UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q




QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934




For the
quarterly period ended March 31, 2010




TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934




Commission
file number: 0896898




U.S.
AEROSPACE, INC.


(Exact
name of registrant as specified in its charter)




Delaware
            0610345787(State
      or other jurisdiction of
              incorporation
      or organization)
            (I.R.S.
      Employer
              Identification
      Number)




9831
Romandel Ave.


Santa
Fe Springs, CA 90670


(Address
of principal executive offices)




(562)
906-8455


(Registrant’s
telephone number, including area code)




New
Century Companies, Inc.


(Former
name, former address and former fiscal year, if changed since last
report)




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 check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes   ̈    No  ̈




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).


Large
      accelerated filer
              Accelerated
      filerNon-accelerated
      filer
              Smaller
      reporting company x




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




As of May
7, 2010, the Company had 24,727,640 shares of common stock, $0.10 par value,
issued and outstanding.








U.S.
AEROSPACE, INC.





INDEX





Page No.PART
      I - FINANCIAL INFORMATIONItem
      1. Financial Statements
                    
                    F-1Condensed
      Consolidated Balance Sheets - March 31, 2010 (Unaudited) and December 31,
      2009
                    
                    F-1Condensed
      Consolidated Statements of Operations (Unaudited) -Three
      Months Ended March 31, 2010 and 2009
                    
                    F-2Condensed
      Consolidated Statements of Cash Flows (Unaudited) -Three
      Months Ended March 31, 2010 and 2009
                    
                    F-3Notes
      to Condensed Consolidated Financial Statements
                    
                    F-4Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
                    
                    4Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
                    
                    7Item
      4T. Controls and Procedures
                    
                    7PART
      II - OTHER INFORMATIONItem
      1. Legal Proceedings
                    
                    8Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds
                    
                    8Item
      3. Defaults Upon Senior Securities
                    
                    8Item
      5. Other Information
                    
                    9Item
      6. Exhibits
                    
                    9SIGNATURES
                    
                    10




2





Forward-Looking
Statements




This
Quarterly Report on Form 10-Q contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. For example, statements regarding the Company’s
financial position, business strategy and other plans and objectives for future
operations, and assumptions and predictions about future product demand, supply,
manufacturing, costs, marketing and pricing factors are all forward-looking
statements. These statements are generally accompanied by words such as
“intend,” anticipate,” “believe,” “estimate,” “potential(ly),” “continue,”
“forecast,” “predict,” “plan,” “may,” “will,” “could,” “would,” “should,”
“expect” or the negative of such terms or other comparable terminology. The
Company believes that the assumptions and expectations reflected in such
forward-looking statements are reasonable, based on information available to it
on the date hereof, but the Company cannot provide assurances that these
assumptions and expectations will prove to have been correct or that the Company
will take any action that the Company may presently be planning. However, these
forward-looking statements are inherently subject to known and unknown risks and
uncertainties. Actual results or experience may differ materially from those
expected or anticipated in the forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to,
regulatory policies, available cash, research results, competition from other
similar businesses, and market and general economic factors. This discussion
should be read in conjunction with the condensed consolidated financial
statements and notes thereto included in Item 1 of this Quarterly Report on
Form 10-Q.


3


Part
I - Financial Information





ITEM
1.  FINANCIAL STATEMENTS





U.S.
AEROSPACE, INC.  AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


March
31, 2010 and December 31, 2009





(Unaudited)March
      31,
                                    
                                    
                                    December
      31,2010
                                    
                                    
                                    2009ASSETSCurrent
      AssetsCash
                                    
                                    $
                                    7,205
                                    
                                    
                                    $
                                    157,633Accounts
      receivable
                                    
                                    
                                    132,088
                                    
                                    
                                    
                                    71,120Loan
      receivable from employees
                                    
                                    
                                    63,050
                                    
                                    
                                    
                                    -Inventories
                                    
                                    
                                    301,066
                                    
                                    
                                    
                                    284,339Costs
      and estimated earnings in excess of billings on uncompleted
      contracts
                                    
                                    
                                    15,132
                                    
                                    
                                    
                                    5,725Deferred
      financing costs, current portion
                                    
                                    
                                    93,392
                                    
                                    
                                    
                                    150,251Prepaid
      expenses and other current assets
                                    
                                    
                                    341,087
                                    
                                    
                                    
                                    7,738Total
      current assets
                                    
                                    
                                    953,020
                                    
                                    
                                    
                                    676,806Property
      and equipment, net
                                    
                                    
                                    1,103,776
                                    
                                    
                                    
                                    716,864Goodwill
                                    
                                    
                                    2,401,342
                                    
                                    
                                    
                                    2,359,121Other
      intangible assets, net
                                    
                                    
                                    1,392,857
                                    
                                    
                                    
                                    1,446,429Deferred
      financing costs, long-term portion
                                    
                                    
                                    87,943
                                    
                                    
                                    
                                    92,338Other
      assets
                                    
                                    
                                    151,790
                                    
                                    
                                    
                                    151,790Total
      Assets
                                    
                                    $
                                    6,090,728
                                    
                                    
                                    $
                                    5,443,348LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      LiabilitiesBank
      overdraft
                                    
                                    $
                                    9,195
                                    
                                    
                                    $
                                    7,515Accounts
      payable and accrued liabilities
                                    
                                    
                                    4,205,828
                                    
                                    
                                    
                                    3,856,316Derivative
      liability
                                    
                                    
                                    -
                                    
                                    
                                    
                                    48,378Dividends
      payable
                                    
                                    
                                    204,600
                                    
                                    
                                    
                                    204,600Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
                                    
                                    
                                    157,953
                                    
                                    
                                    
                                    149,849Capital
      lease obligations
                                    
                                    
                                    953,843
                                    
                                    
                                    
                                    752,957Loan
      payable and accrued interest, net of discount of $0 at March 31,
      2010
                                    
                                    
                                    164,566
                                    
                                    
                                    
                                    145,563and
      $10,003 at December 31, 2009Notes
      payable and accrued interest
                                    
                                    
                                    87,148
                                    
                                    
                                    
                                    115,544Notes
      payable to related parties and accrued interest
                                    
                                    
                                    594,743
                                    
                                    
                                    
                                    545,356Convertible
      notes payable and accrued interest , net of discounts of $1,056,786
      atMarch
      31, 2010 and $1,350,164 at December 31, 2009
                                    
                                    
                                    5,156,754
                                    
                                    
                                    
                                    4,341,613Total
      Liabilities
                                    
                                    
                                    11,534,630
                                    
                                    
                                    
                                    10,167,691Commitments
      and ContingenciesStockholders'
      DeficitCumulative,
      convertible, Series B preferred stock, $1 par value,15,000,000
      shares authorized, no shares issued and outstanding(liquidation
      preference of $25 per share)
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Cumulative,
      convertible, Series C preferred stock, $1 par value,75,000
      shares authorized, 26,880 shares issued and outstanding(liquidation
      preference of $672,000 at March 31, 2010 and December 31,
      2009)
                                    
                                    
                                    26,880
                                    
                                    
                                    
                                    26,880Cumulative,
      convertible, Series D preferred stock, $25 par value,75,000
      shares authorized, 11,640 shares issued and outstanding(liquidation
      preference of $495,600 at March 31, 2010 and December 31,
      2009)
                                    
                                    
                                    291,000
                                    
                                    
                                    
                                    291,000Common
      stock, $0.10 par value, 250,000,000 shares authorized;23,991,640  shares
      issued and outstandingat
      March 31, 2010 and 22,430,211 at December 31, 2009
                                    
                                    
                                    2,399,165
                                    
                                    
                                    
                                    2,243,022Deferred
      equity compensation
                                    
                                    
                                    (11,669
                                    )
                                    
                                    
                                    (29,169
                                    )Notes
      receivable from stockholders
                                    
                                    
                                    (584,691
                                    )
                                    
                                    
                                    (584,691
                                    )Additional
      paid-in capital
                                    
                                    
                                    21,068,514
                                    
                                    
                                    
                                    20,167,283Accumulated
      deficit
                                    
                                    
                                    (28,633,101
                                    )
                                    
                                    
                                    (26,838,668
                                    )Total
      Stockholders' Deficit
                                    
                                    
                                    (5,443,902
                                    )
                                    
                                    
                                    (4,724,343
                                    )Total
      Liabilities and Stockholders' Deficit
                                    
                                    $
                                    6,090,728
                                    
                                    
                                    $
                                    5,443,348




See
accompanying notes to the condensed consolidated financial
statements.


