**UNITED
STATES** **SECURITIES AND EXCHANGE COMMISSION**
 
 **Washington,
D.C. 20549**
 
 **FORM
10-QSB**
 
 **(Mark
One)**
 **[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE** **SECURITIES
EXCHANGE ACT OF 1934**
 
 For
the Quarterly Period Ended May 31, 2005
 
 **OR**
 
 **[
] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE** **SECURITIES
EXCHANGE ACT OF 1934**
 
 For
the period  to
 
 **Commission
File Number: 000-32847**
 
 **VENTURES-NATIONAL
INCORPORATED**
 *(Exact
Name of Registrant as Specified in its Charter)*
  
 **Utah**
    **87-0433444***(State or Other Jurisdiction
      of*
    *(I.R.S.
      Employer**Incorporation or
      Organization)*
    *Identification
      Number)*
 
 ****
 
 **44358
Old Warm Springs Blvd.**
 **Fremont,
California  94538-6148**
 *(Address
of Principal Executive Offices, Including Zip Code)*
 
 **Registrant’s
Telephone Number (including area code): (510) 824-1200**
 
 
 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 [x] No [  ]
 
 
 Indicate
by a check mark whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act)  Yes [ ] No [x]
 
 
 Number of
shares of common stock, $0.001 par value, outstanding at July 1, 2005:
24,749,305


**VENTURES-NATIONAL
INCORPORATED**
 **(dba
TITAN GENERAL HOLDINGS, INC.)**
 **TABLE
OF CONTENTS**
    Page**PART
      I.   FINANCIAL INFORMATION**Item 1.  Consolidated Financial
      Statements
    3Item 2.  Management's Discussion and Analysis
      of Financial Condition and Results of Operations
    9Item 3.  Controls and
      Procedures
    11**PART
      II.  OTHER INFORMATION**Item 1.  Legal Proceedings
    20Item 2.  Changes in securities and small business
      issuer purchases of equity securities
    20Item 3.  Defaults upon senior
      securities
    20Item 4.  Submission of matters to a vote of
      security holders
    20Item 5.  Other information
    20Item 6.  Exhibits
    20Signatures
    21






1
  **VENTURES-NATIONAL
INCORPORATED**
 **(dba
TITAN GENERAL HOLDINGS, INC.)**
 
 **FORM
10-QSB**
 
 **FOR
THE QUARTER ENDED**
 
 **MAY
31, 2005**
 
 **FORWARD-LOOKING
INFORMATION**
 
 Statements
in this report concerning the future sales, expenses, profitability, financial
resources, product mix, market demand, product development and other statements
in this report concerning the future results of operations, financial condition
and business of Ventures-National Incorporated are "forward-looking" statements
as defined in the Securities Act of 1933 and Securities Exchange Act of 1934.
Investors are cautioned that the Company's actual results in the future may
differ materially from those projected in the forward-looking statements due to
risks and uncertainties that exist in the Company's operations and business
environment, including competition, need for increased acceptance of products,
ability to continue to develop and extend its brand identity, ability to
anticipate and adapt to a competitive market, ability to effectively manage
rapidly expanding operations, amount and timing of operating costs and capital
expenditures relating to expansion of its business, operations and
infrastructure, ability to provide superior customer service, dependence upon
key personnel and the like. The Company's most recent filings with the
Securities and Exchange Commission, including Form 10-KSB, contain additional
information concerning many of these risk factors, and copies of these filings
are available from the Company upon request and without charge.
 
 
 2
  **VENTURES-NATIONAL INCORPORATED**
 **(dba
TITAN GENERAL HOLDINGS, INC.)**
 **CONDENSED
CONSOLIDATED BALANCE SHEET**
 **MAY
31, 2005**
 **(In
thousands)**
 **(Unaudited)**
 
   **ASSETS**Current
      assets:Cash
      and cash equivalents
    
    $
    299Accounts
      receivable, net of reserves of $223
    
    
    3,008Inventory,
      net
    
    
    626Prepaid
      expenses and other current assets
    
    
    98Total
      current assets
    
    
    4,031Equipment
      and improvements, net
    
    
    2,346Intangible
      assets, net
    
    
    7Capitalized
      loan fees, net
    
    
    255Other
      assets
    
    
    305Total
      assets
    
    $
    6,944**LIABILITIES
      AND STOCKHOLDERS' EQUITY**Current liabilities:Current
      portion of long term debt, net of discounts of $2,346
    
    $
    1,147Line
      of credit, net of discounts of $1,970
    
    
    927Short
      term debt
    
    
    777Accounts
      payable - trade
    
    
    1,288Accrued
      liabilities
    
    
    1,576Total
      current liabilities
    
    
    5,715Long-term liabilities
    
    
    -Total
      liabilities
    
    
    5,715Commitments
      and contingenciesStockholders'
      equity:Common
      stock, $0.001 par value, 950,000,000 shares authorized, 24,749,305 shares
      issued and outstanding25Additional
      paid-in capital
    
    
    20,927Deferred
      compensation
    
    
    (19
    )Accumulated
      deficit
    
    
    (19,704
    )Total
      Stockholders' equity
    
    
    1,229Total
      liabilities and stockholders' equity
    
    $
    6,944The accompanying notes form an integral
      part of the condensed consolidated financial statements.
 
  3
  **VENTURES-NATIONAL
INCORPORATED**
 **(dba
TITAN GENERAL HOLDINGS, INC.)**
 **CONSOLIDATED
STATEMENTS OF OPERATIONS**
 
 **(In
thousands, except share and per share data)**
 **(Unaudited)**
 ****
    **Three
      Months Ended**
    **Nine
      Months Ended**
 ****
    ****
    ****
    **05/31/05**
    ****
    ****
    **05/31/04**
    ****
    ****
    **05/31/05**
    ****
    ****
    **05/31/04**Sales
    
    $
    4,571
    
    $
    4,727
    
    $
    12,430
    
    $
    11,976Cost
      of sales
    
    
    4,096
    
    
    3,832
    
    
    11,586
    
    
    10,451Gross profit
    
    
    475
    
    
    895
    
    
    844
    
    
    1,525Operating
      expenses:Sales
      and marketing
    
    
    347
    
    
    361
    
    
    1,150
    
    
    1,057General
      and administrative   expenses(Including
      non-cash compensation of
      $47, $88, $178 and $1,766)
    
    
    680
    
    
    364
    
    
    1,797
    
    
    3,579Profit
      (loss) from operations
    
    
    (552
    )
    
    170
    
    
    (2,103
    )
    
    (3,111
    )Other
      income (expenses):Interest
      expense(Including
      non-cash of $372, $1,666, $1,596 and $2,166)
    
    
    (525
    )
    
    (1,721
    )
    
    (1,991
    )
    
    (2,642
    )Miscellaneous
    
    
    -
    
    
    1
    
    
    2
    
    
    203Loss
      before income taxes
    
    
    (1,077
    )
    
    (1,550
    )
    
    (4,092
    )
    
    (5,550
    )Provision
      for income taxes
    
    
    -
    
    
    -
    
    
    -
    
    
    -Net
      loss
    
    $
    (1,077
    )
    $
    (1,550
    )
    
    (4,092
    )
    $
    (5,550
    )Net
      loss per share:Basic
      and Diluted
    
    $
    (0.04
    )
    $
    (0.08
    )
    $
    (0.17
    )
    $
    (0.32
    )Weighted
      average numberof
      shares outstanding:Basic
      and Diluted
    
    
    24,749,305
    
    
    18,481,067
    
    
    24,745,093
    
    
    17,042,738The accompanying notes form an integral
      part of the condensed consolidated financial statements.
   
