UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549









þ QUARTERLY REPORT UNDER
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly
period ended September 30, 2008




o TRANSITION REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




Commission
file number 000-29587




VALLEY
FORGE COMPOSITE TECHNOLOGIES, INC.


(Exact
name of registrant as specified in its charter)




Florida
            
            20-3061892(State
      or other jurisdiction of incorporation or organization)
            
            (I.R.S.
      Employer Identification No.)




50
East River Center Blvd., Suite 820


Covington,
KY 41011


(Address
of principal executive offices) (Zip Code)




859.581.5111


(Registrant's
telephone number, including area code)




Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes þ No o




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):




Large
      accelerated filer o
            
            Accelerated
      filer o
            
            Non-accelerated
      filer o
            
            Smaller
      reporting company þ(Do
      not check if a smaller reporting company)




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).Yes oNo þ




Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.




Class
            
            Outstanding
      at November 14, 2008Common
      Stock, $.001 par value per share
            
            52,015,349




-1-






VALLEY
FORGE COMPOSITE TECHNOLOGIES, INC.


FORM
10-Q


FOR
THE PERIOD ENDED SEPTEMBER 30, 2008




INDEX




PageSPECIAL NOTE REGARDING FORWARD-LOOKING
      STATEMENTS
            3PART I. FINANCIAL INFORMATION
            4Item
      1.
            Financial Statements
            4Consolidated Balance Sheets as of September 30, 2008
      (Unaudited) and December 31, 2007
            4Consolidated Statements of Operations (Unaudited) for three
      months and nine months ended September 30, 2008 and
    2007
            5Consolidated Statements of Cash Flows (Unaudited) for
      the nine months ended September 30, 2008 and 2007
            6Notes to the Consolidated Financial
      Statements
            7Item
      2.
            Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
            20Item
      3.
            Qualitative and Quantitative Disclosures About Market
      Risk
            24Item
      4.
            Controls and Procedures
            24PART II. OTHER INFORMATION
            26Item
      1.
            Legal Proceedings
            26Item
      2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            26Item
      3.
            Defaults Upon Senior Securities
            26Item
      4.
            Submission of Matters to a Vote of Security
      Holders
            26Item
      5.
            Other information
            26Item
      6.
            Exhibits
            27SIGNATURES
            28






-2-








Special
Note Regarding Forward-LookingStatements




Information
included in this Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (“Securities
Act”), and Section 21E of the Securities Exchange Act of 1934, as amended
(“Exchange Act”). This information may involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of Valley Forge Composite Technologies, Inc. (the “Company”), to
be materially different from future results, performance or achievements
expressed or implied by any forward-looking statements. Forward-looking
statements, which involve assumptions and describe future plans, strategies and
expectations of the Company, are generally identifiable by use of the words
“may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,”
“intend,” or “project” or the negative of these words or other variations on
these words or comparable terminology. These forward-looking statements are
based on assumptions that may be incorrect, and there can be no assurance that
these projections included in these forward-looking statements will come to
pass. Actual results of the Company could differ materially from those expressed
or implied by the forward-looking statements as a result of various factors.
Except as required by applicable laws, the Company has no obligation to update
publicly any forward-looking statements for any reason, even if new information
becomes available or other events occur in the future.




In
this report references to “Valley Forge,” “the Company,” “we,” “us,” and “our”
refer to Valley Forge Composite Technologies, Inc. and its
subsidiaries.





-3-





PART I: FINANCIALINFORMATION




ITEM
1. FINANCIAL STATEMENTS





VALLEY FORGE COMPOSITE
      TECHNOLOGIES, INC.CONSOLIDATED  BALANCE
      SHEETS
  September
    30,
              
              
              December
31,2008
              
              
              2007(Unaudited)
              
              
              
              (1)ASSETSCurrent
    assets:Cash
              
              $
              601,313
              
              
              $
              88,656Accounts
      receivable
              
              
              11,300
              
              
              
              -Inventory
              
              
              670,078
              
              
              
              460,114Prepaid
      expenses
              
              
              1,667
              
              
              
              42,659Deposits with
      vendors
              
              
              21,000
              
              
              
              222,735Total current
      assets
              
              
              1,305,358
              
              
              
              814,164Property and equipment,
      net
              
              
              53,208
              
              
              
              59,747Other
    assets:Security
      deposit
              
              
              5,535
              
              
              
              5,535Loan fees, net of amortization of
      $7,157 and $0 atSeptember 30, 2008 and December
      31, 2007
              
              
              227,528
              
              
              
              -Total
      other assets
              
              
              233,063
              
              
              
              5,535Total
Assets
              
              $
              1,591,629
              
              
              $
              879,446LIABILITIES AND SHAREHOLDERS'
      EQUITYCurrent
      liabilities:Accounts payable and accrued
      expenses
              
              $
              192,659
              
              
              $
              128,381Note
payable
              
              
              -
              
              
              
              160,000Deferred
      revenue
              
              
              -
              
              
              
              66,000Convertible
      debenture
              
              
              42,000
              
              
              
              42,000Due to
      shareholder
              
              
              326,558
              
              
              
              216,558Total
      current liabilities
              
              
              561,217
              
              
              
              612,939Long-term debt, net of debt
      discount of $1,108,174 and $0at September 30, 2008 and December
      31, 2007
              
              
              41,826
              
              
              
              -Shareholders'
      Equity:Common stock, $.001 par value,
      100,000,000
                shares authorized;
      52,015,349  and 46,708,333
                shares issued and outstanding at
      September 30, 2008 and
                December 31,
      2007
              
              
              52,015
              
              
              
              46,956Additional paid-in
      capital
              
              
              10,942,527
              
              
              
              4,638,394Accumulated
      deficit
              
              
              (10,005,956
              )
              
              
              (4,418,843
              )Total shareholders'
      equity
              
              
              988,586
              
              
              
              266,507Total Liabilities and
      Shareholders' Equity
              
              $
              1,591,629
              
              
              $
              879,446
  (1)
              
              Derived from Audited Financial
      StatementsSee the accompanying notes to the
      unaudited consolidated financial statements.
  -4-
  VALLEY FORGE COMPOSITE
      TECHNOLOGIES, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED)
 For the three months
      ending
                
                
                For the nine months
      endingSeptember 30,
                
                
                September 30,2008
                
                
                2007
                
                
                2008
                
                
                2007Sales
                
                $
                -
                
                
                $
                -
                
                
                $
                132,000
                
                
                $
                -Cost of
      sales
                
                
                -
                
                
                
                -
                
                
                
                69,368
                
                
                
                -Gross
      Profit
                
                
                -
                
                
                
                -
                
                
                
                62,632
                
                
                
                -Costs and
      expensesLoss on shipped
      inventory
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                481,414Selling and administrative
      expenses
                
                
                3,359,478
                
                
                
                563,508
                
                
                
                3,857,512
                
                
                
                988,793Stock based
      consulting
                
                
                1,571,223
                
                
                
                71,225
                
                
                
                1,713,673
                
                
                
                213,6754,930,701
                
                
                
                634,733
                
                
                
                5,571,185
                
                
                
                1,683,882Loss from
      operations
                
                
                (4,930,701
                )
                
                
                (634,733
                )
                
                
                (5,508,553
                )
                
                
                (1,683,882
                )Other
      incomeInterest
      expense
                
                
                (62,057
                )
                
                
                (6,156
                )
                
                
                (79,907
                )
                
                
                (17,648
                )Investment
      income
                
                
                1,111
                
                
                
                589
                
                
                
                1,347
                
                
                
                10,558Net
    loss
                
                $
                (4,991,647
                )
                
                $
                (640,300
                )
                
                $
                (5,587,113
                )
                
                $
                (1,690,972
                )Loss per common
      shareBasic and
      Diluted
                
                $
                (0.10
                )
                
                $
                (0.01
                )
                
                $
                (0.11
                )
                
                $
                (0.04
                )Weighted Average Common Shares
      OutstandingBasic and
      Diluted
                
                
                51,038,175
                
                
                
                46,481,469
                
                
                
                48,776,680
                
                
                
                46,359,188See the accompanying notes to the
      unaudited consolidated financial
  statements.
  -5-
 VALLEY FORGE COMPOSITE
      TECHNOLOGIES, INC.CONSOLIDATED STATEMENTS
      OF CASHFLOWS(UNAUDITED)
  For the nine months
      endedSeptember
    30,2008
                
                
                2007CASH FLOWS FROM OPERATING
      ACTIVITIESNet loss
                
                $
                (5,587,113
                )
                