F-1





U.S. AEROSPACE, INC.  AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


For
the Three Months Ended March 31, 2010 and 2009


(Unaudited)




For the Three Months Ended March 31,2010
                
                
                2009Net
      revenues
                
                $
                557,690
                
                
                $
                1,054,702Cost
      of sales
                
                
                692,648
                
                
                
                818,893Gross
      (loss) profit
                
                
                (134,958
                )
                
                
                235,809Operating
      expenses:Consulting
      and other compensation
                
                
                198,348
                
                
                
                62,615Salaries
      and related
                
                
                274,016
                
                
                
                153,087Selling,
      general and administrative
                
                
                398,738
                
                
                
                232,021Total
      operating expenses
                
                
                871,102
                
                
                
                447,723Operating
      loss
                
                
                (1,006,060
                )
                
                
                (211,914
                )Other
      income (expenses), net:Gain
      on write-off of accounts payable
                
                
                5,332
                
                
                
                5,681Gain
      on disposal of assets
                
                
                190,754
                
                
                
                -Loss
      on valuation of derivative liabilities
                
                
                (11,253
                )
                
                
                (1,800,978
                )Interest
      expense
                
                
                (973,206
                )
                
                
                (668,395
                )Total
      other expenses, net
                
                
                (788,373
                )
                
                
                (2,463,692
                )Net
      loss
                
                $
                (1,794,433
                )
                
                $
                (2,675,606
                )Basic
      and diluted net loss per common share
                
                $
                (0.08
                )
                
                $
                (0.17
                )Basic
      and diluted weighted average common shares outstanding
                
                
                23,536,005
                
                
                
                15,344,654




See
accompanying notes to the condensed consolidated financial
statements.




F-2





U.S.
AEROSPACE, INC.  AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


For
the Three Months Ended March 31, 2010 and 2009


(Unaudited)




For the Three Months Ended March 31,2010
                    
                    
                    2009Cash
      flows from operating activities:Net
      loss
                    
                    $
                    (1,794,433
                    )
                    
                    $
                    (2,675,606
                    )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                    
                    
                    146,148
                    
                    
                    
                    14,030Gain
      on write-off of accounts payable
                    
                    
                    (5,332
                    )
                    
                    
                    (5,681
                    )Gain
      on disposal of assets
                    
                    
                    (190,754
                    )
                    
                    
                    -Amortization
      of deferred financing costs
                    
                    
                    61,254
                    
                    
                    
                    116,271Amortization
      of stock-based consulting fees
                    
                    
                    104,999
                    
                    
                    
                    20,000Amortization
      of debt discount
                    
                    
                    708,381
                    
                    
                    
                    508,044Estmated
      fair value of common stock issued for services
                    
                    
                    147,143
                    
                    
                    
                    -Loss on
      valuation of  derivative liabilities
                    
                    
                    11,253
                    
                    
                    
                    1,800,978Changes
      in operating assets and liabilities:Accounts
      receivable
                    
                    
                    (60,968
                    )
                    
                    
                    (96,604
                    )Loan
      receivable from employees
                    
                    
                    (63,050
                    )
                    
                    
                    -Inventories
                    
                    
                    (16,727
                    )
                    
                    
                    151,133Costs
      and estimated earnings in excess of billings on uncompleted
      contracts
                    
                    
                    (9,407
                    )
                    
                    
                    314,636Prepaid
      expenses and other current assets
                    
                    
                    (848
                    )
                    
                    
                    2,735Accounts
      payable, accrued liabilities and accrued interest
                    
                    
                    550,653
                    
                    
                    
                    157,388Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
                    
                    
                    8,104
                    
                    
                    
                    (781,287
                    )Net
      cash used in operating activities
                    
                    
                    (403,584
                    )
                    
                    
                    (473,963
                    )Cash
      flows from financing activities:Bank
      overdraft
                    
                    
                    1,680
                    
                    
                    
                    16,823Proceeds
      from issuance of convertible notes payable, net
                    
                    
                    350,000
                    
                    
                    
                    700,000Principal
      payments on notes payable to related parties
                    
                    
                    (1,000
                    )
                    
                    
                    -Proceeds
      from issuance of notes payable to related parties
                    
                    
                    44,138
                    
                    
                    
                    -Principal
      payments on notes payable and capital leases
                    
                    
                    (141,662
                    )
                    
                    
                    (6,654
                    )Net
      cash provided by financing activities
                    
                    
                    253,156
                    
                    
                    
                    710,169Net
      (decrease) increase  in cash
                    
                    
                    (150,428
                    )
                    
                    
                    236,206Cash
      at beginning of period
                    
                    
                    157,633
                    
                    
                    
                    31,889Cash
      at end of period
                    
                    $
                    7,205
                    
                    
                    $
                    268,095Supplemental
      schedule of cash flow information:Interest
      paid
                    
                    $
                    14,915
                    
                    
                    $
                    -Supplemental
      disclosure of non-cash financing and investing activities:Debt
      discount recorded on convertible notes payable
                    
                    $
                    405,000
                    
                    
                    $
                    479,752Conversion
      of convertible notes payable
                    
                    $
                    25,600
                    
                    
                    $
                    -Purchase
      of property and equipment through capital lease
                    
                    $
                    479,488
                    
                    
                    $
                    -Payment
      of accounts payable with proceeds from convertible notes
      payable
                    
                    $
                    55,000
                    
                    
                    $
                    -Estimated
      fair value of warrants issued in connection with consulting service
      agreement
                    
                    $
                    420,000
                    
                    
                    $
                    -Reclassification
      of the estimated fair value of warrants from derivative liabilities
      to additional paid-in capital
                    
                    $
                    59,631
                    
                    
                    $
                    -Addition
      to goodwill for adjustment in net liabilities assumed in
      acquisition
                    
                    $
                    42,221
                    
                    
                    $
                    -




See
accompanying notes to the condensed consolidated financial
statements.


F-3





U.S.
AEROSPACE, INC.  AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009




1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




Organization
And Nature Of Operations




On April
26, 2010 New Century Companies, Inc., a Delaware corporation (“New Century”),
changed its name to U.S. Aerospace, Inc. (“U.S. Aerospace” or the “Company”).
The Company was incorporated in Delaware on August 1, 1980. Its wholly owned
subsidiary, New Century Remanufacturing Inc., a California corporation, was
incorporated in March 1996 and is located in Southern California. On October 9,
2009, New Century entered into a share exchange agreement with Precision
Aerostructures, Inc. (“PAI”) pursuant to which the sole shareholder of PAI
agreed to transfer all capital stock of PAI to New Century (see Note
3).  Collectively, U. S. Aerospace and its wholly owned subsidiaries
are referred to as the “Company”. The Company is engaged in the
production of aircraft assemblies, structural components, and highly engineered,
precision machined details for the United States Department of Defense, United
States Air Force, Lockheed Martin Corporation, The Boeing Company, L-3
Communications Holdings, Inc., the Middle River Aircraft Systems subsidiary of
General Electric Company, and other aircraft manufacturers, aerospace companies,
and defense contractors. The Company also provides after-market services,
including rebuilding, retrofitting and remanufacturing of metal cutting
machinery.  Once completed, a remanufactured machine is “like new”
with state-of-the-art computers and the cost to the Company’s customer is
substantially less than the price of a new machine.





The
Company trades on the OTC Bulletin Board under the symbol
"USAE.OB".





Principles
Of Consolidation




The
condensed consolidated financial statements include the accounts of U.S.
Aerospace and its wholly owned subsidiaries, New Century Remanufacturing, Inc.
and PAI.  All significant intercompany accounts and transactions have
been eliminated in consolidation.





Segments
of an Enterprise and Related Information





The
Company has adopted the authoritative guidance for disclosures about segments of
an enterprise and related information. The guidance requires the Company to
report information about segments of its business in annual financial statements
and requires it to report selected segment information in its quarterly reports
issued to stockholders.  The guidance also requires entity-wide
disclosures about the products and services an entity provides, the material
countries in which it holds assets and reports revenues and its major customers.
The Company’s two reportable segments are managed separately based on
fundamental differences in their operations.  At March 31, 2010, the
Company operated in the following two reportable segments (see Note
10):





(a) CNC
machine tool remanufacturing and


(b)
Multiaxis structural aircraft components.





The
Company evaluates performance and allocates resources based upon operating
income. The accounting policies of the reportable segments are the same as those
described in this summary of significant accounting
policies.