  4
 **VENTURES-NATIONAL
INCORPORATED**
 **(dba
TITAN GENERAL HOLDINGS, INC.)**
 **CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **(In
thousands)**
 **(Unaudited)**
   05/31/05
    
    
    05/31/04Cash
      flows from operating activities:Net
      loss
    
    $
    (4,092
    )
    $
    (5,550
    )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Amortization
      of deferred compensation
    
    
    178
    
    
    1,529Non-cash
      interest paid in common stock
    
    
    20
    
    
    -Non-cash
      interest expense related to debt discounts and bank fees
    
    
    1,576
    
    
    2,554Accrued
      expenses to be converted to notes payable
    
    
    -
    
    
    418Depreciation
      and amortization
    
    
    477
    
    
    470Gain
      on debt extinguishment
    
    
    -
    
    
    (349
    )Changes
      in operating assets and liabilities:Accounts
      receivable
    
    
    (112
    )
    
    (1,682
    )Inventory
    
    
    (90
    )
    
    (152
    )Prepaid
      expenses and other current assets
    
    
    (4
    )
    
    (125
    )Other
      assets
    
    
    (114
    )
    
    (21
    )Accounts
      payable
    
    
    252
    
    
    (485
    )Accrued
      liabilities
    
    
    824
    
    
    (270
    )Net
      cash used in operating activities
    
    
    (1,085
    )
    
    (3,663
    )Cash
      flows from investing activities:Capital
      expenditures
    
    
    (65
    )
    
    (228
    )Net
      cash used in investing activities
    
    
    (65
    )
    
    (228
    )Cash
      flows from financing activities:Borrowings/repayments
      on line of credit, net
    
    
    574
    
    
    2,516Borrowings
      on long-term debt, net of loan cost
    
    
    -
    
    
    2,690Proceeds
      from issuance of note payable to related
      parties
    
    
    583
    
    
    751Proceeds
      from issuance of common stock
    
    
    -
    
    
    667Proceeds
      from issuance of short term debt
    
    
    -
    
    
    135Payments
      of long-term debt
    
    
    (320
    )
    
    (599
    )Payments
      of short-term debt
    
    
    (185
    )
    
    (32
    )Payments
      of capital lease obligations
    
    
    -
    
    
    (85
    )Payments
      to related parties
    
    
    -
    
    
    (743
    )Payments
      on former lines of credit
    
    
    -
    
    
    (1,352
    )Net
      cash provided by financing activities
    
    
    652
    
    
    3,948Net
      (decrease) increase in cash
    
    
    (498
    )
    
    57Cash
      and cash equivalents at beginning of period
    
    
    797
    
    
    97Cash
      and cash equivalents at end of period
    
    $
    299
    
    $
    154Supplemental
      disclosure of cash flow information:Interest
      paid
    
    $
    394
    
    $
    442Income
      tax paid
    
    $
    -
    
    $
    -Non
      cash activities:Issuance
      of common stock to pay accrued interest
    
    $
    20
    
    $
    -Issuance
      of common stock for consulting fees
    
    $
    -
    
    $
    3,520Issuance
      of common stock for debt conversion
    
    $
    -
    
    $
    1,874The accompanying notes form an integral
      part of the condensed consolidated financial statements.
  
  5




**VENTURES-NATIONAL
INCORPORATED**
 **(dba
TITAN GENERAL HOLDINGS, INC.)**
 
 **NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Amounts
in thousands, except share and per share amounts)**
 **(Unaudited)**
 
 
 ***Note
1.*** **** ***Basis
of Presentation and Nature of Business Operations***
 
 **Basis
of Presentation**
 
 The
accompanying unaudited condensed consolidated financial statements have been
prepared by Ventures-National Incorporated, doing business as Titan General
Holdings, Inc. (“Titan” or the “Company”), without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and disclosures normally included in the consolidated financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to such rules and
regulations. These unaudited condensed consolidated financial statements reflect
all adjustments, consisting only of normal recurring adjustments, which in the
opinion of management, are necessary to present fairly the financial position,
the results of operations and cash flows of Titan for the period
presented.
 
 These
unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company’s Annual Report to Shareholders on Form 10-KSB for the
fiscal year ended August 31, 2004 as filed with the Securities and Exchange
Commission on December 14, 2004. All significant intercompany accounts and
transactions have been eliminated in preparation of the condensed consolidated
financial statements.
 
 The
accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As of May 31, 2005, Titan had a
working capital deficit of $1,684 and an accumulated deficit of $19,704. Through
May 31, 2005, the Company has not been able to generate sufficient sales from
its operations to cover its costs and operating expenses. Although the Company
has been able to issue its common stock through private placements to raise
capital in order to fund its operations, it is not known whether the Company
will be able to continue this practice, or be able to obtain other types of
financing or if its sales will increase significantly to be able to meet its
cash operating expenses. This, in turn, raises substantial doubt about the
Company’s ability to continue as a going concern. Management believes that the
private equity financing, new product offerings, and potential strategic
relationships will enable the Company to generate positive operating cash flows
and continue its operations. However, no assurances can be given as to the
success of these plans. The financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
 
 On
November 30, 2004, the Company's Board of Directors formed a strategic committee
to investigate the possible sale or merger of the business appointing Kenneth
Shirley as chairman of this committee. This committee is still in existence
but Mr. Shirley is no longer chairman. Subsequent to quarter end, effective
June 17, 2005, Mr. Shirley resigned from the Board.
  The
results of operations for the interim periods are not necessarily indicative of
the results to be expected for the full year.
 
 **Nature
of Business**
 
 The
Company is a fabrication service provider of time sensitive, high tech,
prototype and pre-production rigid and rigid flex printed circuit boards
(“PCBs”) providing time-critical printed circuit board manufacturing services to
original equipment manufacturers and electronic manufacturing services providers
through its wholly-owned subsidiaries Titan EMS, Inc. and Titan PCB East, Inc.
The Company's prototype printed circuit boards serve as the foundation in many
electronic products used in telecommunications, medical devices, automotive,
military applications, aviation components, networking and computer
equipment.
 