                $
                (1,690,972
                )Adjustments to reconcile net
      lossto net cash used
      inoperating
      activities:Depreciation  and
      amortization expense
                
                
                17,527
                
                
                
                10,151Amortization of debt
      discount
                
                
                41,826Loss on shipped
      inventory
                
                
                -
                
                
                
                481,414Common stock issued for
      services
                
                
                3,076,269
                
                
                
                -Fair value of warrants issued for
      consulting services
                
                
                1,713,673
                
                
                
                213,675Stock based
      compensation
                
                
                26,250
                
                
                
                242,500Change in operating assets and
      liabilities(Increase) decrease
      in:Accounts
      receivable
                
                
                (11,300
                )
                
                
                -Inventory
                
                
                (209,964
                )
                
                
                (89,282
                )Prepaid
      expenses
                
                
                40,992
                
                
                
                (10,623
                )Vendor
    deposits
                
                
                201,735
                
                
                
                (294,798
                )Increase (decrease)
      in:Accounts payable and accrued
      expenses
                
                
                64,278
                
                
                
                (141,676
                )Deferred
      revenue
                
                
                (66,000
                )
                
                
                66,000NET CASH USED IN OPERATING
      ACTIVITIES
                
                
                (691,827
                )
                
                
                (1,213,611
                )CASH FLOWS FROM INVESTING
      ACTIVITIESPurchases of
      equipment
                
                
                (3,831
                )
                
                
                (5,897
                )NET CASH USED IN INVESTING
      ACTIVITIES
                
                
                (3,831
                )
                
                
                (5,897
                )CASH FLOWS FROM FINANCING
      ACTIVITIESGross proceeds from exercise of
      warrants
                
                
                200,000
                
                
                
                -Proceeds from issuance of common
      stock per standby equity agreement
                
                
                93,000
                
                
                
                -Proceeds from issuance of common
      stock
                
                
                50,000
                
                
                
                542,750Proceeds from long-term
      debt
                
                
                915,315
                
                
                
                -Repayments of notes
      payable
                
                
                (160,000
                )
                
                
                -Repayments to
      shareholder
                
                
                -
                
                
                
                (657
                )Proceeds from shareholder
      loans
                
                
                110,000
                
                
                
                119,829NET CASH PROVIDED FROM FINANCING
      ACTIVITIES
                
                
                1,208,315
                
                
                
                661,922NET INCREASE (DECREASE) IN
      CASH
                
                
                512,657
                
                
                
                (557,586
                )CASH AT BEGINNING OF
      PERIOD
                
                
                88,656
                
                
                
                683,997CASH AT END OF
      PERIOD
                
                $
                601,313
                
                
                $
                126,411SUPPLEMENTAL DISCLOSURE OF CASH
      FLOW INFORMATIONCash paid during the period
      for:Income
taxes
                
                $
                -
                
                
                $
                -Interest
                
                $
                10,553
                
                
                $
                6,172See the accompanying notes to the
      unaudited consolidated financial
  statements.
  -6-


VALLEY
FORGE COMPOSITE TECHNOLOGIES, INC.


NOTES TO
UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS


SEPTEMBER
30, 2008


NOTE 1 –
NATURE OF BUSINESS,
BASIS OF PRESENTATION AND SUMMARY OF SIGNFICANT ACCOUNTING
POLICIES
 
 Nature of the
Business
 
 The
Company’s primary operating subsidiary has been Valley Forge Composite
Technologies, Inc., a Pennsylvania corporation, which was incorporated in
Pennsylvania on November 21, 1996. On August 7, 2007, Valley Forge Composite
Technologies, Inc., a Pennsylvania corporation, was re-domiciled as a Florida
corporation and changed its name to Valley Forge Detection Systems, Inc.
(“VFDS”).  Simultaneously, the business segments of the former
Pennsylvania company were split into new Florida corporations, with VFDS’
aerospace segment assigned to Valley Forge Aerospace, Inc. (“VFA”); VFDS’
personnel screening technologies assigned to Valley Forge Imaging, Inc. (“VFI”),
and VFDS’ development and commercialization of potential new product lines
assigned to Valley Forge Emerging Technologies, Inc. (“VFET”).  The
Company is the 100% shareholder of its four subsidiaries.
 
 The
primary activity of VFI is to market and sell a personnel screening device known
as ODIN-ULDRIS (Ultra Low Dose Radiographic Imaging System).  On April
30, 2007, the Company signed an agreement to become a re-seller of the
ODIN-ULDRIS.
 
 VFA is
actively engaged in the design and manufacture of attitude control instruments
for small satellites, in particular, mini momentum reaction wheels based on
VFA’s propriety composite and bearing technology.
 
 VFET
evaluates miscellaneous scientific technologies not matching the Company’s
aerospace and anti-terrorism business segments for potential
commercialization.
 
 Between
1996 and 2003, through VFDS, the Company won numerous contracts to produce
various mechanical devices for special projects. Since September 11, 2001 the
Company has focused much of its energy on the development and commercialization
of its counter-terrorism products.  Such products include an advanced
detection capability for illicit narcotics, explosives, and bio-chemical weapons
using photo-nuclear reactions to initiate secondary gamma quanta the result of
which is a unique and distinguishable signal identifying each component of a
substance.  This product is known as the THOR LVX photonuclear
detection system (“THOR”).  The development and commercialization of
THOR is the present focus of VFDS.
 
 On July
6, 2006, Quetzal Capital 1, Inc., a Florida corporation (“QC1”) entered into a
share exchange agreement with VFDS’ predecessor Pennsylvania corporation. Under
the share exchange agreement, QC1 issued 40,000,000 shares of its common stock
to VFDS shareholders for the acquisition of all of the outstanding capital stock
of VFDS.  For financial accounting purposes, the exchange of stock was
treated as a recapitalization of VFDS with the former shareholders of QC1
retaining 5,000,000 shares (or approximately 11%) of the public
company.  Prior to the merger, QC1 was a reporting shell corporation
with no operations. The share exchange was approved by QC1 and its sole
shareholder, Quetzal Capital Funding I, Inc. (“QCF1”), and by VFDS’ board of
directors and a majority of its shareholders.   QC1 changed its
name to Valley Forge Composite Technologies, Inc., a Florida corporation, and is
referred to throughout this report as the “Company.”
 
 -7-
 NOTE 1 –
NATURE OF BUSINESS,
BASIS OF PRESENTATION AND SUMMARY OF SIGNFICANT ACCOUNTING
POLICIES
 
 Several
related agreements were also made with parties associated or affiliated with QC1
in connection with the approval of the share exchange. These agreements involved
the approval of a consulting agreement and a warrant agreement with Coast To
Coast Equity Group, Inc. (“CTCEG”), a company owned by the same shareholders who
owned QC1’s sole corporate shareholder, QCF1, and a registration rights
agreement for QCF1, CTCEG and private placement unit holders. On March 14, 2007,
QCF1 was dissolved by unanimous decision of its three shareholders, Charles J.
Scimeca, George Frudakis, and Tony N. Frudakis. This resulted in the Company
gaining two additional shareholders due to the splitting of QCF1's share of the
Company’s common stock between the three individual shareholders of
QCF1.
 
 Basis of
Presentation
 
 The
accompanying consolidated financial statements have been prepared by Valley
Forge Composite Technologies, Inc., a Florida corporation (the “Company”). The
Company’s consolidated financial statements are prepared in accordance with
generally accepted accounting principals in the United States of America (“US
GAAP”). The consolidated financial statements of the Company include the Company
and its subsidiaries. All material inter-company balances and transactions have
been eliminated.
 
 Going
Concern
 
 The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. The attainment of sustainable profitability
and positive cash flow from operations is dependent on certain future events.
These conditions raise substantial doubt about the Company’s ability to continue
as a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty (See Note 2).
 
 Use of
Estimates
 
 In
preparing financial statements in conformity with generally accepted accounting
principles, management is required 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 revenues and
expenses during the reported period. Actual results could differ from those
estimates.
 
 Comprehensive
Income
 
 The
Company follows the Statement of Financial Accounting Standards (“SFAS”) No.
130, “Reporting Comprehensive Income.” Comprehensive income is a more inclusive
financial reporting methodology that includes disclosure of certain financial
information that historically has not been recognized in the calculation of net
income. Since the Company has no items of other comprehensive income,
comprehensive income (loss) is equal to net income (loss).
 
 Fair Value of Financial
Instruments
 
 The
Company’s financial instruments consist of cash, security deposits, due to
shareholders, accounts payables, accrued expenses and a convertible debenture.
The carrying values of these financial instruments approximate the fair value
due to their short term maturities.
 