F-4




Basis
Of Presentation





The
accompanying unaudited condensed consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the United
States Securities and Exchange Commission (the "SEC"). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America (“GAAP”) have been omitted pursuant to such SEC rules and regulations;
nevertheless, the Company believes that the disclosures are adequate to make the
information presented not misleading. These financial statements and the notes
hereto should be read in conjunction with the financial statements, accounting
policies and notes thereto included in the Company's Annual Report on Form 10-K
for the year ended December 31, 2009, filed with the SEC. In the opinion of
management, all adjustments necessary to present fairly, in accordance with
GAAP, the Company's consolidated financial position as of March 31, 2010, and
the consolidated results of operations and cash flows for the interim periods
presented, have been made.  Such adjustments consist only of normal
recurring adjustments.  The results of operations for the three months
ended March 31, 2010 are not necessarily indicative of the results for the full
year ending December 31, 2010. Amounts related to disclosure of
December 31, 2009 balances within these interim condensed consolidated
financial statements were derived from the audited 2009 consolidated financial
statements and notes thereto.




Going
Concern





The
accompanying condensed consolidated financial statements have been prepared
assuming the Company will continue as a going concern, which contemplates, among
other things, the realization of assets and satisfaction of liabilities in the
normal course of business. As of and the for the three months ended March 31,
2010, the Company has a net loss of approximately $1,794,000, an accumulated
deficit of approximately $28,633,000, working capital deficit of approximately
$10,582,000 and was in default on several notes payable (see Note 6) and had
events of default on its CAMOFI and CAMHZN debt (see Note
5).   These factors raise substantial doubt about the Company's
ability to continue as a going concern. The Company intends to fund operations
through anticipated increased sales which management believes may be
insufficient to fund its capital expenditures, working capital and other cash
requirements for the year ending December 31, 2010. Therefore, the Company will
be required to seek additional funds to finance its long-term operations in the
form of debt and equity financing which the Company believes is available to
it.  The successful outcome of future activities cannot be determined
at this time and there is no assurance that if achieved, the Company will have
sufficient funds to execute its intended business plan or generate positive
operating results.




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




·
            continued its aggressive program
      for selling its products;




·
            continued to implement plans to
      further reduce operating costs;
and




·
            is seeking investment capital
      through the public and private
markets.




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




Reclassifications




The
Company has reclassified the presentation of prior-year information to conform
to the current period presentation.


F-5





Inventories




Inventories
are stated at the lower of cost or net realizable value. Cost is determined
under the first-in, first-out method. Inventories represent cost of work in
process on units not yet under contract. Cost includes all direct material and
labor, machinery, subcontractors and allocations of indirect overhead. At each
balance sheet date, the Company evaluates its ending inventories for excess
quantities and obsolescence. Among other factors, the Company considers
historical demand and forecasted demand in relation to the inventory on hand and
market conditions when determining obsolescence and net realizable value.
Provisions are made to reduce excess or obsolete inventories to their estimated
net realizable values. Once established, write-downs are considered permanent
adjustments to the cost basis of the excess or obsolete inventories. As of March
31, 2010, inventories consist of $167,206 of work-in-process and $133,860 of
finished goods.





Revenue
Recognition





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





For
contracts, the amount of revenue recognized at the consolidated financial
statement date is the portion of the total contract price that the cost expended
to date bears to the anticipated final cost, based on current estimates of cost
to complete. Contract costs include all materials, direct labor, machinery,
subcontract costs and allocations of indirect overhead.





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





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





For
revenues from stock inventory, the Company follows U.S accounting standards,
which outline the basic criteria that must be met to recognize revenue other
than revenue on contracts, and provides guidance for presentation of this
revenue and for disclosure related to these revenue recognition policies in
financial statements filed with the SEC. The Company recognizes revenue from
stock inventory when persuasive evidence of an arrangement exists, title
transfer has occurred, or services have been performed, the price is fixed or
readily determinable and collectibility is probable.





The
Company accounts for shipping and handling fees and costs in accordance with
U.S. accounting standards. Shipping and handling fees and costs incurred by the
Company are immaterial to the operations of the Company and are included in cost
of sales.





In
accordance with U.S. accounting standards, revenue is recorded net of an
estimate for markdowns and price concessions. Such reserve is based on
management's evaluation of historical experience, current industry trends and
estimated costs. As of March 31, 2010, the Company estimated the markdowns and
price concessions and concluded amounts are immaterial and did not record any
adjustment to revenues.


F-6


Use
of Estimates





The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the condensed consolidated financial statements, and the reported amounts of
revenues and expenses during the reporting periods. Significant estimates made
by management are, among others, deferred tax asset valuation allowances,
realization of inventories, collectibility of receivables, recoverability of
long-lived assets, accrued warranty costs, payroll and income tax penalties, the
valuation of conversion options, stock options and warrants and the estimation
of costs for long-term construction contracts. Actual results could differ from
those estimates.





Warranty





The Company provides a warranty on
certain products sold. Estimated future warranty obligations related to certain
products and services are provided by charges to operations in the period in
which the related revenue is recognized. At March 31, 2010 and December 31,
2009, the warranty obligation balance was approximately $136,000 and $137,000,
respectively. Amounts charged to warranty expense in the accompanying condensed
consolidated statements of operations was approximately $3,000 and $0 for the
three months ended March 31, 2010 and 2009, respectively.





Concentration
of Credit Risks





Cash is
maintained at various financial institutions. The Federal Deposit Insurance
Corporation (“FDIC”) insures accounts at each financial institution for up to
$250,000. At times, cash may be in excess of the FDIC insured limit. The Company
did not have any uninsured bank balances at March 31, 2010 and December 31,
2009. The Company has not experienced any losses in such accounts and believes
it is not exposed to any significant credit risks on cash.





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





The
Company maintains an allowance for doubtful accounts for balances that appear to
have specific collection issues. The collection process is based on the age of
the invoice and requires attempted contacts with the customer at specified
intervals. If, after a specified number of days, the Company has been
unsuccessful in its collection efforts, a bad debt allowance is recorded for the
balance in question. Delinquent accounts receivable are charged against the
allowance for doubtful accounts once uncollectibility has been determined. The
factors considered in reaching this determination are the apparent financial
condition of the customer and the Company’s success in contacting and
negotiating with the customer. If the financial condition of the Company’s
customers were to deteriorate, resulting in an impairment of ability to make
payments, additional allowances may be required.





Management
reviews the collectibility of receivables periodically and believes that the
allowance for doubtful accounts for the period ended March 31, 2010 and the year
ended December 31, 2009 is adequate. There was no allowance for doubtful
accounts at March 31, 2010 and December 31, 2009.





During
the three months ended March 31, 2010, sales to one customer approximated 55% of
net revenues. Further, there was one customer that accounted for approximately
80% of accounts receivable at March 31, 2010.





During
the three months ended March 31, 2009, sales to two customers accounted for
approximately 46% of net revenues.


F-7





Basic
And Diluted Loss Per Common Share





Basic net
loss per share is computed by dividing net loss by the weighted average number
of common shares outstanding for the period. Diluted net loss per share is
computed by dividing net loss by the weighted average number of common shares
and dilutive common stock equivalents outstanding for each respective
year.





Common
stock equivalents, representing convertible Preferred Stock, convertible debt,
options and warrants totaling approximately 150,968,000 and 61,821,000 for March
31, 2010 and 2009, respectively, are not included in the computation of diluted
loss per share as they would be anti-dilutive.





Stock
Based Compensation





The
Company uses the fair value method of accounting for employee stock compensation
cost. Share-based compensation cost is measured at the grant date based on the
fair value of the award and is recognized as expense on a straight-line basis
over the requisite service period, which is the vesting period.  For
the three months ended March 31, 2010 and 2009, no employee share-based
compensation expense was recognized in the accompanying condensed consolidated
statements of operations.





From time
to time, the Company's Board of Directors grants common share purchase options
or warrants to selected directors, officers, employees, consultants and advisors
in payment of goods or services provided by such persons on a stand-alone basis
outside of any of the Company's formal stock plans. The terms of these grants
are individually negotiated and generally expire within five years from the
grant date.





Under the
terms of the Company's 2000 Stock Option Plan, options to purchase an aggregate
of 5,000,000 shares of common stock may be issued to officers, key employees and
consultants of the Company. The exercise price of any option generally may not
be less than the fair market value of the shares on the date of grant. The term
of each option generally may not be more than five years.




In
accordance with U.S. accounting standards, the Company’s policy is to adjust
share-based compensation on a quarterly basis for changes to the estimate of
expected award forfeitures based on actual forfeiture experience.