 The
Company's time sensitive and high quality manufacturing services enable its
customers to shorten the time it takes them to get their products from the
research and development phase to the production phase, thus increasing their
competitive position. The Company's focus is on high quality niche printed
circuit boards consisting of complex, multi-layered, fine-lines and
high-performance materials with delivery cycles between 24 hours and standard 14
day lead times at a competitive price.
 
 Beginning
in the year 2001, Titan began acquiring cutting edge technology equipment and
processes from competitors unable to remain in business due to a severe market
downturn and overwhelming debt.
  ***Note
2.*** **** ***Loss
Per Common Share***
 
 In
accordance with SFAS No. 128, “Earnings Per Share,” the basic loss per common
share is calculated by dividing net loss available to common stockholders by the
weighted average number of common shares outstanding. Diluted loss per common
share is computed similarly to basic loss per common share, except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if the potential common shares had been issued and
if the additional common shares were not antidilutive. Titan has excluded all
outstanding options and convertible debt from the calculation of diluted net
loss per share because these securities are anti-dilutive. As of May 31, 2005,
Titan had common stock equivalents of approximately 5,120,000 shares related to
the options and warrants and approximately 23,144,000 shares related to shares
to be issued upon conversion of the convertible debt. Upon Mr. Shirley's
resignation from the board of directors on June 17, 2005, 550,000 options and
warrants have been cancelled.
   6
 ***Note
3.*** ****  ***Inventory***
  Inventory
consisted of the following:


05/31/05Raw
      materials and finished subassemblies
    
    $
    356Work
      in process
    
    
    289Finished
      goods
    
    
    62707Less
      inventory reserves
    
    
    81Total
    
    $
    626




***Note
4.*** **** ***Notes
Payable - Related Party***
 
 ****** On
November 30, 2004, the Company entered into a 10% $1,000 note agreement with Mr.
Frank Crivello (the “Crivello Note”); whereby, Mr. Crivello will loan the
Company up to a total of $1,000 convertible at $0.12/share with a maturity date
of January 31, 2005. This note can be extended with the approval of both
parties. On November 30, 2004, the Company received the first installment on
this note of $300 when the stock price was $0.30/share; therefore the Company
determined that there was a beneficial conversion feature in the amount of $300.
During the quarter ended February 28, 2005, the Company received further
net installments totaling $283 when the stock was at varying prices
from $0.15 to $0.22; therefore the Company determined that there were additional
beneficial conversion features totaling $202. All these beneficial conversion
features were recorded as additional paid in capital and as discounts on the
note payable. All these beneficial conversion features were expensed during the
quarter ended February 28, 2005. Although the note came due on January 31, 2005,
Mr. Crivello has not requested repayment. The total amount outstanding at May
31, 2005 is $633 and is
included in short-term debt in the accompanying consolidated balance
sheet.
 
 ***Note
5.*** **** ***Laurus
Note***
 
 During
the quarter ended November 30, 2004, Laurus Master Fund LTD (“Laurus”) converted
$20 of interest expense into 50,000 shares of common stock, waived the interest
ratchet for the Crivello Note and extended the Company’s principal payments on
its term loans for a period of six months ending June 30, 2005. Laurus also
opted not to waive the Company’s default of its loan covenants, requiring the
Company to carry all of its debt with Laurus as current.
 
 ***Note
6.*** **** ***Laurus
Over-Advance***
 
 During
the quarter ended May 31, 2005, Laurus issued to the Company an over-advance of
up to $1,000 which is secured by certain assets owned by Farwell Equity
Partners, LLC ("Farwell"), a Delaware limited liability company of which David
Marks, a principal shareholder and chairman of the board of the Company, is the
managing member. This loan is a one-year additional line of credit. In
conjunction with this over-advance, the Company entered into an Indemnification
Agreement with Farwell intended to indemnify Farwell for any liabilities it may
incur as a result of or arising from Farwell’s pledging of certain assets to
Laurus as collateral for the over-advance. During the quarter ended May 31,
2005, the Company borrowed $450 when the stock was at various prices from $0.115
to $0.20; therefore the Company determined that there were beneficial conversion
features totaling $138 which are being amortized over the one-year life of the
over-advance. During the quarter ended May 31, 2005, the Company expensed $20
related to this amortization. The over-advance is due in full on April 4,
2006.
 
 
 7
 ***Note
7. Proforma Loss under FASB 148***
 
 The
Company uses the intrinsic value method (APB Opinion 25) to account for its
stock options granted to officers, directors, and employees. Under this method,
compensation expense is recorded over the vesting period based on the difference
between the exercise price and quoted market price on the date the options are
granted.
 
 Had
the Company chosen the fair value method of accounting for transactions
involving stock option issuance to employees pursuant SFAS No. 123, the Company
would have recorded $19 and $33 in compensation costs for the three month
periods ended May 31, 2005 and 2004, respectively, and $97 and $100 for the nine
month periods ended May 31, 2005 and 2004, respectively, as presented by the
proforma loss statement, as follows:
  Three
      Months Ended
    
    Nine
      Months Ended2005
    
    2004
    
    2005
    
    2004Net loss:As reported
    
    $
    (1,077
    )
    $
    (1,550
    )
    $
    (4,092
    )
    $
    (5,550
    )Compensation recognized under APB
    25
    
    
    12
    
    
    12
    
    
    35
    
    
    40Compensation determined under SFAS
    123
    
    
    (19
    )
    
    (33
    )
    
    (97
    )
    
    (100
    )Proforma net loss
    
    $
    (1,084
    )
    $
    (1,571
    )
    $
    (4,154
    )
    $
    (5,610
    )Net loss per common share - basic and
      diluted:As reported
    
    $
    (0.04
    )
    $
    (0.08
    )
    $
    (0.17
    )
    $
    (0.32
    )Proforma
    
    $
    (0.04
    )
    $
    (0.08
    )
    $
    (0.17
    )
    $
    (0.33
    )


***Note
8. Litigation***
 **
 From time
to time, the Company may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in such
matters, if any, could arise from time to time that may harm Titan’s
business, financial condition and results of operations.
  ***Note
9. Convertible Notes***
 **
 In the
prior fiscal year, the Company issued convertible notes to private parties for
cash infusions into the Company. These notes were issued as convertible notes
with a conversion price of $0.32 per share and carry an interest rate of 10% per
annum with an expiration date of December 31, 2004. During the quarter ended
November 30, 2004, the Company received extensions from these lenders extending
the due date 90 days which were later extended an additional 90 days during the
quarter ended May 31, 2005. A convertible note in the amount of $50 was repaid
in the quarter ended February 28, 2005 in conjunction with an advance under the
Note Payable - Related Party (see Note 4). The total amount due under these
notes is $135 at May 31, 2005.  These notes have been rewritten
without a conversion feature and are now due July 31, 2005.
 