 
 -8-
 NOTE 1 –
NATURE OF BUSINESS,
BASIS OF PRESENTATION AND SUMMARY OF SIGNFICANT ACCOUNTING
POLICIES
 
 Concentration of Credit
Risk
 
 Certain
financial instruments potentially subject the Company to concentrations of
credit risk. These financial instruments consist primarily of cash. The Company
maintains its cash investments in high credit quality financial institutions.
At various times, the Company has
deposits in excess of the Federal Deposit Insurance Corporation limit. The
Company has not experienced any losses on these accounts.At September
30, 2008, the Company’s cash deposits exceeded the FDIC insured limits by
$373,626.
 
 Cash
Equivalents
 
 The
Company considers all short-term securities purchased with a maturity of three
months or less to be cash equivalents. At September 30, 2008, the Company held
no cash equivalent securities.
 
 Inventories
 
 The
Company’s accounts for finished goods inventory by applying the lower of cost or
market method, on a first-in, first-out (FIFO) basis. Inventories consist of the
following:
  September
      30
              
              
              December
      312008
              
              
              2007Raw materials
              
              $
              -0-
              
              
              $
              -0-Work in process
              
              
              200,988
              
              
              
              460,114Finished goods
              
              
              469,090
              
              
              
              -0-$
              670,078
              
              
              $
              460,114
  Property and
Equipment
 
 Property
and equipment is stated at cost. Depreciation on property and equipment is
calculated using the straight-line method over the estimated useful lives of the
assets.
  Computers and
      Equipment
              5 yearsFurniture and
      fixtures
              7
  years
 
 Expenditures
for major renewals and betterments that extend the useful lives of the assets
are capitalized.  Expenditures for maintenance and repairs of the
assets are charged to expense as incurred.
 
 -9-
 Loan
Fees
 
 Loan fees
are stated at cost.  Amortization of loan fees is calculated using the
straight-line method over the term of the loans.
 
 Revenue
Recognition
 
 The
Company only recognizes revenue when persuasive evidence of a customer or
distributor arrangement exists, receipt of goods by the customer occurs, the
price is fixed or determinable, collection is reasonably assured and upon the
customer acceptance of the goods.
 
 Persuasive
evidence of a customer or distributor arrangement exists upon the Company’s
receipt of a signed purchase order from the customer, the Company’s shipment of
the goods as specified in the purchase order and the customer’s receipt of the
goods ordered.
 
 A sales
agreement is initiated when the customer submits a signed purchase order which
states the product(s) ordered, price, quantity and the terms and conditions of
sale. Acceptance occurs upon the earlier of: (1) the Company’s receipt of a
written acceptance of the goods from the customer; or (2) expiration of the time
period stated in each purchase order for final payment which may vary with each
order. The customer has a right of return from the date that the shipment occurs
until the final payment date stated in the purchase order. Revenue is only
recognized upon completion of product testing by the customer, but not later
than 180 days after product shipment occurs.
  Income
Taxes
 
 Under the
asset and liability method of FASB Statement 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities, and their respective tax bases and operating loss and tax
credit carryforwards.  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. Deferred tax assets are reduced by a valuation allowance, when in the
Company's opinion it is likely that some portion or the entire deferred tax
asset will not be realized.
  Advertising
  Advertising
costs are expensed as incurred. As of September 30, 2008 and 2007, advertising
was $88,313 and $599, respectively.
  Loss per common
share
  In
accordance with SFAS No 128 “Earnings Per Share,” Basic earnings per share is
computed by dividing net loss by the weighted average number of shares of common
stock outstanding during the period. Diluted earnings per share is computed by
dividing net loss by the weighted average number of shares of common stock,
common stock equivalents and potentially dilutive securities outstanding during
each period. For the periods below the Company excludes potentially dilutive
securities such as convertible
warrants and the convertible debenturefrom the loss per share
calculations as their effect would have been anti-dilutive.
  The
following sets forth the computation of earnings per share.
  For
      the Period EndedSeptember
      30,2008
              
              
              2007Net
      loss
              
              $
              (
      5,587,113
              )
              
              $
              (1,690,972
              )Weighted
      average shares outstanding
              
              
              48,776,680
              
              
              
              46,359,188Loss
      per share - basic and diluted
              
              $
              ( 
      .11
              )
              
              $
              ( 
      .04
              )
 
 -10-
 NOTE 1 –
NATURE OF BUSINESS,
BASIS OF PRESENTATION AND SUMMARY OF SIGNFICANT ACCOUNTING
POLICIES
 
 The
Company’s common stock equivalents include the following:
  September
      30,
              
              
              December
      31,2008
              
              
              2007Class
      A
      Warrants
              
              
              2,800,000
              
              
              
              3,000,000Class
      B Warrants
              
              
              958,500
              
              
              
              958,500Class
      C Warrants
              
              
              1,000,000
              
              
              
              -Class
      D Warrants
              
              
              1,857,146
              
              
              
              -Class
      E
      Warrants
              
              
              2,500,000
              
              
              
              -Total
      common stock
      equivalents
              
              
              9,115,646
              
              
              
              3,958,500
  Share Based
Payments
 
 In
December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," which
replaces SFAS No. 123 and supersedes APB Opinion No. 25. Under SFAS No. 123(R),
companies are required to measure the compensation costs of share-based
compensation arrangements based on the grant-date fair value and recognize the
costs in the financial statements over the period during which employees or
independent contractors are required to provide services. Share-based
compensation arrangements include stock options and warrants, restricted share
plans, performance-based awards, share appreciation rights and employee share
purchase plans. In March 2005, the SEC issued Staff Accounting Bulletin No. 107,
or “SAB 107”. SAB 107 expresses views of the staff regarding the interaction
between SFAS No. 123(R) and certain SEC rules and regulations and provides the
staff's views regarding the valuation of share-based payment arrangements for
public companies. SFAS No. 123(R) permits public companies to adopt its
requirements using one of two methods. On April 14, 2005, the SEC adopted a new
rule amending the compliance dates for SFAS 123(R). Companies may elect to apply
this statement either prospectively, or on a modified version of retrospective
application under which financial statements for prior periods are adjusted on a
basis consistent with the pro forma disclosures required for those periods under
SFAS 123.
 
 Effective
January 1, 2006, the Company has fully adopted the provisions of SFAS No. 123(R)
and related interpretations as provided by SAB 107.As such, compensation cost is measured
on the date of grant as the fair value of the share-based payments. Such
compensation amounts, if any, are amortized over the respective vesting periods
of the option grant. The Company applies this statement prospectively.Prior to January 1, 2006, neither VFDS nor QC1 had any stock-based
compensation plans.
 
 On July
6, 2006 the Company granted 3,000,000 Class A warrants in connection with a
two-year consulting agreement beginning July 6, 2006 to CTCEG. These
warrants granted in connection with the consulting agreement include the
following provisions: 1,000,000 warrants to purchase 1,000,000 shares at an
exercise price of $1.00 per share when the per share market value closes at or
above $1.00 for up to two years from the effective date of the registration
statement registering the underlying shares; 1,000,000 warrants to purchase
1,000,000 shares at an exercise price of $1.50 per share when the per share
market value closes at or above $1.50 for up to two years from the effective
date of the registration statement registering the underlying shares; and,
1,000,000 warrants to purchase 1,000,000 shares at an exercise price of $2.00
per share when the per share market value closes at or above $2.00 for up to two
years from the effective date of the registration statement registering the
underlying shares.  On February 8, 2008, the Board of Directors
extended the consulting and warranty agreement until May 13, 2010.  A
total of $569,800 was allocated to these warrants using the Black-Scholes
pricing model with the following assumptions: share price of $1.00; Strike
prices ranging from $1.00 to $2.00 per share; Time to expiration (days) of 638;
Expected volatility of 52.86%; no dividends; and an annual interest rate based
on 3-month U.S. Treasury Bill of 4.81%.  Nine months consulting
expense in the amount of $142,450 was attributed to the grant of these warrants
through the period ended September 30, 2008. A reconciliation of these related
warrants issued and outstanding at September 30, 2008 is as
follows:
 
 Class
      A warrants outstanding at December 31,
      2007
              
              
              3,000,000Granted
              
              
              -Exercised/forfeited
              
              (200,000
              )Class
      A warrants outstanding at September 30,
      2008
              
              
              2,800,000
  -11-
 Warranties
 
 Some of
the Company’s product lines will be covered by an annual renewable warranty
effective only with the purchase of the Company’s annual maintenance contract
agreement. The Company expects the annual maintenance contract agreement fees
will total 15% to 20% of the original purchase price of the
products.
 