The fair
value of stock-based awards to employees and directors is calculated using the
Black-Scholes option pricing model, even though the model was developed to
estimate the fair value of freely tradable, fully transferable options without
vesting restriction, which differ significantly from the Company's stock
options. The Black-Scholes model also requires subjective assumptions regarding
future stock price volatility and expected time to exercise, which greatly
affect the calculated values. The expected term of options granted is derived
from historical data on employee exercises and post-vesting employment
termination behavior. The risk-free rate selected to value any particular grant
is based on the U.S. Treasury rate that corresponds to the pricing term of the
grant effective as of the date of the grant. The expected volatility is based on
the historical volatility of the Company’s common stock. These factors could
change in the future, affecting the determination of stock-based compensation
expense in future periods.





There
were no options granted, exercised or cancelled during the three months ended
March 31, 2010.   There were 1,700,000 shares available for grant at
March 31, 2010.


F-8




All
options outstanding have vested as of March 31, 2010 and are as
follows:





WeightedWeighted
                  
                  
                  AverageAverage
                  
                  
                  Remaining
                  
                  
                  AggregateNumber of
                  
                  
                  Exercise
                  
                  
                  Contractual
                  
                  
                  IntrinsicShares
                  
                  
                  Price
                  
                  
                  Term in Years
                  
                  
                  Value (1)Vested
                  
                  
                  7,400,000
                  
                  
                  $
                  0.12
                  
                  
                  
                  1.82
                  
                  
                  $
                  134,000




(1)
            Represents
      the approximate difference between the exercise price and the closing
      market price of the Company's common stock at the end of the reporting
      period (as of March 31, 2010 the market price of the Company's common
      stock was $0.12).





The
Company accounts for transactions involving services provided by third parties
where the Company issues equity instruments as part of the total consideration
using the fair value of the consideration received (i.e. the value of the goods
or services) or the fair value of the equity instruments issued, whichever is
more reliably measurable. In transactions when the value of the goods and/or
services are not readily determinable, the fair value of the equity instruments
is more reliably measurable and the counterparty receives equity instruments in
full or partial settlement of the transactions, the Company uses the following
methodology:





a) For
transactions where goods have already been delivered or services rendered, the
equity instruments are issued on or about the date the performance is complete
(and valued on the date of issuance).





b) For
transactions where the instruments are issued on a fully vested, non-forfeitable
basis, the equity instruments are valued on or about the date of the
contract.





c) For
any transactions not meeting the criteria in (a) or (b) above, the Company
re-measures the consideration at each reporting date based on its then current
stock value.





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





Deferred
Financing Costs




Direct
costs of securing debt financing are capitalized and amortized over the term of
the related debt. When a loan is paid in full, any unamortized financing costs
are removed from the related accounts and charged to operations. During the
three months ended March 31, 2010 and 2009, the Company amortized approximately
$61,000 and $116,000, respectively, of deferred financing costs to interest
expense in the accompanying condensed consolidated statements of
operations.





Fair
Value Measurements





U.S.
accounting standards require disclosure of a fair-value hierarchy of inputs the
Company uses to value an asset or a liability. The three levels of the
fair-value hierarchy are described as follows:





Level 1:
Quoted prices (unadjusted) in active markets for identical assets and
liabilities. For the Company, Level 1 inputs include quoted prices on the
Company’s securities that are actively traded.


F-9





Level 2:
Inputs other than Level 1 that are observable, either directly or indirectly.
For the Company, Level 2 inputs include assumptions such as estimated life, risk
free rate and volatility estimates used in determining the fair values of the
Company’s option and warrant securities issued.





Level 3:
Unobservable inputs for the asset or liability. Level 3 inputs may be required
for the determination of fair value associated with certain nonrecurring
measurements of nonfinancial assets and liabilities. The Company does not
currently present any nonfinancial assets or liabilities at fair
value.





Determining
which category an asset or liability falls within the hierarchy requires
significant judgment. The Company evaluates its hierarchy disclosures each
quarter.





The
Company has no assets or liabilities that are measured at fair value on a
recurring basis as of March 31, 2010. There were no assets or liabilities
measured at fair value on a non-recurring basis during the period ended March
31, 2010.





Accounting
for Derivative Instruments





In
connection with the issuance of certain convertible notes payable (see Note 5),
the notes had conversion features that the Company determined were embedded
derivative instruments. The Company issued warrants in connection with a loan
payable (see Note 6) that had an anti-dilution provision which caused the
warrants to be a derivative instrument.  The accounting treatment of
derivative financial instruments requires that the Company record the
derivatives and related warrants at their fair values as of the inception date
of the note and warrant agreements and at fair value as of each subsequent
balance sheet date.





For all
of the derivative instruments, any change in fair value is recorded as
non-operating, non-cash income or expense at each balance sheet date. If the
fair value of the derivatives was higher at the subsequent balance sheet date,
the Company recorded a non-operating, non-cash charge. If the fair value of the
derivatives was lower at the subsequent balance sheet date, the Company recorded
non-operating, non-cash income.





As
discussed in Note 5, effective December 31, 2009, CAMOFI and CAMHZN removed the
variability of the conversion feature of their notes, fixing the conversion
price at the then conversion price of $0.04 per share.  In addition,
CAMOFI and CAMHZN also removed the variability of the exercise price of their
outstanding warrants.  As a result, the fair values of the variable
conversion feature ($11,190,904) of the notes and the related warrants
($747,381) were reclassified to additional paid-in capital on December 31,
2009.





As
discussed in Note 6, effective January 31, 2010, the variability feature of the
exercise price of the outstanding warrants issued to Micro Pipe were
removed.  As a result, the fair value of the warrants of $59,631 was
reclassified to additional paid-in capital on January 31, 2010.





During
the periods ended March 31, 2010 and 2009, the Company recognized other expense
of $11,253 and $1,800,978, respectively, related to recording derivative
liabilities at fair value.  At March 31, 2010 and December 31, 2009,
the derivative liability balance was $0 and $48,378,
respectively.


F-10





Warrant-related
derivatives were valued using the Black-Scholes Option Pricing Model with the
following assumptions during the period ended March 31, 2010: dividend yield of
0%; volatility of 204% and a risk free interest rate of 2.34%.





The
following table summarizes the activity related to the derivative liability
during the period ended March 31, 2010:




Derivative
      liability – December 31, 2009
                  
                  $
                  48,378Derivative
      liability reduced for reclassification of warrants to
    equity
                  
                  
                  (59,631
                  )Change
      in fair value of derivative liability
                  
                  
                  11,253Total
      derivative liability – March 31, 2010
                  
                  $
                  -




Accounting
for Debt Issued with Detachable Stock Purchase Warrants and Beneficial
Conversion Features





The
Company accounts for debt issued with stock purchase warrants by allocating the
proceeds of the debt between the debt and the detachable warrants based on the
relative fair values of the debt security without the warrants and the warrants
themselves, if the warrants are equity instruments. The relative fair value
of the warrants are recorded as a debt discount and amortized to expense over
the life of the related debt using the effective interest method which
approximates the straight-line amortization method. At each balance sheet date,
the Company makes a determination if these warrant instruments should be
classified as liabilities or equity, and reclassify them if the circumstances
dictate.





In
certain instances, the Company enters into convertible notes that provide for an
effective or actual rate of conversion that is below market value, and the
embedded conversion feature does not qualify for derivative treatment (a
“BCF”).  In these instances, we account for the value of the BCF as a
debt discount, which is then amortized to expense over the life of the related
debt using the effective interest method which approximates the straight-line
amortization method (see Note 5).





Subsequent
Events





The
Company has evaluated subsequent events through the filing date of this
quarterly report on Form 10-Q, and determined that no subsequent events have
occurred that would require recognition in the condensed consolidated financial
statements or disclosure in the notes thereto other than as disclosed in the
accompanying notes.





Significant
Recent Accounting Pronouncements





In
January 2010, the Financial Accounting Standards Board (“FASB”) issued an update
to its accounting guidance regarding fair value measurement and disclosure. The
guidance affects the disclosures made about recurring and non-recurring fair
value measurements. This guidance is effective for annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances and settlements in the roll forward of activity in Level 3 fair
value measurements. Those disclosures are effective for fiscal years beginning
after December 15, 2010. Early adoption is permitted. The Company is currently
evaluating the impact that this guidance will have on its condensed consolidated
financial statements.





Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not or are not believed by
management to have a material impact on the Company’s present or future
consolidated financial statements.