 ***Note
10. Gain on Extinguishment of Debt***
 
 During
the quarter ended November 30, 2003, the Company settled an unpaid capital lease
obligation with a gain of approximately $349 which is included in
miscellaneous income in the accompanying condensed consolidated statements of
operations.
 
 ***Note
11. Commitments***
 
 Included
in the Company’s accrued liabilities are unpaid payroll taxes to the State of
California of $37 and to the Internal Revenue Service of $210 for the calendar
year 2004 and $77 to the State of California, $12 to the Commonwealth of
Massachusetts and $424 to the Internal Revenue Service for calendar year 2005.
The Company is currently working with counsel on payment plans for these unpaid
payroll taxes.
 
 
  8
 **Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS AND PLAN OF OPERATIONS**
 
 *This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations and Plan of Operations and other portions of this report contain
forward-looking information that involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated by the
forward-looking information. Factors that may cause such differences include,
but are not limited to, availability and cost of financial resources, product
demand, market acceptance and other factors discussed in this report under the
heading “Business - Risk Factors.” This Management’s Discussion and Analysis of
Financial Condition and Results of Operations and Plan of Operations should be
read in conjunction with its consolidated financial statements and the related
notes included elsewhere in this report.*
 
 **Overview**
 
 A
detailed overview of the Company's business and history is set forth in its
Annual Report on Form 10-KSB for the year ended August 31, 2004, to which
overview the Company makes reference.
 
 **Summary
Corporate Background**
 
 The
Company is a fabrication service provider of time sensitive, high tech,
prototype and pre-production PCBs. The Company provides time-critical, PCB
manufacturing services to original equipment manufacturers and electronic
manufacturing services providers. The Company's prototype PCBs serve as the
foundation in many electronic products used in telecommunications, medical
devices, automotive, military applications, aviation components, networking and
computer equipment. The Company's focus is on niche PCBs consisting of complex,
high layer count, fine-lines and high-performance materials with capabilities to
deliver in 24 hours, at premium pricing, as compared to standard 14 day lead
time.
 
 The
Company's wholly-owned subsidiary Titan PCB West (“Titan”) was incorporated on
March 27, 2001. On August 30, 2002, the Company acquired Titan through the
merger of Titan EMS Acquisition Corp. with and into Titan. In connection with
the Merger, the stockholders of Titan received shares of its common stock. For
financial reporting purposes, the Merger has been treated as a reverse-merger,
where Titan was the acquirer. Because the Merger is treated as a purchase of
Ventures-National Incorporated, the historical financial statements of Titan
became its historical financial statements after the Merger.
 
 On
August 6, 2002, Titan acquired all of the non-real estate assets and assumed all
of the non-term loan liabilities of SVPC in exchange for the issuance to SVPC of
800,000 shares of Titan common stock, pursuant to the terms and conditions of a
Contribution Agreement and Assignment and Assumption of Liabilities dated August
6, 2002.
 
 Beginning
in 2001, SVPC began acquiring cutting edge technology equipment, processes,
customer lists and orders from competitors unable to remain in business
principally due to a severe market downturn and excessive levels of
indebtedness. On July 16, 2001, SVPC acquired all of the assets of SVPC Circuit
Systems, Inc. and certain assets of CSI pursuant to a combined approved
bankruptcy court sale. After these acquisitions, Titan acquired certain system
integration division assets out of bankruptcy from creditors of Paragon
Electronic Systems, Inc.
  9
 On
August 6, 2002, Titan acquired certain intangible assets contributed by Louis
George, a former executive officer and director, in exchange for 50,000 shares
of Titan common stock valued at $1.50 per share, pursuant to the terms and
conditions of a Contribution Agreement and Assignment and Assumption of
Liabilities dated August 6, 2002.
 
 Effective
August 30, 2002, through its wholly-owned subsidiary Titan EMS Acquisition Corp.
(“AcquisitionCo”), a Delaware corporation, the Company acquired all of the
capital stock of Titan through an exchange of its common stock pursuant to an
Agreement and Plan of Merger. In connection with the Merger, its fiscal year was
also changed from June 30 in each year to August 31 in each year.
 
 On
February 27, 2003, through its wholly-owned subsidiary Titan PCB East, the
Company acquired certain assets of Eastern Manufacturing Corporation ("EMC") for
approximately $500,000 in a foreclosure sale from EMC’s secured lender Eastern
Bank. The results from EMC’s operations have been reflected in its financial
statements from the date of acquisition. No goodwill resulted from this
acquisition.
 
 Effective
March 5, 2003, the Company purchased shares of common stock of Coesen
representing 33.3% of its issued and outstanding shares of common stock from Mr.
Howard Doane, the principal stockholder and an officer and director of EMC, in
exchange for 30,000 shares of common stock and $5,000 in cash.
 
 **Plan
of Operations**
 
 The
Company's business strategy is to:
  ·
    target
      potential customers and industries needing prototype boards with required
      turnaround times of between 24 hours and the industry standard 14-days as
      well as preproduction needs requiring numerous types of
      materials;
 ·
    aggressively
      market specialty manufacturing services for time sensitive, high-tech
      prototype and pre-production PCBs to the high technology industry and
      cater to customers who need time sensitive delivery of low to medium
      production runs with high quality and superior design and customer service
      interface whether for production or research and
      development;
  ·
    expand
      its services to include flexible circuits and rigid-flexcombinations in order to diversify sources of
  sales;
 ·
    expand
      its sales through the marketing and manufacture of rigid-flex PCBs using
      the patented HVR Flex process available;
  ·
    acquire
      and integrate strategic assets of companies producing time sensitive, high
      tech prototype and pre-production PCBs with other unique customers,
      technology or processes in order to accelerate entry into its target
      market;
  ·
    acquire
      manufacturing facilities that have military certification and achieve
      military certification for its current
facilities;
  ·
    develop
      and continuously improve fabrication and sales processes in order to
      improve margins and competitive pricing;
and
 ·
    evaluation
      of other strategic acquisitions or initiatives  outside of the
      company's core
business.
 
 The
Company plans to add and is in the process of adding additional independent
sales representatives to extend its selling capacity. Commission costs therefore
will fluctuate depending on the origin of sales orders with its internal sales
team or its independent sales representative organization. The Company also
plans to increase its marketing expenditures. There are no assurances that
additional independent sales representatives or increased marketing expenditures
will increase its sales.
 
  10
 **Accounting
Principles**
 
 Below
the Company describes a number of basic accounting principles, which the Company
employs in determining its recognition of sales and expenses, as well as a brief
description of the effects that the Company believes that its anticipated growth
will have on its sales and expenses in the future.
 