 Revenue
from periodic maintenance agreements shall be recognized ratably over the
respective maintenance periods provided no significant obligations remain, and
collectability of the related receivable is probable.
 
 Recent accounting
pronouncements
 
 In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, “Fair Value
Measurements”(“SFAS 157”). SFAS 157 defines fair value, establishes a
framework for measuring fair value, and requires enhanced disclosures about fair
value measurements.  SFAS 157 requires companies to disclose the fair value
of their financial instruments according to a fair value hierarchy as defined in
the standard.  Additionally, companies are required to provide enhanced
disclosure regarding financial instruments in one of the categories, including a
reconciliation of the beginning and ending balances separately for each major
category of assets and liabilities.  In February 2008, the FASB issued FASB
Staff Position (FSP) No. FAS 157-2, which delays by one year the effective date
of SFAS No. 157 for certain types of non-financial assets and non-financial
liabilities.  As a result, SFAS 157 will be effective for financial
statements issued for fiscal years beginning after November 15, 2007, or the
Company’s fiscal year beginning July 1, 2008, for financial assets and
liabilities carried at fair value on a recurring basis, and on July 1, 2009, for
non-recurring non-financial assets and liabilities that are recognized or
disclosed at fair value.  The Company adopted SFAS No. 157 on July 1, 2008
for financial assets and liabilities carried at fair value on a recurring basis,
with no material impact on its financial statements.  The Company is
currently determining what impact the application of SFAS 157 on July 1, 2009
for non-recurring non-financial assets and liabilities that are recognized or
disclosed at fair value will have on its financial statements.
 
 In
October 2008, the FASB issued Staff Position No. FAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset is Not Active” (“FSP
157-3”).  FSP 157-3 clarifies the application of SFAS 157, which the
Company adopted as of July 1, 2008, in cases where a market is not
active.  The Company has considered the guidance provided by FSP 157-3
as of September 30, 2008, and the impact was not material.
 
 In
February 2007, the FASB issued SFAS No. 159 The Fair Value Option for Financial
Assets and Financial Liabilities – including an Amendment of SFAS No.
115, (“SFAS 159”), which permits an entity to measure many financial
assets and financial liabilities at fair value that are not currently required
to be measured at fair value. Entities that elect the fair value option will
report unrealized gains and losses in earnings at each subsequent reporting
date. The fair value option may be elected on an instrument-by-instrument basis,
with few exceptions. SFAS 159 amends previous guidance to extend the use of the
fair value option to available-for-sale and held-to-maturity securities. The
Statement also establishes presentation and disclosure requirements to help
financial statement users understand the effect of the election. SFAS No. 159 is
effective as of the beginning of the first fiscal year beginning after November
15, 2007. The Company does not believe the acceptance of SFAS 159 has a material
impact on the financial statements.
 
 In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of Accounting Research Bulletin
No 51” (SFAS 160). SFAS 160 establishes accounting and reporting
standards for ownership interests in subsidiaries held by parties other than the
parent, changes in a parent’s ownership of a noncontrolling interest,
calculation and disclosure of the consolidated net income attributable to the
parent and the noncontrolling interest, changes in a parent’s ownership interest
while the parent retains its controlling financial interest and fair value
measurement of any retained noncontrolling equity investment. SFAS 160 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early adoption
is prohibited. The adoption of SFAS No. 160 is not expected to have a material
effect on its financial position, results of operations or cash
flows.
 
 In March
2008, the Financial Accounting Standards Board issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities.  SFAS No. 161 requires
additional disclosures related to the use of derivative instruments, the
accounting for derivatives and the financial statement impact of
derivatives.  SFAS No. 161 is effective for fiscal years beginning
after November 15, 2008.  The adoption of SFAS No. 161 will not impact
the Company's financial statements.
 -12-
 
 In
May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally
Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the
sources of accounting principles and the framework for selecting the principles
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with generally accepted accounting principles (the
GAAP hierarchy). SFAS 162 will become effective 60 days following the
SEC’s approval of the Public Company Accounting Oversight Board amendments to
AU Section 411, “The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles.” We do not currently expect the
adoption of SFAS 162 to have a material effect on our results of operations
and financial condition.
 
 In
May 2008, the FASB issued FSP Accounting Principles Board (“APB”) 14-1
“Accounting for Convertible Debt instruments That May Be Settled in Cash upon
Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”). FSP
APB 14-1 requires the issuer of certain convertible debt instruments that
may be settled in cash (or other assets) on conversion to separately account for
the liability (debt) and equity (conversion option) components of the
instrument in a manner that reflects the issuer’s non-convertible debt borrowing
rate. FSP APB 14-1 is effective for fiscal years beginning after
December 15, 2008 on a retroactive basis.
 
 In
June 2008, the FASB issued FASB Staff Position Emerging Issues Task
Force (EITF) No. 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities
(“FSP EITF No. 03-6-1”).  Under FSP EITF No. 03-6-1, unvested
share-based payment awards that contain rights to receive nonforfeitable
dividends (paid or unpaid) are participating securities, and should be included
in the two-class method of computing EPS. FSP EITF No. 03-6-1 is effective for
fiscal years beginning after December 15, 2008, and interim periods within
those years, and is not expected to have a significant impact on the Company’s
financial statements.
 
 The
Company does not believe that any other recently issued, but not yet effective
accounting standards will have a material effect on the Company’s consolidated
financial position, results of operations or cash flows.
 
 NOTE
2 - GOING
CONCERN
 
 As
reflected in the accompanying consolidated financial statements, the Company has
an accumulated deficit of $10,005,956 at September 30, 2008, net losses in
the period ended September 30, 2008 of $5,587,113 and cash used in operations
during the period ended September 30, 2008 of $691,827. The accompanying
financial statements have been prepared assuming that the Company will continue
as a going concern.
 
 The
attainment of sustainable profitability and positive cash flow from operations
is dependent on certain future events. These conditions raise substantial doubt
about the Company’s ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty. Management may attempt to raise additional funds by way of a
public or private offering of its securities. While the Company believes in the
viability of its strategy to improve sales volume and its ability to raise
additional funds, there can be no assurances to that effect.
 
 Since its
inception in 1996, the Company was involved in the development and sales of
advanced scientific technologies. Sales through the years were sporadic but had
high margins. The Company’s limited financial resources have prevented the
Company from aggressively advertising its products and services to achieve
consumer recognition. The ability of the Company to continue as a going concern
is dependent on the Company’s ability to further implement its business plan to
generate increased revenues and to raise additional funds.
 
 In 2003,
the Company entered into a Cooperative Research and Development Agreement for
the development and commercialization of the THOR system, which is more fully
described in Note 4.
 
 While the
Company is attempting to increase sales in general, the growth has not been
significant enough to support the Company’s daily operations. The consolidated
financial statements do not include any adjustments that might be necessary if
the Company is unable to continue as a going concern.
 
 The
Company also seeks the acquisition, development, and commercialization of other
advanced technologies. The ultimate success of the Company in attaining
sustainable profitability and positive cash flow from operations is dependent
upon the successful development and commercialization of these advanced
technologies including the THOR and Odin systems together with obtaining
sufficient capital or financing to support management plans. Management believes
that the actions presently being taken to further implement its business plan
and generate additional revenues and to raise additional funds provide the
opportunity for the Company to continue as a going concern.
 -13-
 
 NOTE 3 –
INCOMETAXES
 
 There was
no income tax expense for the periods ended September 30, 2008 and 2007 due to
the Company’s net losses.
 
 Under the
asset and liability method of FASB Statement 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities, and their respective tax bases and operating loss and tax
credit carryforwards. 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. Deferred
tax assets are reduced by a valuation allowance, when in the Company's opinion
it is likely that some portion or the entire deferred tax asset will not be
realized. After consideration of all the evidence, both positive and negative,
management has recorded a full valuation allowance due to the uncertainty of
realizing the deferred tax assets. Utilization of the Company's net operating
loss carryforwards are limited based on changes in ownership as defined in
Internal Revenue Code Section 382. Due to ongoing losses and the establishment
of a valuation allowance to offset deferred tax assets, the Company did not
record a tax provision for the period ended September 30, 2008.
  NOTE 4
- RELATED PARTY
TRANSACTIONS
 
 At
September 30, 2008 the Company owed Louis J. Brothers, the Company’s president
and major shareholder, $326,558 for advances made to the Company. Such amount,
which is included in the due to shareholders balance on the balance sheet at
September 30, 2008 earns 6% annual interest compounded quarterly, and is due on
demand.
 