F-11





2.
CONTRACTS IN PROGRESS





Contracts
in progress which include completed contracts not completely billed approximate
the following as of March 31, 2010 and December 31, 2009:





(Unaudited)March 31, 2010
                      
                      
                      December 31, 2009Cumulative
      costs to date
                      
                      $
                      573,000
                      
                      
                      $
                      3,166,000Cumulative
      gross profit to date
                      
                      
                      279,000
                      
                      
                      
                      2,611,000Cumulative
      revenue earned
                      
                      
                      852,000
                      
                      
                      
                      5,777,000Less
      progress billings to date
                      
                      
                      (995,000
                      )
                      
                      
                      (5,921,000
                      )Net
      over billings
                      
                      $
                      (143,000
                      )
                      
                      $
                      (144,000
                      )





The
following approximate amounts are included in the accompanying condensed
consolidated balance sheets under these captions:





(Unaudited)March 31, 2010
                    
                    
                    December 31, 2009Costs
      and estimated earnings in excess of billings on uncompleted
      contracts
                    
                    $
                    15,000
                    
                    
                    $
                    6,000Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
                    
                    
                    (158,000
                    )
                    
                    
                    (150,000
                    )Net
      over billings
                    
                    $
                    (143,000
                    )
                    
                    $
                    (144,000
                    )




3.
ACQUISITION OF PRECISION AEROSTRUCTURES, INC.





On
October 9, 2009, the Company entered into a Share Exchange Agreement (the “Share
Exchange Agreement”) with PAI and Michael Cabral (“Cabral”) pursuant to which
Cabral, as the sole shareholder of PAI, agreed to transfer to the Company, and
the Company agreed to acquire from Cabral, all of the capital stock of PAI (the
“PAI Shares”) in exchange for 5,000,000 shares of the Company’s common stock
(the “NCCI shares”) with an acquisition-date fair value of $900,000 and the
delivery of a promissory note of the Company (the “Note”) in the principal
amount of $500,000 payable from the proceeds of any equity financing with gross
proceeds of at least $2,000,000 provided that the investors in such financing
permit the proceeds thereof  to be used for such purpose (see Note
8).





Additionally,
at such time (the “Vesting Date”) as the cumulative net income of PAI is at
least $3,000,000 for the period commencing on January 1, 2010 and ending on
October 9, 2012 the Company will issue to Cabral warrants (“Warrants”) to
purchase 3,000,000 shares of Company common stock.  The Warrants will
be for a term of the earlier of three years from the Vesting Date or January 1,
2014, and shall have an exercise price of $0.10 per share.  The
Warrant vests immediately on the Vesting Date and the estimated acquisition-date
fair value of the Warrants was $540,000 (based on the Black-Scholes option
pricing model).





The
Company acquired PAI to position itself for growth in the aerospace business,
which is projected to grow at a 5% compounded annual rate for the next 20
years.  PAI complements the Company’s machining capabilities in an
industry that shows more growth in comparison to machine tooling.





The terms
of the purchase were the result of arms-length negotiations.  There is no
material relationship between the Company, on the one hand, and PAI or Cabral,
on the other hand.


F-12





The pro
forma combined historical results, as if PAI had been acquired as of January 1,
2009, are estimated as follows (unaudited):





Three Months
                        EndedMarch 31, 2009Net
      revenues
                      
                      $
                      1,188,097Net
      loss
                      
                      $
                      (2,981,071
                      )Weighted
      average common share outstanding:Basic
      and diluted
                      
                      
                      20,344,654Loss
      per share:Basic
      and diluted
                      
                      $
                      (0.15
                      )




The pro
forma information has been prepared for comparative purposes only and does not
purport to be indicative of what would have occurred had the acquisition
actually been made at such date, nor is it necessarily indicative of future
operating results.





4. 
GOODWILL AND OTHER INTANGIBLE ASSETS




Goodwill
represents the excess of acquisition cost over the net assets acquired in a
business combination and is not amortized.  The Company allocates its
goodwill to its various reporting units, determines the carrying value of those
businesses, and estimates the fair value of the reporting units so that a
two-step goodwill impairment test can be performed.  In the first step of
the goodwill impairment test, the fair value of each reporting unit is compared
to its carrying value.  Management reviews, on an annual basis, the
carrying value of goodwill in order to determine whether impairment has
occurred.  Impairment is based on several factors including the Company's
projection of future undiscounted operating cash flows. If an impairment of the
carrying value were to be indicated by this review, the Company would perform
the second step of the goodwill impairment test in order to determine the amount
of goodwill impairment, if any.




The
changes in the carrying amount of goodwill for the period ended March 31, 2010
are as follows:




Balance,
      December 31, 2009
                  
                  $
                  2,359,121Addition
      of goodwill for adjustment to net liabilities assumed in
      acquisition
                  
                  
                  42,221Balance,
      March 31, 2010
                  
                  $
                  2,401,342




The
Company recorded a purchase price adjustment to goodwill of $42,221 related to
the balance of capital lease obligations assumed upon acquisition.





Identifiable
intangibles acquired in connection with business acquisitions are recorded at
their respective fair values.  Deferred income taxes have been recorded to
the extent of differences between the fair value and the tax basis of the assets
acquired and liabilities assumed.




Other
intangible assets consist of the following as of March 31,
2010:




Estimated
                          Useful Life (Years)
                        
                        Gross Carrying
                          Amount
                        
                        
                        Accumulated
                          Amortization
                        
                        
                        Net Carrying
                          AmountCustomer
      relationships
                        
                        Seven
                        
                        $
                        1,500,000
                        
                        
                        $
                        (107,143
                        )
                        
                        $
                        1,392,857




Amortization
of other intangible assets was $53,572 and $0 for the three months ended March
31, 2010 and 2009.  During the three months ended March 31, 2010, the
Company did not acquire or dispose of any intangible assets.


Other intangible assets consist of the
following as of December 31, 2009:


F-13





Estimated
                          Useful Life (Years)
                        
                        Gross Carrying
                          Amount
                        
                        
                        Accumulated
                          Amortization
                        
                        
                        Net Carrying
                          AmountCustomer
      relationships
                        
                        Seven
                        
                        $
                        1,500,000
                        
                        
                        $
                        (53,571
                        )
                        
                        $
                        1,446,429





5.
CONVERTIBLE NOTES PAYABLE





CAMOFI
AND CAMHZN 12% AND 15% Senior Secured Convertible Debt




The
Company entered into various convertible debt financings with CAMOFI Master LDC
(“CAMOFI”) and CAMHZN Master LDC (“CAMZHN”) prior to January 1, 2009 under the
Amended 12% CAMOFI Convertible Note (“Amended 12% CAMOFI Note) and 15% CAMHZN
Convertible Note (“15% CAMHZN Note”) (collectively, the “Notes”).  As
of December 31, 2008, the amounts due under the Notes to CAMOFI and CAMHZN were
$2,834,281 and $750,000, respectively.  In connection with the Notes,
the Company issued warrants and stock to CAMOFI and warrants to
CAMHZN.  The debt discounts as of December 31, 2008 related to the
Notes, which includes amounts for the conversion options, warrants and stock, to
CAMOFI and CAMHZN were $2,089,443 and $350,090, respectively.  The
debt discounts as of December 31, 2009 related to the amounts borrowed prior to
2009 from CAMOFI and CAMHZN were $753,619 and $127,128,
respectively.  The debt discounts as of March 31, 2010 related to the
amounts borrowed prior to 2009 from CAMOFI and CAMHZN were $416,390 and $71,202,
respectively.





In
addition, the conversion option of the Notes and the warrants issued to CAMOFI
and CAMHZN contained an anti-dilution feature, which caused these instruments to
be accounted for as derivative liabilities.  The derivative
liabilities were accounted for at their fair values on a quarterly basis and the
resulting changes in the fair value were recorded as a gain or loss in the
condensed consolidated statements of operations.  As discussed in Note
1, CAMOFI and CAMHZN cancelled the anti-dilution provisions of the conversion
option of the Notes and the warrants effective December 31, 2009.





2009





During
2009, the Company borrowed $1,199,600 from CAMOFI and $298,400 from CAMHZN under
the Notes.  The debt discounts, which includes amounts for the
conversion options, as of December 31, 2009 related to the 2009 borrowings from
CAMOFI and CAMHZN were $375,535 and $93,882, respectively.  The debt
discounts as of March 31, 2010 related to the 2009 borrowings from CAMOFI and
CAMHZN were $206,024 and $51,504, respectively. In connection with extending the
maturity date of the Notes in August 2009, the Company issued 800,000 and
200,000 warrants to CAMOFI and CAMHZN, respectively.  The fair value
of the warrants on the date of issuance was $80,000 and was recorded as interest
expense.





In
addition, the conversion option of the Notes and the warrants issued to CAMOFI
and CAMHZN during 2009 contained an anti-dilution feature, which caused these
instruments to be accounted for as derivative liabilities.  The
derivative liabilities were accounted for at their fair values on a quarterly
basis and the resulting changes in the fair value were recorded as a gain or
loss in the condensed consolidated statements of operations.  As
discussed in Note 1, CAMOFI and CAMHZN cancelled the anti-dilution provisions of
the conversion option of the Notes and the warrants effective December 31,
2009.