 *Sales*
 
 The
Company recognizes sales upon shipment to its customers. The Company records net
sales as its gross sales less an allowance for returns. At May 31, 2005, the
Company had approximately 360 customers. The Company provides its customers a
limited right of returns for defective PCBs and records an allowance against
gross sales for estimated returns at the time of sale based on its historical
results. Because its customers quickly test the PCBs the Company manufactures
for them, the majority of returns for defects occur within the first 15 days
following shipment. At May 31, 2005, the Company provided an allowance against
accounts receivable for returns of $14,000. Actual returns may differ materially
from its estimates, and revisions to the allowances may be required from time to
time.
 
 The
Company expects the number and complexity of PCBs the Company sells to fluctuate
with the changes in demand from its customers and, the prices the Company
charges its customers to fluctuate as a result of intense competition in the PCB
industry and the current economic situation and its impact on the high
technology market. Until industry conditions improve and demand increases, the
Company expects that decreased average pricing will continue to negatively
affect its sales.
 
 The
Company expects sales to grow as the Company develops its reputation in its
target market. Acquisitions will also increase sales as well as cause disruption
as facilities, employees, and processes are integrated. The Company expects
these fluctuations to be relatively short lived while expecting the sales growth
to be more permanent with the variable of market demand as a
condition.
 
 Future
demand and product pricing will depend on many factors including product mix,
levels of advanced technology, capacity utilization, competitive pressure in the
PCB industry, and economic conditions affecting the markets the Company serves
and the electronics industry in general. The current uncertainty regarding the
level and timing of an economic recovery in its product markets and volatility
in its customer forecasts continue to make its forecasting less reliable than in
prior periods.
 
 In
each case, the Company's plan of operations anticipates that its internal
growth, as well as acquisitions shall materially contribute to its ability to
increase its sales as described above.
 
 Through
the time of its acquisition of EMC, the Company’s primary source of sales were
from rigid bare-board manufacturing that provides time sensitive, high
technology, and superior quality PCB’s to the electronics industry at a
competitive price. Currently Titan additionally receives sales from customers
who need rigid-flex and flex bare-board manufacturing that provide time
sensitive, high technology, and superior quality PCBs. In addition, Titan has
expanded its sales focus to the military market place, which includes those
vendors supplying the U.S. military with products in its target
market.
  11
 *Cost
of Sales*
 
 Cost
of sales consists of materials, labor, outside services and overhead expenses
incurred in the manufacture and testing of its products. Many factors affect its
gross margin, including, but not limited to, capacity utilization, production
volume and yield. The Company does not participate in any long-term supply
contracts and it believes there are a number of high quality suppliers for the
raw materials the Company uses. Its cost of goods, as a percentage of sales,
varies depending on the complexity of the PCBs the Company manufactures in any
given period.
 
 Based
upon its plan of operations, the Company anticipates that its cost of sales will
increase as its sales increase, but that cost of sales as a percentage of net
sales shall generally decrease as its sales increase. The Company believes that
the amount of the decrease of this percentage over the next several fiscal
periods will be dependent in large part upon the source of the increase in
sales. For example, an increase in its penetration in the existing market for
its goods and services will permit us to increase sales at a low cost in part by
causing us to utilize a greater portion of its existing manufacturing capacity,
an expense which the Company already incurs. On the other hand, an increase in
its sales attributable to offering a greater portfolio of products including
much more complex products and services may result in less of a decrease in such
percentage as such activities may initially be less efficient than its existing
operations.
 
 Included
in cost of sales is overhead which is relatively fixed. Materials and labor are
semi-variable and are influenced by the complexity of orders as well as the
quantity of orders. As its business is continually changing with regard to the
type of product produced, the Company plans to implement broader use of
production systems to control the overtime in production as well as the use of
materials in production. The Company anticipates that these systems will assist
in the pricing of its products with the objective to be more competitive and
profitable in its target market.
 
 The
Company intends to continue to expand and upgrade its production capability as
well as its production systems and the financial systems interface in order to
better manage material, labor and overhead costs.
 
 *Operating
Expenses*
 
 The
Company's operating expenses for the three and nine month periods ended May 31,
2005 and 2004 are comprised of costs for sales and marketing, general and
administrative.
 
 Sales
and marketing expenses consist primarily of salaries and commissions paid to the
Company's internal sales team, commissions paid to independent sales
representatives and costs associated with advertising and marketing activities.
The Company expects its selling and marketing expenses to fluctuate as a
percentage of sales as the Company adds new personnel, develop new independent
sales representative channels and advertise its products.
 
 General
and administrative expenses include all corporate and administrative functions
that serve to support its current and future operations and provide an
infrastructure to support future growth. Major items in this category include
management and staff salaries and benefits, travel, network administration and
systems/data processing, training, rent/leases and professional services. The
Company expects these expenses to fluctuate as a percentage of sales as the
Company expands its business. **** The
Company intends to slightly expand its customer and sales support operation in
order to support the increased complexity and volume of its PCB business and its
anticipated use of indirect sales. The Company does not expect a material
increase in sales and marketing expense that is not consistent with an increase
in sales.
  12
 *Interest
Expense*
 
 Interest
expense, including finance charges, relates primarily to an accounts receivable
line of credit with Laurus, term loans with Laurus, and the associated
amortization of discounts on convertible debt with Laurus and others. The
Company expects interest expense to fluctuate based on the timing of borrowings
under its lines of credit.
 
 **Results
of Operations**
 
 The
following table sets forth statement of operations data for the three and nine
month periods ended May 31, 2005 and 2004 and should be read in conjunction with
the “ Management’s
Discussion and Analysis of Financial Condition and Results of Operations and
Plan of Operations ” and its
consolidated financial statements and the related notes appearing elsewhere in
this report .
 
 **Three
      Months Ended**
    
    **Nine
      Months Ended****05/31/05**
    
    **05/31/04**
    
    **05/31/05**
    
    **05/31/04**Net
      sales
    
    
    100.0
    %
    
    100.0
    %
    
    100.0
    %
    
    100.0
    %Cost
      of sales
    
    
    89.6
    
    
    81.1
    
    
    93.2
    
    
    87.3Gross
      profit
    
    
    10.4
    
    
    18.9
    
    
    6.8
    
    
    12.7Operating
      expenses:Sales
      and marketing
    
    
    7.6
    
    
    7.6
    
    
    9.3
    
    
    8.8General
      and administrative
    
    
    14.9
    
    
    7.7
    
    
    14.4
    
    
    29.9Total
      operating expenses
    
    
    22.5
    
    
    15.3
    
    
    23.7
    
    
    38.7Operating
      income (loss)
    
    
    (12.1
    )
    
    3.6
    
    
    (16.9
    )
    
    (26.0
    )Interest
      expense
    
    
    (11.5
    )
    
    (36.4
    )
    
    (16.0
    )
    
    (22.0
    )Miscellaneous
    
    
    0.0
    
    
    0.0
    
    
    0.0
    
    
    1.7Net
      loss
    
    
    (23.6
    )
    
    (32.8
    )
    
    (32.9
    )
    
    (46.3
    )
 
 **Three
Months Ended May 31, 2005 Compared to the Three Months Ended May 31,
2004.**
 
 *Net
Sales*
 
 Net
sales decreased by $156,000 or 3.3% from $4,727,000 in the three months ended
May 31, 2004 to $4,571,000 in the three months ended May 31, 2005. This decrease
resulted from increased sales in the Company's West facility which are primarily
due to the generation of new customers; and a decline of sales in its East
facility. Military contracts materialize slowly but when they materialize remain
solid for a long span of time and at which time are expected to greatly increase
the sales in the Company's East operation.
 