 On August
11, 2006, Coast to Coast Equity Group, Inc., a Company warrant holder, loaned
the Company $42,000 as described in Note 6.
  NOTE 5
- DESCRIPTION OF
LEASING ARRANGEMENTS
 
 On
September 1, 2006, the Company entered into a lease of 2,985 square feet of
office space located at 50 E. River Center Boulevard, Suite 820, Covington,
Kentucky.The term of
the lease shall be for five years beginning on the first day of September, 2006
and ending on the last day of August, 2011.
 
 Under the
terms of the lease, the Company shall pay additional rent to cover operating
expenses of the property at a pro rata share deemed to be 0.928%, which will
total approximately $19,402 for the initial twelve months.  These
expenses are anticipated to increase at a 3% rate annually for the remaining
term of the agreement.
 
 On
December 1, 2007, the Company entered into a lease of 2,700 square feet of
rentable space located at 1895 Airport Exchange Blvd, Building A, Erlanger,
Kentucky. The term of the lease shall be for 37 months beginning on the
first day of December, 2007 and ending on the last day of December,
2010.
 -14-
 Under the
terms of the lease, the Company shall pay additional rent to cover operating
expenses of the property of approximately $349 per month.  Rent
expense for the period ended September 30, 2008 and 2007 was $68,905 and
$50,524, respectively.
 
 The
following is a schedule of future minimum lease payments required under the
lease as of September 30, 2008:
  Period
      EndingSeptember
      30
              
              Amount2009
              
              $
              69,7272010
              
              
              71,7922011
              
              
              54,146$
              195,665
  NOTE 6
- CONVERTIBLE
DEBENTURE
 
 On August 11, 2006, the Company issued a
convertible debenture toCoast To Coast Equity Group, Inc.
(“CTCEG”),in the amount of
$42,000 in exchange for cash received.  This debenture matures upon
the earlier of twelve months from the date of the closing of the merger between
VFDS and CTCEG, which occurred on July 6, 2006, or upon the date of an “event of
default” which would include any proceedings by VFDS to seek protection due to
insolvency. On August 10, 2007, the Company and CTCEG agreed to extend the
agreement for an additional twelve months ending July 6, 2008.  The
stated interest rate is 4% per annum. The amounts due may be paid in cash or,
upon mutual agreement of the parties, cash equivalents including but not limited
to payment in the form of the Company’s common stock valued at $1.00 per share;
or upon mutual agreement of the parties, CTCEG may apply amounts due toward the
cash exercise of the 3,000,000 Class A warrants granted to CTCEG as stated in
detail within the Consulting agreement as Share Based Payments which is
described in Note 1.
  NOTE 7
– SHAREHOLDERS’
EQUITY
 
 On July
6, 2006, the Company issued 3,000,000 Class A warrants in exchange for
consulting services rendered. The Company valued these warrants at the fair
market value on the dates of the grant as referred to in Note 1. The Company
recorded stock based consulting expense of $142,450 for the period ending
September 30, 2008.
 
 During
the period August 2006 through November 2006, the Company sold in private
placement transactions 1,296,500 units at $1.00 per unit which consist of 1
share of common stock and 1 Class B warrant which can be exercised at $1.50 per
share within 6 months from the effective date of a registration statement
registering the units and the underlying shares reserved for the exercise of the
warrants. A registration statement was required to be filed within 30 days from
the date that the Company attains a shareholder base of 35 shareholders. This
filing occurred on November 14, 2006 and was declared effective on May 14,
2007.  On September 23, 2008, the Class B warrants’ contractual
expiration date of November 13, 2007 has been extended to January 2, 2009 by
decision of the board of directors.
 
 The
Company established a price protection provision relating to the selling unit
holders of the private placement securities named in the registration statement.
The provision states that parties to the agreement are entitled to receive
additional stock or warrants if the Company sells shares of stock or warrants
for less than $1.00 per share of common stock and $1.50 per warrant prior to the
time limitations specified which are one (1) year from the effective date of the
Registration Statement for common stock issued and six (6) months from the
effective date of the Registration Statement for warrants issued. The Company
does not anticipate that it will offer any additional securities which would
cause this provision to become effective prior to the applicable time
limitations of the provisions. Accordingly, the Company believes that the price
protection provision will have no accounting impact.
 
 Coast To
Coast Equity Group, Inc., and Charles J. Scimeca, George Frudakis, and Tony N.
Frudakis (formerly the shareholders of Quetzal Capital Funding 1, Inc.), are
protected from dilution of their percentage ownership of the Company.
Non-dilution rights, as defined by the registration rights agreement
(incorporated by reference herein), mean that these parties shall continue to
have the same percentage of ownership and the same percentage of voting rights
of the class of the Company’s common stock regardless of whether the Company or
its successors or its assigns may thereafter increase or decrease the authorized
number of shares of the Company’s common stock or increase or decrease the
number of shares issued and outstanding. The non-dilution rights, by the terms
of the registration rights agreement, will continue in effect for a period of
two years from the effective date of this registration statement and are
assignable in private transactions, provided that the shares are not sold in
market transactions. The Company does not anticipate that it will offer any
additional securities which would cause this provision to become effective prior
to the applicable time limitations of the provisions. Accordingly, the Company
believes that the non-dilution provision will have no accounting
impact.
  Common Stock
Warrants
  accredited
institutional investor. The financing consists of a $500,000 Convertible Note,
with a conve rsion price of
$0.50 per share, bearing interest at the rate of 8% per year,
payable on a quarterly basis and has a term of three years due on July 3, 2011.
In connection with the financing, MKM was also issued Series C
Warrants (the "Warrants")
to purcha se up to 1,000,000
shares of the Company's common stock. The warrants are exercisable at an exercise
price of 1.61 per share. In connection with this financing arrangement, the
Company recorded an initial debt discount of $500,000 to be
amortized over the term of
the note and charged $40,639 to interest expense during the nine months ended September
30,2008.
 -15-
 
 On August
14, 2008 the Company granted 2,500,000 Class E warrants in connection with a
consulting agreement to Daniel Katz.  These warrants granted in
connection with the consulting agreement include the following
provision:  2,500,000 warrants to purchase 2,500,000 shares at an
exercise price of $0.90 per share for a period of three
years.  $1,571,223 was allocated to these warrants using the
Black-Scholes pricing model with the following assumptions: share price of
$0.96; Strike prices of $0.90; Time to expiration (days) of 1,095; Expected
volatility of 103.80%; no dividends; and an annual interest rate based on
3-month U.S. Treasury Bill of 2.72%. The Company recorded consulting
expense of $1,571,223 in the period ended September 30, 2008.
  accredited
institut ional investor. The
financing consists of a $650,000 Convertible Note, with a conversion price of
$0.35 per share, bearing interest at the rate of 8% per year,
payable on a quarterly basis and has a term of three years due on September 29,
2011. In conne ction with the financing, MKM was also
issued Series D Warrants
(the "Warrants") to purchase up to 1,857,146 shares of the Company's common
stock. The warrants are
exercisable at an exercise price of .75 per share. In
connection with this financing arran gement, the Company recorded an initial debt discount of $650,000 to be
amortized over the term of the note and charged $1,187 to interest expense
during the nine months ended September 30, 2008.
  Stock
warrant activity for the period ended September 30, 2008 is summarized as
follows:
 
 Number
      of
              
              
              Weighted
      averageshares
              
              
              exercise
      priceOutstanding at December 31,
      2007
              
              
              3,958,500
              
              
              $
              1.50Granted
              
              
              5,357,146
              
              
              
              0.98Exercised
              
              
              (200,000)
              
              
              
              (1.00)Outstanding at September 30, 2008
              
              
              9,115,646
              
              
              $
              1.21
 
 The
following table summarizes the Company's Class A, B, C, D and E stock warrants
outstanding at September 30, 2008:
 
 Weighted
      Average
              
              
              Weighted
      AverageRange
      of
              
              
              
              
              
              Remaining
              
              
              ExerciseExcercise
      Price
              
              
              Number
              
              
              Life
              
              
              Price$
              1.00
              
              
              
              800,000
              
              
              
              1.65
              
              
              $
              1.00$
              1.50
              
              
              
              1,000,000
              
              
              
              1.65
              
              
              $
              1.50$
              2.00
              
              
              
              1,000,000
              
              
              
              1.65
              
              
              $
              2.00$
              1.50
              
              
              
              958,500
              
              
              
              0.25
              
              
              $
              1.50$
              1.61
              
              
              
              1,000,000
              
              
              
              6.75
              
              
              $
              1.61$
              0.75
              
              
              
              1,857,146
              
              
              
              7.00
              
              
              $
              0.75$
              0.90
              
              
              
              2,500,000
              
              
              
              2.95
              
              
              $
              0.90
  -16-
 NOTE 8-
REGISTRATION RIGHTS
AGREEMENT
 
 Pursuant
to the terms of a registration rights agreement entered into on July 6, 2006,
the Company agreed to file a registration statement covering the shares of
common stock underlying the securities issued to CTCEG and to private securities
purchasers (the unit purchasers), and to register for resale the 5,000,000
shares owned by Charles J. Scimeca, George Frudakis, and Tony N. Frudakis
(formerly QCF1), no later than 30 days after the Company obtains a shareholder
base of 35 shareholders, and to use its best efforts to have the registration
statement declared effective with the SEC within 180 days of the filing date. If
the Company did not meet the scheduled filing date, it had agreed to pay
liquidated damages as required in the registration rights agreement. Similar
registration rights applied to the Company’s sales of securities in a private
placement transaction occurring between August 2006 and November 2006.
Management timely filed the Form SB-2 registration agreement with the Securities
and Exchange Commission (SEC) on November 14, 2006, and the SEC declared
the registration effective on May 14, 2007, which was the first business day
after the 180-day period expired. Accordingly, liquidated damages have not been
accrued as of the balance sheet date.
 