2010





During
2010, the Company borrowed $324,000 from CAMOFI and $81,000 from CAMHZN under
the Notes and recorded debt discounts related to the conversion options and
warrants issued for the same amounts as borrowed.  The Company
received proceeds of $350,000, net of amounts paid directly to a vendor by the
note holder.   The Notes are due on August 1, 2010 and bear
interest at 15% per annum.  The debt discounts as of March 31, 2010
related to the 2010 borrowings from CAMOFI and CAMHZN were $249,333 and $62,333,
respectively.


F-14


In
January 2010, the Company issued 640,000 shares of common stock to CAMOFI and
CAMHZN for conversion of $20,480 and $5,120, respectively, of principal on the
Notes (See Note 7).




The
Company has incurred events of default on the Notes.  The last monthly
contractual payment on the CAMOFI note was made in October 2008 and no payments
have made on the CAMHZN Note which were scheduled to begin on September 1,
2008.  As a result, these are events of default under the terms of the
agreement. Under the terms of
the agreement, if any event of default occurs, the full principal amount of the
note, together with interest and other amounts owing in respect thereof, to the
date of acceleration shall become, at the note holder’s election, immediately
due and payable in cash. The note holders have yet to elect to exercise the
default provisions. As of March 31, 2010 and December 31, 2009, the principal
balances and the debt discounts are presented in the Convertible Notes Table,
below.





(Unaudited)March 31, 2010
                        
                        
                        December 31, 2009CONV NOTES
                        
                        CAMOFI
                        
                        
                        CAMHZN
                        
                        
                        CAMOFI
                        
                        
                        CAMHZNPrincipal
                        
                        $
                        4,337,401
                        
                        
                        $
                        1,124,280
                        
                        
                        $
                        4,033,881
                        
                        
                        $
                        1,048,400Discount
      – warrants
                        
                        
                        (101,951
                        )
                        
                        
                        (30,830
                        )
                        
                        
                        (38,814
                        )
                        
                        
                        (16,160
                        )Discount
      – conversion options
                        
                        
                        (757,568
                        )
                        
                        
                        (154,209)
                        
                        
                        
                        (1,068,542
                        )
                        
                        
                        (204,850)Discount
      – stock issued with notes
                        
                        
                        (12,228
                        )
                        
                        
                        -
                        
                        
                        
                        (21,798
                        )
                        
                        
                        -Notes
      presented net of debt discounts
                        
                        $
                        3,465,654
                        
                        
                        $
                        939,241
                        
                        
                        $
                        2,904,727
                        
                        
                        $
                        827,390




As of
March 31, 2010 and December 31, 2009, the Company has recorded $751,859 and
$609,496, respectively, in accrued interest on the Notes.





During
the three months ended March 31, 2010 and 2009, the Company amortized debt
discounts of approximately $698,000 and $508,000, respectively, to interest
expense related to the Notes.





6.
LOAN AND NOTES PAYABLE





On
November 12, 2009, the Company entered into an agreement with Micro Pipe Fund I,
LLC for the receipt of a Secured Loan of $150,000 (the “Micro Pipe
Loan”).  The loan accrued interest at a rate of 2% per month and
matured on January 5, 2010.  On the maturity date, all principal and
interest was due in addition to a payment equal to 10% of the principal
balance.  The loan was not repaid at maturity, is currently in default
and is now due on demand.  The loan is secured by a secondary interest
in all of the assets of the Company.




In
connection with the Micro Pipe Loan, the Company granted 500,000 immediately
vested five year warrants with a term of five years and an exercise price of
$0.20 (“Micro Pipe Warrants”).





The Micro
Pipe Warrants had an exercise feature that was the same as the anti-dilution
provision in the CAMOFI Warrants (See Note 5). Consequently, the warrants were
also treated as a derivative liability.





The
Company recorded at issuance a $108,101 derivative liability for the Micro Pipe
warrants.  As discussed in Note 1, the anti-dilution provision of the
warrants was cancelled effective January 31, 2010.  As a result of the
cancellation of the anti-dilution provision, the fair value of the warrant on
such date ($59,631) was reclassified from derivative liability to additional
paid-in capital.  As of March 31, 2010 and December 31, 2009, the fair
value of the warrant derivative was determined to be $0 and $48,378,
respectively.  For the three months ended March 31, 2010, the Company
recorded a change in fair value of the warrant derivative liability that
resulted in a loss of $11,253, which is included in loss on valuation of
derivative liabilities in the accompanying condensed consolidated statements of
operations.


F-15





The
initial Micro Pipe Warrants derivative liability of $108,101 represented a
discount from the face amount of the note payable. Such discount was amortized
to interest expense over the term of the note. During the three months ended
March 31, 2010, the Company amortized the balance of $10,003 to interest expense
in the accompanying condensed consolidated statements of
operations.





In March
2010, the Company issued 71,429 shares of restricted common stock in lieu of
penalties on its loan payable. The common stock was recorded at the estimated
fair value of the common stock on the date of the transaction. Approximately
$12,000 was expensed to interest at the time of issuance and is included in the
accompanying condensed consolidated statements of operations.





As of
March 31, 2010 and December 31, 2009, the Company had recorded $14,566 and
$5,566, respectively, in accrued interest on the Micro Pipe Loan.





Notes
Payable




The notes
payable are in default and are classified as current on the accompanying
condensed consolidated balance sheets.




The
Company’s notes payable consist of the following at March 31, 2010:




Mercedes-Benz
      Financial, secured with an auto, entered into in February
      2007, bearing interest at 9.5% per annum, payable in principal and
      interest monthly installments of $1,839, maturing in January 2012,
      includes accrued interest of $4,814. The Company is in default on the
      note and the balance is due on demand.
                  
                  $
                  42,138GE
      Money Bank, secured with equipment, entered into in July 2007,
      bearing interest at 17.9% per annum, payable in monthly principal and
      interest installments of $1,156, maturing in June 2012, includes
      accrued interest of $5,807. The Company is in default on the note and
      the balance is due on demand.
                  
                  
                  28,054Capital
      One Finance, secured with an auto, entered into in April 2008,
      bearing interest at 7.9% per annum, payable in monthly principal and
      interest installments of $530, maturing in March 2013, includes
      accrued interest of $678. The Company is in default on the note and
      the balance is due on demand.
                  
                  
                  16,95687,148Less
      current portion
                  
                  
                  (87,148
                  )$
                  -





7. EQUITY
TRANSACTIONS





Common
Stock, Warrants and Options





Issuance
of Common Stock





In
January 2010, the Company issued 150,000 shares of restricted common stock to a
consultant in consideration for investor relation services rendered valued at
$21,000. The consulting fees were expensed entirely at the time of issuance and
are included in consulting and other compensation in the accompanying condensed
consolidated statements of operations.





In
January 2010, the Company issued 250,000 shares of restricted common stock to a
consultant in consideration for finance consulting services rendered valued at
$35,000. The consulting fees were expensed entirely at the time of issuance and
are included in consulting and other compensation in the accompanying condensed
consolidated statements of operations.


F-16


In
January 2010, the Company issued 640,000 shares of common stock to CAMOFI and
CAMHZN for conversion of $20,480 and $5,120, respectively, of principal on
Convertible Notes (See Note 5).





In
January 2010, the Company issued 250,000 shares of restricted common stock to
the Company’s landlord in lieu of penalties for late payments due. The common
stock was recorded at the estimated fair value of the common stock on the date
of the transaction. Approximately $45,000 was expensed entirely at the time of
issuance and is included in selling, general and administrative expenses in the
accompanying condensed consolidated statements of operations.





In
February 2010, the Company issued 100,000 shares of restricted common stock to
one of the Company’s capital lease lenders in lieu of penalties for late
payments due.  The common stock was recorded at the estimated fair
value of the common stock on the date of the
transaction.  Approximately $19,000 was expensed entirely at the time
of issuance and is included in interest expense in the accompanying condensed
consolidated statements of operations.





In
February 2010, the Company issued 100,000 shares of restricted common stock to a
consultant in consideration for investor relation services rendered valued at
$15,000. The consulting fees were expensed entirely at the time of issuance and
are included in consulting and other compensation in the accompanying condensed
consolidated statements of operations.





In March
2010, the Company issued 71,429 shares of restricted common stock in lieu of
penalties on its loan payable (See Note 6).