 *Cost
of Sales*
 
 ****Cost
of sales increased $264,000 or 6.9%, from $3,832,000 in the three months
ended May 31, 2004 to $4,096,000 in the three months ended May 31, 2005.
As a percentage of sales, these costs increased from 81.1% in the three
months ended May 31, 2004 to 89.6% in the three months ended May 31, 2005. The
increase in cost of sales percent resulted from a greater number of
qualification boards built to the new military specifications which should
result in future orders. In addition there has been a steady increase in the
Company's percentage of products sold through it's offshore fulfillment
program. These products have smaller margins than boards built by the Company's
but provide additional access to customers through expanded production
capabilities.
 
 13
 *Gross
Profit*
 
 Gross
profit decreased by $420,000 or 46.9%, from $895,000 in the three months ended
May 31, 2004 to $475,000 in the three months ended May 31, 2005. As
a percentage of sales, gross profit decreased from 18.9% in the
three months ended May 31, 2004 to 10.4% in the three months ended May 31, 2005.
 The decrease was primarily due to higher cost associate with the offshore
fulfillment program described above.
 
 *Operating
Expenses*
 
 Sales
and marketing expenses decreased $14,000 from $361,000 in the three months ended
May 31, 2004 to $347,000 in the three months ended May 31, 2005 and as a
percentage of sales remained relatively flat at 7.6% of sales.
 
 General
and administrative expenses increased by $316,000 or 86.8%, from $364,000 in the
three months ended May 31, 2004 to $680,000 in the three months ended May 31,
2005. This increase was due to an expense for potential uncollectible
receivables from one customer and a settlement related to the departure of an
executive from the company.
 
 *Interest
Expense*
 
 Interest
expense decreased by $1,196,000, or 69.5%, from interest expense of $1,721,000
in the three months ended May 31, 2004 to $525,000 in the three months ended May
31, 2005 and as a percentage of sales, interest expense decreased from 36.4% in
the three months ended May 31, 2004 to 11.5% in the three months ended May 31,
2005. The large decrease was due to a non-cash charge in the prior year dealing
with the conversion of notes from our largest shareholder into stock at
beneficial conversion rates. In the three months ended May 31, 2005, interest
expense relates primarily to amortization of loan discounts associated with the
Crivello and Laurus notes.
  *Net
Loss*
 
 Net
loss decreased $473,000 from $1,550,000 in the three months ended May 31, 2004
to $1,077,000 in the three months ended May 31, 2005 mainly due to the decrease
in non-cash interest expenses incurred in the three months ended May 31, 2005
due to the reasons noted above offset by reduced gross profit and increased
general and administrative expenses.
 
 **Nine
Months Ended May 31, 2005 Compared to the Nine Months Ended May 31,
2004.**
 
 *Net
Sales*
 
 Net
sales increased by $454,000 or 3.8% from $11,976,000 in the nine months ended
May 31, 2004 to $12,430,000 in the nine months ended May 31, 2005. This increase
resulted primarily from the 17.9% additional sales achieved in the West
operation which is primarily due to the generation of new customers; offset by
the 12.7% decrease in sales in its East operation. The Company's East operation
experienced a reduction during the first three months of the year but has since
increased. This was due to sales efforts being spent on long-term military
contracts due to the new military P31032 specification. Military contracts
materialize slowly but when they materialize remain solid for a long span of
time and at which time are expected to greatly increase the sales in the
Company's East operation. No assurances can be given that such increases will be
achieved.
  14
 *Cost
of Sales*
 
 Cost
of sales increased $1,135,000, or 10.9%, from $10,451,000 in the nine months
ended May 31, 2004 to $11,586,000 in the nine months ended May 31, 2005. As a
percentage of sales, these costs increased from 87.3% in the nine months ended
May 31, 2004 to 93.2% in the nine months ended May 31, 2005. The increase in
cost of sales percent resulted from a greater number of qualification boards
built to the new military specifications which should result in future orders.
In addition there has been a steady increase in the Company’s percentage of
product sold through its offshore fulfillment program. These products have
smaller margins than boards built by the Company but provide additional access
to customers through expanded production capabilities.
 
 *Gross
Profit*
 
 Gross
profit decreased by $681,000 or 44.7%, from $1,525,000 in the nine months ended
May 31, 2004 to $844,000 in the nine months ended May 31, 2005. As a percentage
of sales, gross profit decreased from 12.7% in the nine months ended
May 31, 2004 to 6.8% in the nine months ended May 31, 2005. The decrease in
gross profit resulted primarily from the higher costs mentioned
above.
 
 *Operating
Expenses*
 
 Sales
and marketing expenses increased $93,000 from $1,057,000 in the nine months
ended May 31, 2004 to $1,150,000 in the nine months ended May 31, 2005 and as a
percentage of sales increased from 8.8% of sales in the nine months ended May
31, 2004 to 9.3% of sales in the nine months ended May 31, 2005. This was
primarily due to an increase in activities from the outside sales
representatives and the commissions associated with those sales.
 
 General
and administrative expenses decreased by $1,782,000 or 49.8%, from $3,579,000 in
the nine months ended May 31, 2004 to $1,797,000 in the nine months ended May
31, 2005. The decrease was due in large part to the higher amortization of
deferred compensation and stock issuances  for consulting
services  issued in the prior fiscal year.
 