 Pursuant to the terms of the
August-November 2006 private placement agreement, the Company agreed to obtain a
trading symbol from the NASD within three (3) months after the effective date of
the Company’s registration statement registering the private
placement securities, and, if it failed to do so, the Company agreed that
it would undertake to locate and merge with a company having a public quote for
its common stock within the seven (7) month period following the effective date
of the Company’s Registration Statement, and, failing the ability to merge
timely with a trading company, the Company had agreed to rescind the
Purchaser’s investment. The Company obtained a trading symbol for its common
stock on July 9, 2007.  Accordingly, damages have not been accrued as
of the balance sheet date.
  NOTE 9
– PROPERTY AND
EQUIPMENT
 
 The major
classifications of equipment are summarized below:
  Estimated
              
              
              September
      30,
              
              
              December
      31,Life
              
              
              2008
              
              
              2007Office
      equipment
              5
      years
              
              
              $
              50,705
              
              
              $
              50,551Furniture and
      fixtures
              7
      years
              
              
              
              49,564
              
              
              
              45,887100,269
              
              
              
              96,438Less accumulated
depreciation
              
              
              
              
              (47,061
              )
              
              
              (36,691
              )$
              53,208
              
              
              $
              59,747Depreciation expense for the months ending September 30, 2008 and 2007 was
      $10,370 and $10,151, respectively.
  NOTE 10 –
LOAN
FEES
  September
      30,
              
              
              December
      31,2008
              
              
              2007Loan fees
              
              $
              234,685
              
              
              $
              -Less accumulated amortization
              
              
              (7,157
              )
              
              
              -$
              227,528
              
              
              $
              -Amortization for the nine months ending September 30, 2008 and 2007 was
      $7,157 and $-0-,
respectively.
    -17-
 NOTE 11 –
ACCOUNTS
PAYABLE
 
 The
Company’s current accounts payable and accrued expenses include $86,361 borrowed
on revolving credit lines utilizing corporate credit cards which bear interest
at an average rate of 13.24% per annum and call for total minimum monthly
installment payments of $2,543 as of September 30, 2008. However, since amounts
may be due on demand and it is the Company’s intent to pay such balances in
their entirety during 2008, such amounts have been classified as
current.
 
 The
remaining accounts payable and accrued liabilities consist of ordinary
administrative expenses which were incurred in the operations of the
Company.
  NOTE 12 –
NOTES
PAYABLE
  On
December 19, 2007, the Company borrowed $160,000 from a financial institution at
a rate of 5.00% with a maturity date of June 15, 2008.  The note was
secured by a personal guarantee of an officer and employee of the Company. As of
September 30, 2008 the balance outstanding was $-0-.
 On July 3, 2008, the Company secured a
financing arrangement with MKM Opportunity Master Fund, LLC ("MKM") an
unaffiliatedaccredited
institutional investor. The financing consists of a $500,000 Convertible Note,
with a conversion price of
$0.50 per share, bearinginterest at the rate of 8% per year,
payable on a quarterly basis and has a term of three years due on July 3, 2011.
In connection with thefinancing, MKM was also issued Series C
Warrants (the"Warrants")
to purchase up to 1,000,000
shares of the Company's common stock. Thewarrants are exercisable at an exercise
price of 1.61 per share. In connection with this financing arrangement, the
Company recorded an initialdebt discount of $500,000 to be
amortized over theterm of
the note and charged $40,639 to interest expense during the nine months endedSeptember 30,
2008.
 On September 29, 2008, the Company
secured a financing arrangement with MKM Opportunity Master Fund, LLC an
unaffiliatedaccredited
institutional investor. The
financing consists of a $650,000 Convertible Note, with a conversion price of
$0.35 per share, bearinginterest at the rate of 8% per year,
payable on a quarterly basis and has a term of three years due on September 29,
2011. In connection withthe financing, MKM was also
issuedSeries D Warrants
(the "Warrants") to purchase up to 1,857,146 shares of the Company's common
stock.The warrants are
exercisableatan exercise price of .75 per share. In
connection with this financing arrangement, the Company recordedaninitial debt discount of $650,000 to be
amortized over the term of the note and charged $1,187 to interest expense
during the nine monthsended September 30,
2008.
  The
promissory notes are as follows:
 
 September
      30,
              
              
              December
      31,2008
              
              
              2007Notes payable
              
              $
              1,150,000
              
              
              $
              160,000Less:  principal
payments
              
              
              -
              
              
              
              -Notes
      payable outstanding at September 30, 2008 and December 31, 2007
              
              
              1,150,000
              
              
              
              160,000Less: unamortized discount on notes
      payable
              
              
              (1,108,174
              )
              
              
              -Notes
      payable, net
              
              
              41,826
              
              
              
              160,000Less
      current portion
              
              
              -
              
              
              
              (160,000
              )Notes
      payable, net of discount of $1,108,174, less current
      portion
              
              $
              41,826
              
              
              $
              -
 
 -18-
 NOTE 13 –
DEFERRED
REVENUE
 
 On April
20, 2007, VFA entered into an agreement with NASA to manufacture certain
satellite components for $132,000.  As of September 30, 2008, the
Company had received $120,700 in cash and recorded accounts receivable of
$11,300 for revenue of $132,000 and in accordance with the Company’s revenue
recognition policy (see note 1), the revenue has been recognized because goods
have been received by the customer.
  NOTE 14
– STANDBY EQUITY
AGREEMENT
 
 On August
22, 2007, the Company entered into an agreement with CTCEG to sell 333,333
shares of common stock at $1.50 per share on demand of the Company.
 
 The
Company established a price protection provision relating to the selling price
of common stock per the agreement. The provision states that parties to the
agreement are entitled to receive additional stock if the Company sells shares
of stock for less than $1.50 per share of common stock to an investor prior to
the time limitations specified which is one (1) year from the effective date of
the agreement.
 
 As of
September 30, 2008, the Company had sold 333,333 shares for
$500,000.
 
 NOTE 15–
STOCK
COMPENSATION
  On August
15, 2007, the Board of Directors of the Company issued 50,000 shares of
restricted common stock to an employee of the Company.  The Company
incurred a $242,500 expense based on the closing price of the stock on August
15, 2007.
 
 On August
1, 2008, the Board of Directors of the Company issued 25,000 shares of
restricted common stock to an employee of the Company.  The Company
incurred a $26,250 expense based on the closing price of the stock on August 1,
2008.
 
 The
employee will also receive an additional 25,000 restricted shares on August 1,
2009, provided that the employee is performing services for the Company on the
given date.
  NOTE 16 –
SUBSEQUENT
EVENTS
  Common Stock Rescission
  On
November 12, 2008, the Company's Board of Directors authorized the recission of
a transactions involving 866,667 shares of common stock issued to Coast to Coast
Equity Group. Coast to Coast Equity Group approved the recission following 
subsequent review of the price protection mechanism that triggered the issuances
in July 2008. This recission has no impact on
the Statement of Operations or Shareholders’ Equity.
 -19-
 Item 2.Management’s Discussion and Analysis or Planof Operation.
 
 The
following analysis of our consolidated financial condition and results of
operations for the three and nine months ended September 30, 2008 and 2007
should be read in conjunction with the Consolidated Financial Statements and
other information presented elsewhere in this quarterly report and in
conjunction with our Form 10-KSB for the fiscal year ended December 31, 2007,
which was filed with the SEC on March 28, 2008.
 
