.

In December 2004, the Company issued 100,000 shares of restricted
common stock valued at $10,000 (estimated based on the market price on the date
of grant) to a consultant for services to be rendered through May 2005. The
Company recorded the entire value to deferred consulting fees and is amortizing
the amount to consulting expense over the period of service. As of December 31,
2004, the total unamortized consulting fees approximated $8,300, which is
recorded as an increase to stockholders equity (deficit).

***Stock Options and Warrants***

Under the terms of the Company's Incentive Stock Option Plan
(“ISOP”), options to purchase an aggregate of 1,000,000 shares of common stock
may be issued to key employees, as defined. The exercise price of any option may
not be less than the fair market value of the shares on the date of grant. No
options granted may be exercisable more than 10 years after the date of grant.
The options granted generally vest evenly over a one-year period, beginning from
the date of grant.

Under the terms of the Company’s Non-Statutory Stock Option Plan
("NSSO"), options to purchase an aggregate of 1,350,000 shares of common stock
may be issued to non-employees for services rendered. These options are
non-assignable and non-transferable, are exercisable over a five-year period
from the date of grant, and vest on the date of grant.

*Page
F-20*

****
**NEW CENTURY COMPANIES, INC. AND SUBSIDIARY**
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
**December 31, 2004**
**7. EQUITY TRANSACTIONS**(continued)

***Stock Options and Warrants***
(continued)

In December 2001, the Company issued 100,000 warrants to purchase
common stock for $2 per share, which is exercisable for two years from the date
of issuance. The warrants were issued in connection with a six-month, short-term
note payable and cancelled during fiscal 2003. In accordance with GAAP, the
proceeds of the financing have been allocated to the debt and the warrants,
based on their relative fair values. Accordingly, a discount of $106,000 was
recorded as a reduction in the debt balance, and the off-setting credit was
recorded as additional paid-in capital. The debt discount was amortized and
charged to interest expense over the life of the debt during the year ended
December 31, 2002. As part of an extension agreement (see “Note A” at Note 5),
the Company effectively cancelled the original 100,000 warrants and issued
warrants to purchase 200,000 shares of common stock at an exercise price of
$1.00, which vested upon grant and expired in December 2003. As the pro-rata
value of the 200,000 warrants issued approximates the amounts expensed in 2002,
no additional expense has been recorded. Note A is personally guaranteed by a
stockholder and is in default at December 31, 2003.

In September 2002, the Company granted 100,000 stock options to a
third party for services rendered valued at $68,000 (estimated based on the
Black-Scholes option pricing model pursuant to SFAS 123). The stock options had
an exercise price of $1.10, vested immediately and expired in September
2003.

During the year ended December 31, 2003, the Company granted a
warrant to purchase 25,000 shares of the Company’s restricted common stock in
connection with the issuance of a note payable (see “Note C” at Note 5). The
pro-rata value of the warrant was $13,000 (estimated based on the Black-Scholes
option pricing model pursuant to SFAS 123). The warrant has an exercise price of
$1.00, vests immediately and is exercisable through January 2008.

During the year ended December 31, 2003, the Company granted a
warrant to purchase 5,000 shares of the Company’s restricted common stock in
connection with the deferral of the maturity date of a note payable (see “Note
D” at Note 5). The value of the warrant was $4,500 (estimated based on the
Black-Scholes option pricing model pursuant to SFAS 123). The warrant has an
exercise price of $1.25, vests immediately and is exercisable through March
2008.

In September 2003, the Company granted options to purchase an
aggregate of 1,300,000 shares of restricted common stock, at an exercise price
of $0.25 per share (the fair market value of the Company's common stock on the
date of grant), to various employees of the Company. The options vested
immediately and are exercisable through September 2008.

During the year ended December 31, 2004, the Company did not grant
any stock options or warrants.