In
February 2008, the Company entered into a one year contract with a third party
for corporate consulting and marketing services valued at $30,000. The fee was
paid in the form of 150,000 shares of the Company’s common stock and valued
based on the stock market price of the shares at the contract date. The value of
the common stock on the date of the transaction was recorded as a deferred
charge and was amortized to operating expense over the life of the agreement.
During the three months ended March 31, 2010 and 2009, consulting fees under
this contract of $0 and $2,500, respectively, were amortized to consulting and
other compensation in the accompanying condensed consolidated statements of
operations.





In June
2007, the Company entered into a three year contract with a third party for
Internet public investor relations services valued at $210,000. The fee was paid
in the form of 300,000 shares of the Company’s common stock and valued based on
the stock market price of the shares at the contract date. The value of the
common stock on the date of the transaction was recorded as a deferred charge
and during the three months ended March 31, 2010 and 2009, $17,500 and $18,000,
respectively, was amortized to consulting and other compensation in the
accompanying condensed consolidated statements of operations.  At
March 31, 2010 and December 31, 2009, the remaining deferred consulting fees
totaled $11,669 and $29,169, respectively.





STOCK
OPTIONS





Under the
terms of the Company's Incentive Stock Option Plan ("ISOP"), options to purchase
an aggregate of 5,000,000 shares of common stock may be issued to key employees,
as defined. The exercise price of any option may not be less than the fair
market value of the shares on the date of grant. No options granted may be
exercisable more than 10 years after the date of grant.





At March
31, 2010 and December 31, 2009, the Company had 1,700,000 options available for
future issuance under their ISOP equity compensation plan.





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





As of
March 31, 2010 and December 31, 2009, the Company had 650,000 options available
for future issuance under their non-statutory stock option
plans.


F-17


There
were no options granted, exercised or forfeited during the three months ended
March 31, 2010 and 2009.





WARRANTS





From time
to time, the Company issues warrants to employees and to third parties pursuant
to various agreements, which are not approved by the stockholders.





On
January 19, 2010, in connection with a 12-month strategic advisory consulting
services agreement, the Company issued an immediately vested warrant to purchase
3,000,000 shares of the Company’s common stock.  The warrant is for a
term of seven years, and  has an exercise price of $0.000001 per
share. The estimated fair value of the warrants of $420,000 was capitalized
as a deferred charge on the date of grant and will be amortized to operating
expense ratably over the term of the consulting agreement.  During the
three months ended March 31, 2010, the Company amortized $87,499 which is
included in consulting and other compensation in the accompanying condensed
consolidated statements of operations.





In
connection with the 2010 Notes, the Company issued CAMOFI and CAMHZN warrants to
purchase a total of 976,000 and 244,000 shares, respectively, of the Company’s
common stock. The warrants were issued on various dates, are immediately vested,
have a term of seven years and an exercise price of $0.000001.  The
relative fair values of the warrants totaling $132,738 were recorded as a debt
discount upon issuance (see Note 5).




The
following represents a summary of all warrant activity for the three months
ended March 31, 2010:





Outstanding WarrantsNumber of
                                    Shares
                                  
                                  
                                  Weighted
                                    Average
                                    Exercise
                                    Price
                                  
                                  
                                  Aggregate
                                    Intrinsic
                                    Value (1)Outstanding
      at January 1, 2010
                                  
                                  
                                  12,497,538
                                  
                                  
                                  $
                                  0.12
                                  
                                  
                                  $
                                  -Grants
      (2)
                                  
                                  
                                  4,220,000
                                  
                                  
                                  $
                                  0.000001
                                  
                                  
                                  $
                                  -Exercise
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Cancelled
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Outstanding
      at March 31, 2010 (3)
                                  
                                  
                                  16,717,538
                                  
                                  
                                  $
                                  0.09
                                  
                                  
                                  $
                                  1,216,000Exercisable
      at March 31, 2010 (3)
                                  
                                  
                                  13,717,538
                                  
                                  
                                  $
                                  0.09
                                  
                                  
                                  $
                                  1,156,000




(1)
            Represents the approximate added
      value as difference between the exercise price and the closing market
      price of the Company's common stock at the end of the reporting period (as
      of March 31, 2010, the market price of the Company's common stock was
      $0.12).





(2)
            All of the warrants issued are
      exercisable at March 31,
  2010.





(3)
            The warrants outstanding and
      exercisable at March 31, 2010 have a weighted-average contractual
      remaining life of 4.54 years and 5.53 years, respectively. The 3,000,000
      warrants not exercisable at March 31, 2010 were issued in connection with
      the acquisition of PAI in 2009.  See Note 3 for a description of
      the vesting terms of the
warrant.




F-18


8. RELATED PARTY
TRANSACTIONS





At March
31, 2010 and December 31, 2009, the Company had loans to two stockholders
approximating $585,000, including accrued interest. These loans were originated
in 1999 and no additional amounts have been loaned to the stockholders. The
loans accrued interest at 5% and are due on demand. The Company has included the
notes receivable from stockholders in stockholders’ deficit as such amounts have
not been repaid during 2010 or 2009.  The Company did not accrue any
interest for the three months ended March 31, 2010 as it was determined that
future interest amounts would be uncollectible.





At March
31, 2010 and December 31, 2009, the Company has loans from various employees
totaling $82,244 and $39,106, respectively, which are included in notes payable
to related parties in the condensed consolidated balance sheet. The loans are
non-interest bearing and are due on demand.





In
connection with the acquisition of PAI (see Note 3), the Company issued a
promissory note to Cabral in the amount of $500,000. Interest on the note
accrues at 5% per annum and all principal and interest is due only on and paid
from the proceeds of any equity financing of the Company with gross proceeds of
at $2,000,000 provided that the investors in such financing permit the proceeds
thereof to be used for such purpose.  During the three months ended
March 31, 2010, $6,249 of interest expense was recorded in the accompanying
condensed consolidated statements of operations.  At March 31, 2010
and December 31, 2009, the Company has accrued $12,499 and $6,250 in interest,
respectively.





During
the three months ended March 31, 2010, the Company advanced funds to various
employees.  At March 31, 2010, the Company has a loan receivable from
employees totaling $63,050.  The loans have been repaid subsequent to
quarter-end.





9.
COMMITMENTS AND CONTINGENCIES





Service
Agreements





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





Capital
Lease





During
the three months ended March 31, 2010, the Company purchased property and
equipment under a capital lease totaling $479,488.  The terms of the
lease are monthly principal payments of $25,000 and interest payments of 6% per
annum on the remaining principal balance beginning on February 5,
2010.  The payments are due every 30 days for up to 120
days.  At the end of the 120 days, the Company is required to pay the
total remaining balance plus accrued interest.  The Company was also
required to pay $35,000 upon signing the capital lease agreement.  In
addition, the Company issued 100,000 shares to the lender (see Note 7) to settle
past penalties and interest.





Legal





From time
to time, the Company may be involved in various claims, lawsuits, and disputes
with third parties, actions involving allegations or discrimination or breach of
contract actions incidental to the normal operations of the
business.


F-19





Delinquent
Income Taxes





At March
31, 2010 and December 31, 2009, the Company has approximately $352,000 accrued
related to penalties and interest in connection with delinquent income taxes
related to PAI’s Federal and State income tax returns for the years ended
December 31, 2007 and 2006. The Company has included the accrued amounts in
accounts payable and accrued liabilities.  The related returns were
filed in April 2009.





Delinquent
Payroll Taxes





At March
31, 2010 and December 31, 2009, the Company has accrued approximately $1,324,000
and $1,187,000, respectively, for payroll taxes not yet remitted for employee
compensation and estimated penalties and interest in connection with payroll
taxes incurred but not remitted related to executive compensation. The Company
has included the accrued amounts in accounts payable and accrued liabilities in
the accompanying condensed consolidated balance sheets and the related expense
in salaries and related expenses in the accompanying condensed consolidated
statements of operations.





Delinquent
Sales Taxes





At March
31, 2010 and December 31, 2009, the Company has accrued approximately $132,000
and $127,000, respectively, for sales taxes not yet remitted and estimated
penalties and interest in connection with the sales tax incurred but not yet
remitted for the period October 1, 2007 to December 31, 2008 and January 1, 2008
to March 31, 2008.  The Company has included the accrued amounts in
accounts payable and accrued liabilities in the accompanying condensed
consolidated balance sheets and the related expense in selling, general and
administrative expenses in the accompanying condensed consolidated statements of
operations.  The Company has yet to file a return for the following
quarterly sales tax periods.





Tax
Lien





On August
25, 2009, PAI received notice from the IRS of a federal tax lien filing for
amounts totaling $30,340. The lien attaches to all property owned by PAI and any
property to be acquired in the future.