 This
Management's Discussion and Analysis of Financial Condition and Results of
Operation (MD&A) contains forward-looking statements that involve known and
unknown risks, significant uncertainties and other factors that may cause our
actual results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed, or implied, by those forward-looking statements. You can
identify forward-looking statements by the use of the words may, will, should,
could, expects, plans, anticipates, believes, estimates, predicts, intends,
potential, proposed, or continue or the negative of those terms. These
statements are only predictions. In evaluating these statements, you should
specifically consider various factors, including the risk factors outlined
below. These factors may cause our actual results to differ materially from any
forward-looking statements. Although we believe that the exceptions reflected in
the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements. Therefore, actual
results may differ materially and adversely from those expressed in any
forward-looking statements. We undertake no obligation to revise or update
publicly any forward-looking statements for any reason.
 
 Liquidity
and Capital Resources
 
 Between
December 31, 2007 and September 30, 2008, our capital requirements have largely
been met through sales of securities. We recorded $132,000 from a sale of a
momentum wheel to NASA in May, 2008.  Until we are able to generate
significant revenues from our core homeland security-related detection
technologies, we anticipate being dependent on sales of securities to finance
our ongoing capital requirements. The following liquidity events describe the
amounts and sources of our capital resources and describe how we have paid our
expenses.
 
 We have
incurred losses for the past two fiscal years and had a net loss of $5,587,113
for the nine months ended September 30, 2008. Our auditors have expressed
substantial doubt that we can continue as a going concern.
  Historically,
we have relied on revenues, debt financing and sales of our common stock to
satisfy our cash requirements. For the nine months ended September 30, 2008 we
received cash proceeds of $120,700 from revenues, $343,000 from sales of our
common stock and $1,260,000 in debt financing.
  For the
year ended December 31, 2007, we received cash proceeds from debt financing of
$160,000 and sales of our common stock of $914,000.
  For the
nine months ended September 30, 2008 we issued 3,237,516 shares and
2,500,000 warrants for services. For the year ended December 31, 2007 we issued
659,333 shares for services. Management anticipates that we will continue to
issue shares for services in the short term.
  Management
intends to finance our 2008 operations primarily with the revenue from product
sales and any cash short falls will be addressed through equity financing, if
available. Management expects revenues will be realized but not to the point of
profitability in the short term. We will need to continue to raise additional
capital, both internally and externally, to cover cash shortfalls and to compete
in our markets. At our current revenue levels management believes we will
require an additional $1,000,000 during the next 12 months to satisfy our cash
requirements of approximately $95,000 per month. These operating costs include
cost of sales, general and administrative expenses, salaries and benefits and
professional fees. We have insufficient financing commitments in place to meet
our expected cash requirements for 2008 and we cannot assure you that we will be
able to obtain financing on favorable terms. If we cannot obtain financing to
fund our operations in 2008, then we may be required to reduce our expenses and
scale back our operations.
 -20-
  Commitments
and Contingent Liabilities
  The
Company leases office and warehouse spaces in Covington, KY and Erlanger, KY
under a five-year and 37 month non-cancelable operating lease,
expiring August 2011 and December 2010, respectively. Base rent is $5,807
per month with an annual rent escalator of 3%. At December 31, 2007, future
minimum payments for operating leases related to our office and manufacturing
facilities were $195,666 through August 2011.
  Our total
current liabilities decreased to $561,217 at September 30, 2008 compared to
$612,939 at December 31, 2007. Our total current liabilities at September 30,
2008 included accounts payable and accrued expenses of $192,659,
convertible debentures of $42,000 and a loan from shareholder of
$326,558.
 
 Results
of Operations
 
 The
following discussions are based on the unaudited consolidated financial
statements of Valley Forge Composite Technologies and its
subsidiaries. These charts and discussions summarize our financial statements
for the three and nine months’ ended September 30, 2008, and 2007, and should be
read in conjunction with the financial statements, and notes thereto, included
with this report at Part II, Item 7, below.
 SUMMARY COMPARISON
      OF OPERATING RESULTSThree months
      ended
                  September 30,
                
                
                Nine months
      ended
                  September 30,2008
                
                
                2007
                
                
                2008
                
                
                2007Gross
      Profit
                
                $
                -
                
                
                $
                -
                
                
                $
                62,632
                
                
                $
                -Total
      operating Expenses
                
                
                4,930,701
                
                
                
                634,733
                
                
                
                5,571,185
                
                
                
                1,683,882Loss from
      operations
                
                
                (4,930,701
                )
                
                
                (634,733
                )
                
                
                (5,508,553
                )
                
                
                (1,683,882
                )Total
      other income (expense)
                
                
                (60,946
                )
                
                
                (5,567
                )
                
                
                (78,560
                )
                
                
                (7,090
                )Net income
      (loss)
                
                
                (4,991,647
                )
                
                
                (640,300
                )
                
                
                (5,587,113
                )
                
                
                (1,690,972
                )Net income (loss) per
      share
                
                $
                (0.10
                )
                
                $
                (0.01
                )
                
                $
                (0.11
                )
                
                $
                (0.04
                )
  Our
operating expenses have generally increased from the three and nine months ended
September 30, 2007 compared with the three and nine months ended September 30,
2008.  The major components of our operating expenses consist of
selling and administrative expense and stock based consulting for the comparable
reporting periods.  For the three months ended September 30, 2008 and
September 30, 2007, our selling and administrative expenses were $3,359,478 and
$563,508, respectively, while our stock based consulting expenses were
$1,571,223 and $71,225, respectively.  For the nine months ended
September 30, 2008 and September 30, 2007, our selling and administrative
expenses were $3,857,512 and $988,793, respectively, while our stock based
consulting expenses were $1,713,673 and $213,675, respectively.
 -21-
 
 The
Company only recognizes revenue when persuasive evidence of a customer or
distributor arrangement exists, receipt of goods by the customer occurs, the
price is fixed or determinable, collection is reasonably assured and upon the
customer acceptance of the goods.
  Persuasive
evidence of a customer or distributor arrangement exists upon the Company’s
receipt of a signed purchase order from the customer, the Company’s shipment of
the goods as specified in the purchase order and the customer’s receipt of the
goods ordered.
  A sales
agreement is initiated when the customer submits a signed purchase order which
states the product(s) ordered, price, quantity and the terms and conditions of
sale. Acceptance occurs upon the earlier of: (1) the Company’s receipt of a
written acceptance of the goods from the customer; or (2) expiration of the time
period stated in each purchase order for final payment which may vary with each
order. The customer has a right of return from the date that the shipment occurs
until the final payment date stated in the purchase order. Revenue is only
recognized upon completion of product testing by the customer, but not later
than 180 days after product shipment occurs.
  The
following chart provides a breakdown of our sales in 2008
and 2007.
  September
      30,
                
                
                December
      31,2008
                
                
                2007-Valley
      Forge Detection Systems, Inc.
                
                
                -
                
                
                
                -Valley
      Forge Aerospace, Inc.
                
                
                132,000
                
                
                
                -Valley
      Forge Imaging, Inc.
                
                
                -
                
                
                
                -Valley
      Forge Imaging Technologies, inc.
                
                
                -
                
                
                
                -Totals
      per financial statements:
                
                
                132,000
                
                
                
                -
  Our total
operating expense was $5,571,185 for the nine months ended September 30, 2008
and $1,998,412 for the year ended December 31, 2007.
 
 Our
average monthly cost of operations from January 2008 through September 2008 was
$619,021. Excluding, non-cash charges of $1,713,673 for stock based consulting,
$3,076,269 for issuances of common stock for services, and $26,250 in stock
based compensation, the monthly cost of operations from January 2008 through
September 2008 was $83,910.
  As of
September 30, 2008, we have approximately $601,313 in cash remaining. Of this
amount, $601,313 is available for use as payroll expense pursuant to the terms
of the investment agreements entered into with purchasers of units in the Unit
Offering.
 -22-
  At this
rate, and barring any material changes to our capital requirements, we
anticipate being able to sustain our operations for seven months, at which
time we will have to obtain additional capital funding. Thus, our ability to
sustain ourselves on our current cash position depends almost entirely on: (1)
how long the government approval process may take and how high the initial
market demand is for the THOR system, and (2) how long it takes to realize
revenue from sales of the ODIN ULDRIS unit; and (3) whether additional cash
infusions are obtained via the exercise of outstanding warrants or from other
sources. While the receipt of purchase orders for the THOR will dictate our
initial production needs, the timing of the government approval process is
largely out of our control. Likewise, we have just begun to market the ODIN
ULDRIS system and do not have a forecast of how long it may take to realize
revenues from any sales of such units.
  Other
than for general operational and payroll expenses, which may also include the
payment of additional research and development and marketing expenses, the
Company’s day-to-day operations are not expected to change materially until such
time as we obtain the necessary government approvals to commence production and
then the delivery of the first commercial THOR devices. We do not anticipate
having significant additional research and development expenses during the next
twelve months, but such expenses may be necessary to facilitate the obtaining of
U.S. Government approvals before we can commence production of the THOR system
or may be necessary to facilitate the execution of our recent contract with
NASA.
  In the
coming months, the Company will sharpen its estimates of its capital
requirements based on the quantities of THOR and ODIN ULDRIS units ordered and
based on reliable information enabling us to better predict when government
approvals might be obtained for the THOR system.
 