*Page
F-21*

****
**NEW CENTURY COMPANIES, INC. AND SUBSIDIARY**
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
**December 31, 2004**
**7. EQUITY TRANSACTIONS**(continued)

***Stock Options and Warrants***
(continued)

The following is a status of the stock options and warrants
outstanding at December 31, 2004 and the changes during the three years then
ended:
Year
      Ended
      December
      31, 2004
    
    Year
      Ended
      December
      31, 2003OptionsandWarrants
    
    WeightedAveragePrice
    
    OptionsandWarrants
    
    WeightedAveragePriceOutstanding,
      beginning of year
    
    
    1,821,583
    
    $
    2.34
    
    
    741,583
    
    $
    8.06Granted
    
    
    -
    
    
    -
    
    
    1,530,000
    
    
    0.36Exercised
    
    
    -
    
    
    -
    
    
    -
    
    
    -Cancelled/Terminated
    
    
    (135,000
    )
    
    (9.54
    )
    
    (450,000
    )
    
    (5.06
    )Outstanding
      and exercisable, end of year
    
    
    1,686,583
    
    $
    1.77
    
    
    1,821,583
    
    $
    2.34Weighted
      average fair value of options granted
    
    
    
    
    $
    -
    
    
    
    
    $
    0.17


The following table summarizes information related to stock
options outstanding at December 31, 2004:

Options
      OutstandingWeightedAverage
    
    WeightedRemaining
    
    AverageContractual
    
    ExerciseExercise
      Price
    
    Number
    
    Life
      (Years)
    
    Price$0.25
    
    
    1,300,000
    
    
    3.7
    
    $
    0.25$1.00-
      $1.25
    
    
    130,000
    
    
    2.8
    
    
    1.09$5.00-
      $6.56
    
    
    10,000
    
    
    1.8
    
    
    5.78$9.80-
      $10.00
    
    
    246,583
    
    
    0.3
    
    
    9.951,686,583
    
    
    
    
    $
    1.77


*Page
F-22*

****
**NEW CENTURY COMPANIES, INC. AND SUBSIDIARY**
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
**December 31, 2004**
**7. EQUITY TRANSACTIONS**(continued)

***Stock Options and Warrants***
(continued)
****
The following outlines the significant assumptions used to
calculate the fair market value information presented utilizing the
Black-Scholes pricing model during fiscal years 2004 and 2003:

**Year
      Ended**
      **December
      31, 2004**
    
    **Year
      Ended**
      **December
      31, 2003**Discount
      rate
    -
    
    2%-
      3%Volatility
    -
    
    253%Expected
      life
    -
    
    4
      yearsExpected
      dividend yield
    -
    
    -


**8. LOSS PER SHARE**

The following is a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations for the
years ended December 31, 2004 and 2003:

**2004**
    
    **2003**Net
      loss
    
    $
    (1,423,359
    )
    $
    (2,937,616
    )Cumulative
      preferred dividends (See Note 7)
    
    
    (214,575
    )
    
    (137,250
    )Deemed
      dividends on preferred stock (See Note 7)
    
    
    (153,660
    )
    
    -Numerator
      for basic and diluted loss per share:Net loss applicable to
      common stockholders
    
    
    (1,791,594
    )
    
    (3,074,866
    )Denominator
      for basic and diluted loss per share:Weighted average
      shares
    
    
    7,038,209
    
    
    7,355,214Basic
      and diluted loss per share
    
    $
    (0.25
    )
    $
    (0.42
    )



*Page
F-23*

****
**NEW CENTURY COMPANIES, INC. AND SUBSIDIARY**
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
**December 31, 2004**
**9. COMMITMENTS AND CONTINGENCIES**

***Service Agreements***

Periodically, the Company enters into various agreements for
services including, but not limited to, public relations, financial consulting
and manufacturing consulting. Generally, the agreements are ongoing until such
time they are terminated, as defined. Compensation for services is paid either
at a fixed monthly rate or based on a percentage, as specified, and may be
payable in shares of the Company’s common stock. The Company's policy is that
expenses related to these types of agreements are valued at the fair market
value of the services or the shares granted, whichever is more realistically
determinable. Such expenses are amortized over the period of service.

***Leases***

The Company leases equipment under various operating lease
agreements which require monthly payments ranging from approximately $250 to
$600, and maturing through July 2006.