 *Interest
Expense*
 
 Interest
expense decreased by $651,000, or 24.6%, from interest expense of $2,642,000 in
the nine months ended May 31, 2004 to $1,991,000 in the nine months ended May
31, 2005 and as a percentage of sales, interest expense decreased from 22.0% in
the nine months ended May 31, 2004 to 16.0% in the nine months ended May 31,
2005. In the nine months ended May 31, 2004, interest expense related primarily
to interest expense on a 60 day note which carried a 10% premium and the
issuance of 600,000 shares of stock as well as the expense associated with the
conversion of notes payable to related parties at beneficial conversion rates.
In the nine months ended May 31, 2005, interest expense related mainly to the
amortization of loan discounts associated with its Crivello and Laurus
convertible debt as well as other convertible debt the Company has
issued.
  *Miscellaneous*
 
 Miscellaneous
income decreased $201,000 from $203,000 in the nine months ended May 31, 2004 to
$2,000 in the nine months ended May 31, 2005. In the nine months ended May 31,
2004, the Company paid off a capitalized lease obligation that was on the books
for $434,000 for $85,000 recording a $349,000 gain offset by the penalties
incurred upon the early payoff of various debt obligations upon the closing of
the Laurus transaction.
  15
 *Net
Loss*
 
 ** Net loss
decreased $1,458,000 for the nine months ended May 31, 2005 from $5,550,000 in
the nine months ended May 31, 2004 to $4,092,000 in the nine months ended May
31, 2005 for the reasons noted above offset by reduced gross profit and
increased administrative expenses.
  **Liquidity
and Capital Resources**
 
 The
Company's principal sources of liquidity have been cash provided by Laurus and
an infusion of capital from the Company's largest shareholder. The Company's
principal uses of cash have been for operations, to meet debt service
requirements, and to finance capital expenditures. The Company anticipates these
uses will continue to be its principal uses of cash in the future.
 
 The
Company will require additional financing in order to implement its business
plan. The Company currently anticipates capital expenditures of at least $1.0
million during the next 12 months. If the anticipated cash generated by its
operations are insufficient to fund requirements and losses, the Company will
need to obtain additional funds through third party financing in the form of
equity, debt or bank financing. Particularly in light of its limited operating
history and losses incurred, there can be no assurance that the Company will be
able to obtain the necessary additional capital on a timely basis or on
acceptable terms, if at all. In any of such events, the Company's business,
prospects, financial condition, and results of operations would be materially
and adversely affected. As a result of any such financing, the holders of its
common stock may experience substantial dilution.
 
 The
following factors, among others, could cause actual results to differ from those
indicated in the forward-looking statements included in this Form 10Q-SB:
pricing pressures in the industry; the loss of any of its major customers; a
continued downturn in the economy in general or in the technology sector; a
further decrease in demand for electronic products or continued weak demand for
these products; its ability to attract new customers. These factors or
additional risks and uncertainties not known to us or that the Company currently
deems immaterial may impair business operations and may cause its actual results
to differ materially from any forward-looking statement.
 
 Although
the Company believes the expectations reflected in the forward-looking
statements are reasonable, the Company cannot guarantee future results, levels
of activity, performance or achievements. The Company is under no duty to update
any of the forward-looking statements after the date of this report to conform
them to actual results or to make changes in its expectations.
 
 In
the nine months ended May 31, 2005, net cash used by operations was $1,085,000
while in the nine months ended May 31, 2004 cash used in operating activities
was $3,663,000, a decrease of $2,578,000. This decrease was primarily the result
of the Company's accounts receivable leveling off as well as the extension of
payables and accruals due to an immediate cash shortage.
 
 In
the nine months ended May 31, 2005, the Company utilized $65,000 for the
purchase of fixed assets compared to $228,000 used for the purchase of fixed
assets in the nine months ended May 31, 2004, a decrease of $163,000, or 71.5%.
As the Company achieves positive operating cash flow, the Company expects its
spending on capital expenditures to increase during the fourth quarter of this
fiscal year.
  16
 In the
nine months ended May 31, 2005, net cash provided by financing activities was
$652,000 while in the nine months ended May 31, 2004 cash provided by financing
activities was $3,296,000. The large amount provided last year was the Laurus
debt entered into in November 2003 offset by the debt that was extinguished upon
the issuance of the Laurus debt.
 
 On
November 30, 2004, the Company entered into a 10% Convertible Promissory Note
with Mr. Frank Crivello, a related party. This note is convertible into the
Company's Common Stock at $0.12/share, expired on January 31, 2005 but has been
extended by agreement from both parties. The Company initially borrowed $300,000
and during the quarter ended February 28, 2005 borrowed an additional
net $282,500 with the ability to borrow up to $1,000,000. Since the fair
market value of its stock on the borrowing dates ranged from $0.15 to $0.30 the
Company recorded beneficial conversion features of which some were limited to
the amount borrowed. These beneficial conversion features were recorded as
additional paid in capital and as a discount on the debt which have all been
amortized to interest expense during the nine months ended May 31,
2005.
 
 On
November 20, 2003, the Company entered into a loan and security agreement with
Laurus pursuant to which the Company is permitted to borrow up to $4,000,000
under a revolving line of credit (the "Credit Agreement"). On April 4, 2005, the
Company and Laurus entered into an agreement to provide up to an additional
$1,000,000 over-advance pursuant to the terms of the Credit Agreement.
Concurrently with such agreement, Farwell Equity Partners, LLC ("Farwell"), a
Delaware limited liability company, pledged certain assets to secure the
repayment of the over-advance. David Marks, a principal stockholder and chairman
of the board of the Company is the managing member of Farwell. The Company also
agreed to indemnify Farwell for any loss it may incur as a result of the pledge
of assets. During the quarter ended May 31, 2005, the Company borrowed $450,000
under this over-advance.
 
 On
November 30, 2004, the Company's board of directors formed a strategic committee
to explore the sale or merger of the Company and appointed Kenneth Shirley the
chairman of this committee. This committee is still active but no longer has Mr.
Shirley as its chairman. Effective June 17, 2005, Mr. Shirley resigned from the
board of directors.
 
 **Quantitative
And Qualitative Disclosures About Market Risk**
 
 The
Company’s exposure to market risk for changes in interest rates relates
primarily to the Company’s long-term debt since the interest rate charged by
Laurus is prime plus 3% but at the present we do not enter into interest rate
swap agreements to guard against any fluctuation in the prime rate.
 
 The Company also has interest rate risk that effects the increase or decrease in
the amount of interest income the Company can earn on our available funds for
investment. The Company ensures the safety and preservation of its invested
principal funds by limiting default risk, market risk and reinvestment risk. The
Company mitigates default risk by investing in high quality, short-term
securities. The Company does not believe that changes in interest rates will
have a material effect on our liquidity, financial condition or results of
operations.
 
 **Impact
of Inflation**
 
 The
Company believes that its results of operations are not dependent upon moderate
changes in inflation rates as the Company expects it will be able to pass along
component price increases to its customers.
  17
 ****
 **Seasonality**
 
 The
Company has experienced sales fluctuations due to customer business shut downs
over December holidays and the slow down of purchasing activities in the summer
during peak vacation months.
 