 Description
of Critical Accounting Policies and Estimates, Going Concern, and Fair Value of
Financial Instruments
 
 This
section of our Form 10-Q contains a description of our critical accounting
policies as they pertain to: the Company’s business as a going concern, our use
of estimates, our fair valuation of financial instruments, our revenue
recognition policy, and to the effect on our financial statements of recent
accounting pronouncements. A more comprehensive discussion of our critical
accounting policies, and certain additional accounting policies, can be found in
Note 1 to the financial statements.
 
 Critical Accounting Policies and
Estimates
  The
accompanying consolidated financial statements have been prepared by the
Company. The Company’s financial statements are consolidated with the results of
its subsidiaries. All material inter-company balances and transactions have been
eliminated.
  Our
financial statements have been prepared according to accounting principles
generally accepted in the United States of America. In preparing these financial
statements, we are required to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses and related
disclosures of contingent assets and liabilities. We evaluate these estimates on
an on-going basis. We base these estimates on historical experiences and on
various other assumptions that we believe are reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities. Actual results may differ from
these estimates under different assumptions or conditions. At this point in our
operations, subjective judgments do not have a material impact on our financial
statements except as discussed in the next paragraph.
  -23-
  Going
Concern
  The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. The attainment of sustainable profitability
and positive cash flow from operations is dependent on certain future events.
These conditions raise substantial doubt about the Company’s ability to continue
as a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
  Fair Value of Financial
Instruments
  The
Company’s financial instruments consist of cash, security deposits, due to
shareholders, accounts payables, accrued expenses and a convertible debenture.
The carrying values of these financial instruments approximate the fair value
due to their short term maturities.
 
 ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
  As a
“smaller reporting company” as defined by Item 10 of Regulation S-K, the Company
is not required to provide information required by this Item.
  ITEM
4T. CONTROLS AND PROCEDURES
  Disclosure
Controls and Procedures
  Under the
supervision and with the participation of our principal executive officer and
principal financial officer, we conducted an evaluation of the effectiveness of
the design and operation of our disclosure controls and procedures, as defined
in Rule 13a-15(e) promulgated under the Exchange Act, as of September 30, 2008
(the "Evaluation Date"). Based on this evaluation, our principal executive
officer and principal financial officer concluded as of the Evaluation Date that
our disclosure controls and procedures were effective such that the information
relating to the Company, including our consolidated subsidiaries, required to be
disclosed in our SEC reports (i) is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms and (ii) is accumulated
and communicated to management, including our principal executive
officer/principal financial officer, as appropriate, to allow timely decisions
regarding required disclosure.
  Our
management, including our chief executive officer and chief financial officer,
does not expect that our disclosure controls and procedures or our internal
controls will prevent all error and all fraud. A 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. Due to
the inherent limitations in all 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.
  Management's
Report on Internal Control over Financial Reporting
  Our
management is responsible for establishing and maintaining adequate control over
financial reporting (as defined in Rule 13a-15(f) promulgated under the Exchange
Act. Our management assessed the effectiveness of our internal control over
financial reporting as of September 30, 2008. In making this assessment, our
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO") in Internal Control-Integrated
Framework. Our management has concluded that, as of September 30, 2008,
our internal control over financial reporting is effective based on these
criteria.
 -24-
  Changes
in Internal Control over Financial Reporting
  Our
management has also evaluated our internal control over financial reporting, and
there have been no significant changes in our internal controls or in other
factors that could significantly affect those controls subsequent to the date of
our last evaluation.
  The
Company is not required by current SEC rules to include, and does not include,
an auditor's attestation report. The Company's registered public accounting firm
has not attested to Management's reports on the Company's internal control over
financial reporting.
  -25-
 PART II: OTHER
INFORMATION
   ITEM
1. LEGAL PROCEEDINGS
  On March
18, 2008, the Company filed suit in the U.S. District Court for the Eastern
District of Kentucky against National Concept Licensing, Inc., Marvin Moore,
Cindy L. Seide, and Richard S. Gold, jointly and severally, seeking the recovery
of $105,000 in funds paid to the defendants to produce a television commercial
and to obtain suitable time slots for a national television advertising
campaign. The services promised by the defendants were not delivered. The
Company seeks, in addition to the $105,000 paid to the defendants, special or
consequential damages, costs, pre-judgment interest, attorneys’ fees, and such
other and further relief that the court deems just and proper.
  ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  On
January 12, 2008, we issued 62,000 shares of common stock for $93,000 in cash to
Coast To Coast Equity Group pursuant to the Standby Equity
Agreement.  On January 28, 2008, we issued 10,000 shares of common
stock to a third party as a retainer for investment banking
services.  On February 25, 2008, we issued 200,000 shares of common
stock for $200,000 pursuant to the exercise of 200,000 Class A
warrants.  On March 20, 2008, we issued 2,516 shares of common stock
to a third party for advertising services.  On May 6, 2008, we issued
1,560,000 shares of common stock for $50,000 in cash to Coast To Coast Equity
Group.  On July 3, 2008 we issued 200,000 shares of common stock to
Coast To Coast Equity Group for consulting services.  On July 14,
2008, we issued 1,500,000 shares of common stock for consulting services to a
third party.  On August 1, 2008, we issued 25,000 shares of common
stock to an employee as compensation.  On August 14, 2008, we issued
1,500,000 shares of common stock to a third party for consulting
services.
  ITEM
3. DEFAULTS UPON SENIOR SECURITIES
  None.
  ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  None
  ITEM
5. OTHER INFORMATION
  None
 -26-
  ITEM
6. EXHIBITS
  The
following exhibits are filed herewith:
  (a)
                Exhibits
  Exhibit
    No.
                Description2.1*
                Share
      Exchange Agreement Between Quetzal Capital 1, Inc. and the Shareholders of
      Valley Forge Composite Technologies, Inc., dated July 6,
    20063(i)(1)*
                Articles
      of Amendment by Quetzal Capital 1, Inc.4.3*
                Valley
      Forge Composite Technologies, Inc.’s Notice of Shareholder Action and
      Information Statement4.4*
                Articles
      and Plan of Share Exchange Between Quetzal Capital 1, Inc., a Florida
      corporation, and Valley Forge Composite Technologies, Inc., a Pennsylvania
      corporation, filed with the Florida Department of State, Division of
      Corporations, effective July 6, 20064.5*
                Articles
      and Plan of Share Exchange Between Quetzal Capital 1, Inc., a Florida
      corporation, and Valley Forge Composite Technologies, Inc., a Pennsylvania
      corporation, filed with the Pennsylvania Department of State, Corporation
      Bureau, effective July 6, 200610.1*
                Registration
      Rights Agreement, dated July 6, 200610.2*
                Consulting
      Agreement between Coast To Coast Equity Group, Inc. and Quetzal Capital 1,
      Inc., dated July 6, 200610.3*
                Warrant
      Agreement between Coast To Coast Equity Group, Inc. and Quetzal Capital 1,
      Inc., dated July 6, 200610.4**
                Form
      of Investment Letter31.1
                13a-14(a)-15d-14(a) Certification - Louis J.
      Brothers31.2
                13a-14(a)-15d-14(a) Certification - Louis J.
      Brothers32.1
                18 U.S.C. § 1350 Certification - Louis J.
      Brothers32.2
                18 U.S.C. § 1350 Certification - Louis J.
      Brothers
  *
Incorporated by reference from Form 8-K filed on July 11, 2006.
 **
Incorporated by reference from Form SB-2/A filed on May 3, 2007.
 -27-
 
   SIGNATURES
  Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
  VALLEY
      FORGE COMPOSITE TECHNOLOGIES, INC.Date:
      November 14, 2008
                  By:
                  /s/ Louis
      J. BrothersLouis
      J. BrothersPresident,
      Secretary and Treasurer
                    (Principal
      Accounting Officer and Authorized Officer)
  -28-