The Company also leases its office and warehouse facility under a
non-cancelable operating lease agreement. The lease requires monthly lease
payments of approximately $33,000, with annual increases of 3% through December
2006. The lease is personally guaranteed by one of the stockholders. The lease
agreement included a provision in which the Company could purchase the land and
building (the “Property”) for $3,050,000 from the current landlord/owner, as
amended. During the year ended December 31, 2001, the Company entered into a
note payable with the prior landlord/owner of the Property in the amount of
$215,000, as a condition of sale of the Property to the current landlord/owner
and as a deposit toward the eventual purchase of the Property by the Company,
then subsequently deposited an additional $250,000 directly into escrow. The
deposits totaling $465,000 were non-refundable. In March 2003, a third party
purchased the Property. Therefore, since the Company had no legal claim for the
deposits, such amounts were expensed in the accompanying consolidated statement
of operations for the year ended December 31, 2003.

The Company was a sublessor in a sublease of an office and
warehouse facility under a non-cancelable operating sublease agreement which
expired in August 2003. In connection with the sublease, the Company recognized
approximately $167,000 of rental income, which has been included in operating
expenses in the accompanying consolidated statements of operations for the year
ended December 31, 2003. Of this amount, $148,000 represented the Company’s
obligation as the original lessee.

The Company leases certain equipment under capital lease
obligations that expire through December 2005. Monthly payments approximate
$9,000, including interest at rates ranging from 14% to 20%. The assets under
capital leases are recorded at the lower of the present value of the minimum
lease payments or the fair market value.


*Page
F-24*

****
**NEW CENTURY COMPANIES, INC. AND SUBSIDIARY**
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
**December 31, 2004**
**9. COMMITMENTS AND CONTINGENCIES**
(continued)

***Leases***(continued)

Future minimum lease payments on the operating and capital lease
obligations approximates the following for the years ending December 31:

OperatingLeases
    
    Capital
      Leases
    
    Total2005
    
    $
    389,000
    
    $
    78,000
    
    $
    467,0002006
    
    
    397,000
    
    
    -
    
    
    397,000Total
      minimum lease payments
    
    $
    786,000
    
    $
    78,000
    
    $
    864,000Less
      imputed interest
    
    
    
    
    
    6,000Present
      value of minimum leasepayments
    
    
    
    
    
    72,000Less
      current portion
    
    
    
    
    
    72,000Long-term
      portion
    
    
    
    
    $
    -

Rental expense for operating leases approximated $410,000 and
$380,000 (net of approximately $165,000 sublease rental income) for the years
ended December 31, 2004 and 2003, respectively. Interest expense incurred
pursuant to capital lease obligations approximated $18,000 and $25,000 for the
years ended December 31, 2004 and 2003, respectively.

Equipment under capital leases as of December 31, 2004, which is
included in property and equipment in the accompanying consolidated balance
sheet (see Note 3) approximates:

Machinery
      and equipment
    
    $
    271,000Accumulated
      depreciation
    
    
    (150,000
    )$
    121,000

***Legal***

From time to time, the Company may be involved in various claims,
lawsuits, disputes with third parties, actions involving allegations or
discrimination or breach of contract actions incidental in the normal operations
of the business. The Company is currently not involved in any such litigation,
which management believes could have a material adverse effect on its financial
position or result of operations.

*Page
F-25*

****
**NEW CENTURY COMPANIES, INC. AND SUBSIDIARY**
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
**December 31, 2004**
**9. COMMITMENTS AND CONTINGENCIES**
(continued)

***Backlog*** (Unaudited)

The following schedule approximates a reconciliation of backlog
representing signed contracts:

Balance,
      January 1, 2004
    
    $
    2,192,000New
      contracts, January 1, 2004 through December 31, 2004
    
    
    5,885,0008,077,000Less,
      contract revenue earned - January 1, 2004 through December 31,
      2004
    
    
    (4,606,000
    )Balance
      December 31, 2004
    
    $
    3,471,000

*Page
F-26*