 **Contractual
Obligations**
 
 The
following table presents the Company's contractual obligations as of May 31,
2005 for the remaining of this fiscal year as well as over the next five fiscal
years. The Company does not have any contractual obligations that extend beyond
five fiscal years :
  Payment
by period
  DuringcurrentContractual
      Obligations
    
    
    Amount
    
    
    fiscal
      year
    
    
    1-3
      years
    
    
    4-5
      yearsEmployment
      agreements
    
    $
    462,500
    
    $
    46,250
    
    $
    416,250
    
    $
    -Short-term
      debt
    
    
    776,984
    
    
    776,984
    
    
    -
    
    
    -Long-term
      debt
    
    
    3,495,894
    
    
    3,495,894
    
    
    -
    
    
    -Revolving
      line of credit
    
    
    2,896,516
    
    
    2,896,516
    
    
    -
    
    
    -Operating
      leases
    
    
    2,712,019
    
    
    305,614
    
    
    2,058,211
    
    
    348,194Other
    
    
    30,000
    
    
    30,000
    
    
    -
    
    
    -Total
      Contractual Obligations
    
    $
    10,373,913
    
    $
    7,551,258
    
    $
    2,474,461
    
    $
    348,194




*Critical
Accounting Policies* The U.S.
Securities and Exchange Commission ("SEC") recently issued Financial Reporting
Release No. 60, "CAUTIONARY ADVICE REGARDING DISCLOSURE ABOUT CRITICAL
ACCOUNTING POLICIES" ("FRR 60"), suggesting companies provide additional
disclosure and commentary on their most critical accounting policies. In FRR 60,
the SEC defined the most critical accounting policies as the ones that are most
important to the portrayal of a company's financial condition and operating
results, and require management to make its most difficult and subjective
judgments, often as a result of the need to make estimates of matters that are
inherently uncertain. Based on this definition, the Company's most critical
accounting policies include: inventory valuation, which affects its cost of
sales and gross margin; and allowance for doubtful accounts, which affects the
general and administrative expenses; and stock-based compensation, which affects
general and administrative expenses. The methods, estimates and judgments the
Company uses in applying these most critical accounting policies have a
significant impact on the results the Company reports in its consolidated
financial statements.
 **
 18
 **
 *Inventory
Valuation* The
Company's policy is to value raw material inventories at the lower of cost or
market on a part-by-part basis on a first in first out basis ("FIFO") . The
Company also values work-in-process and finished goods at the lower of cost or
market utilizing a standard cost system which management believes approximates
cost on a FIFO basis. This policy requires the Company to make estimates
regarding the market value of its inventories, including an assessment of excess
or obsolete inventories. The Company determines excess and obsolete inventories
based on an estimate of the future demand for its products within a specified
time horizon, generally 12 months. The estimates the Company uses for demand are
also used for near-term capacity planning and inventory purchasing and are
consistent with its revenue forecasts. If the Company's demand forecast is
greater than its actual demand the Company may be required to take additional
excess inventory charges, which will decrease gross margin and net operating
results in the future. In addition, as a result of the downturn in demand for
its products, the Company has excess capacity in its manufacturing facilities.
The Company is not capitalizing any inventory costs related to this excess
capacity.. The application of this policy adversely affects its gross
margin.
 
 *Allowance
for doubtful accounts* The
Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. The
Company's allowance for doubtful accounts is based on its assessment of the
collectibility of specific customer accounts, the aging of accounts receivable,
its history of bad debts, and the general condition of the industry. If a major
customer's credit worthiness deteriorates, or its customers' actual defaults
exceed its historical experience, the Company's estimates could change and
impact its reported results.
 
 *Stock-based
compensation.* The
Company records stock-based compensation to outside consultants at a fair market
value in general and administrative expense. The Company does not record expense
relating to stock options granted to employees with an exercise price greater
than or equal to market price at the time of grant. The Company reports
pro-forma net loss and loss per share in accordance with the requirements of
SFAS 148. This disclosure shows net loss and loss per share as if the Company
has accounted for its employee stock options under the fair value method of
those statement. Pro-forma information is calculated using the Black-Scholes
pricing method at the date of the grant. This option valuation model requires
input of highly subjective assumptions. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumption can materially
affect the fair value estimate, in management's opinion, the existing model does
not necessarily provide a reliable single measure of fair value of its employee
stock options.
  **ITEM 3. CONTROLS AND PROCEDURES**
 
 *Evaluation
of Disclosure Controls and Procedures* . As of
May 31, 2005, our management carried out an evaluation, under the supervision of
our Chief Executive Officer and Chief Financial Officer of the effectiveness of
the design and operation of our system of disclosure controls and procedures
pursuant to the Securities and Exchange Act, Rule 13a-15(e) and 15d-15(e) under
the Exchange Act).  Based on that evaluation, our chief executive officer
and chief financial officer concluded that our disclosure controls and
procedures are effective to provide reasonable assurance that information we are
required to disclose in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms, and that such information
is accumulated and communicated to our management, including our chief executive
officer and chief financial officer, as appropriate, to allow timely decisions
regarding required disclosure.
 
 *Change
in Internal Controls* . There
were no changes in internal controls over financial reporting that occurred
during the period covered by this report that have materially affected, or are
reasonably likely to materially effect, our internal control over financial
reporting.
  19
  **PART
II**
 
 **OTHER
INFORMATION**
 
 **ITEM 1. LEGAL PROCEEDINGS**
 
 From time
to time, the Company may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm the Company's business. The
Company is currently not aware of any such legal proceedings or claims that the
Company believes will have, individually or in the aggregate, a material adverse
affect on its business, financial condition or operating results.
  **ITEM
2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES**
 
 None
 
 **ITEM 3. DEFAULTS UPON SENIOR
SECURITIES**
 
 The
Company is in default of its loan covenants with Laurus and has classified all
its senior debt as current. Laurus has cooperated with the Company and has
waived its principal payments on its senior debt for a period of six months
ending June 30, 2005 but will not waive the non-compliance with
covenants.
  **ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS**
 
 None.
 
 **ITEM 5. OTHER INFORMATION**
  None.
  **ITEM 6. EXHIBITS**
 
 31.1
    Certification
      of Principal Executive Officer pursuant to Rule 13a-14 and Rule15d-14(a),
      promulgated under the Securities and Exchange Act of 1934, as
      amended
  31.2
    Certification
      of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a),
      promulgated under the Securities and Exchange Act of 1934, as
      amended
 32.1
    Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section906
      of the Sarbanes-Oxley Act of 2002 (Chief Executive
      Officer)
 32.2
    Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
      of the Sarbanes-Oxley Act of 2002 (Chief Financial
      Officer)
 20
  **S I G N A T U R E S**
 
 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.


**VENTURES-NATIONAL INCORPORATED**July 14, 2005
    By:
    /s/ Curtis
  OkumuraCurtis OkumuraPresident and
CEO




****By:
    /s/ Daniel
  GuimondDaniel GuimondChief Financial
  Officer