Indemnities
and Guarantees





The
Company has made certain indemnities and guarantees, under which it may be
required to make payments to a guaranteed or indemnified party, in relation to
certain actions or transactions. The Company indemnifies its directors,
officers, employees and agents, as permitted under the laws of the State of
California. In connection with its facility leases, the Company has indemnified
its lessors for certain claims arising from the use of the
facilities.  The duration of the guarantees and indemnities varies,
and is generally tied to the life of the agreement. These guarantees and
indemnities do not provide for any limitation of the maximum potential future
payments the Company could be obligated to make. Historically, the Company has
not been obligated nor incurred any payments for these obligations and,
therefore, no liabilities have been recorded for these indemnities and
guarantees in the accompanying consolidated balance sheets.





10.
SEGMENT REPORTING





The
Company’s operations are classified into two principal reportable segments that
provide different products or services. Separate management of each segment is
required because each business unit is subject to different marketing,
production, and technology strategies. The Company operates in the following two
reportable segments:





(a)
            CNC
      machine tool remanufacturing and


(b)
            Multiaxis
      structural aircraft components.




F-20


The
Company evaluates performance and allocates resources based upon operating
income. The accounting policies of the reportable segments are the same as those
described in the summary of accounting policies. Inter-segment sales are
eliminated upon consolidation.





The
following table summarizes segment asset and operating balances by reportable
segment, has been prepared in accordance with the internal accounting policies,
and may not be presented in accordance with GAAP:





Three
                                          MonthsEnded/
                                          As of
                                          March 31,
                                          2010
                                        
                                        
                                        Three
                                          Months
                                          Ended
                                          March 31,
                                          2009Net
      revenue from external customers:CNC
      machine tool remanufacturing
                                        
                                        $
                                        160,047
                                        
                                        
                                        $
                                        1,054,702Multiaxis
      structural aircraft components
                                        
                                        
                                        397,643
                                        
                                        
                                        
                                        -Total
      net revenue from external customers:
                                        
                                        
                                        557,690
                                        
                                        
                                        
                                        1,054,702Operating
      loss:CNC
      machine tool remanufacturing
                                        
                                        
                                        (812,706
                                        )
                                        
                                        
                                        (211,914
                                        )Multiaxis
      structural aircraft components
                                        
                                        
                                        (193,354
                                        )
                                        
                                        
                                        -Total
      operating loss:
                                        
                                        
                                        (1,006,060
                                        )
                                        
                                        
                                        (211,914
                                        )Depreciation
      and amortization from operations:CNC
      machine tool remanufacturing
                                        
                                        
                                        20,652
                                        
                                        
                                        
                                        14,030Multiaxis
      structural aircraft components
                                        
                                        
                                        125,496
                                        
                                        
                                        
                                        -Total
      depreciation and amortization expense:
                                        
                                        
                                        146,148
                                        
                                        
                                        
                                        14,030Interest
      expense:CNC
      machine tool remanufacturing
                                        
                                        
                                        937,958
                                        
                                        
                                        
                                        668,395Multiaxis
      structural aircraft components
                                        
                                        
                                        35,248
                                        
                                        
                                        
                                        -Total
      interest expense:
                                        
                                        
                                        973,206
                                        
                                        
                                        
                                        668,395Net
      loss:CNC
      machine tool remanufacturing
                                        
                                        
                                        (1,757,005
                                        )
                                        
                                        
                                        (2,675,606)Multiaxis
      structural aircraft components
                                        
                                        
                                        (37,428)
                                        
                                        
                                        
                                        -Total
      loss from continuing operations:
                                        
                                        
                                        (1,794,433
                                        )
                                        
                                        
                                        (2,675,606)Identifiable
      assets:CNC
      machine tool remanufacturing
                                        
                                        
                                        1,080,829Multiaxis
      structural aircraft components
                                        
                                        
                                        5,009,899Total
      identifiable assets:
                                        
                                        
                                        6,090,728




F-21





11.
SUBSEQUENT EVENTS





During
the second quarter of 2010, the Company issued 736,000 shares of common stock
for cashless exercise of employee options.





On April
5, 2010, the Company granted each of five new non-employee directors non-plan
options to purchase 1,000,000 shares of common stock, and a consultant non-plan
options to purchase 5,000,000 shares of common stock in consideration for
investor relations services, all at an exercise price of $0.13 per
share.


F-22





ITEM
2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS





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





OVERVIEW





U.S.
Aerospace is engaged in the production of aircraft assemblies, structural
components, and highly engineered, precision machined details for the United
States Department of Defense, United States Air Force, Lockheed Martin
Corporation, The Boeing Company, L-3 Communications Holdings, Inc., the Middle
River Aircraft Systems subsidiary of General Electric Company, and other
aircraft manufacturers, aerospace companies, and defense contractors.  The
Company supplies structural aircraft parts for military aircraft such as the P-3
Orion, and wide-body commercial airliners such as the Boeing747.




The
Company is also a leading manufacturer and remanufacturer of specialized
aircraft machining tools, including vertical boring mills and large Vertical
Turning Centers (“VTCs”) used to manufacture the largest jet engines, airplane
landing gear and other precision components for aerospace and other
industries.





Through
PAI, we are an emerging world class supplier of complex structural airframe
machined components and assemblies for commercial and military aircraft builders
in the United States and around the world.  PAI specializes in
engineering, and manufacturing of precision computerized numerical control
(“CNC”) machined multiaxis structural aircraft components, with tolerances of up
to +/-.0001” on ferrous and non-ferrous metals.




PAI’s
capabilities include high speed three, four and five axis precision CNC
machining of titanium, aluminum, stainless steel, and nickel-chromium-based
superalloys.  PAI’s aircraft component products include wing ribs,
stringers, spars, longerons, bulkheads, frames, engine mounts, chords, and
fittings.  In addition, PAI designs and fabricates tools and
fixtures.





New
Century manufactures large VTC lathes and attachments under the trade name
Century Turn.  New Century is also engaged in acquiring,
re-manufacturing and selling pre-owned CNC machine tools to manufacturing
customers. In addition, New Century provides rebuilt, retrofit and
remanufacturing services for numerous brands of machine tools. The
remanufacturing of a machine tool, typically consisting of replacing all
components, realigning the machine, adding updated CNC capability and electrical
and mechanical enhancements, generally takes two to four months to complete.
Once completed, a remanufactured machine is a "like new," state-of-the-art
machine with a price ranging from $275,000 to $1,000,000 or more, which is
approximately 40%-50% of the price of a new machine.





The
Company continues to incur operating losses for each of the periods ended March
31, 2010 and 2009. This was a result of a dramatic decrease in sales. The
Company's current strategy is to expand its customer sales base with its present
line of machine products. Plans for expansion are expected to be funded through
current working capital from ongoing sales. However, significant growth will
require additional funds in the form of debt or equity, or a combination
thereof. The Company's growth strategy also includes strategic mergers in
addition to growing the current business. A significant acquisition will require
additional financing.


4





RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2010 COMPARED TO MARCH 31,
2009.





Net
Revenues.  The Company generated net revenues of $557,690 for
the three months ended March 31, 2010, which was a $497,012 or 47% decrease from
$1,054,702 for the three  months  ended  March
31,  2009.  The decrease is the result of lower sales due to
the recession and a tighter credit market.





Gross (Loss)
Profit.  Gross (loss) profit for the
three months ended March 31, 2010,  was ($134,958) or 24% of
revenues,  compared to a gross profit of $235,809 or 22% of revenues
for the three months ended March 31, 2009, a 157% decrease. The increase in
gross loss is due to certain continuing fixed overhead expenses applied to lower
revenues.





Operating
Loss.  Operating loss for the three months ended March 31,
2010, was $1,006,060 compared to $211,914 for the three months ended March 31,
2009. The increase in loss of $794,146 is primarily due to a 95% increase in
operating expenses and secondarily to 47% decreased revenues for the three
months ended March 31, 2010.





Interest
Expense and Debt Discount Amortization.  Interest expense for
the three months ended March 31, 2010, was $973,206 compared with $668,395 for
the three months ended March 31, 2009. The increase of 46%  in
interest expenses is due to additional interest and discount amortization on six
new convertible notes for the three months ended March 31, 2010 and eight
convertible noted issued after the period ended March 31, 2009 (See Note
5).




Operating Expenses.The
Company incurred total operating expenses of $871,102 for the three months ended
March 31, 2010, which was a $423,379 or a 95% increase from $447,723 for the
three months ended March 31, 2009. In the three months ended March 31, 2010,
compared with the three months ended March 31, 2009, all the operating expenses
increased as follow:





Increase
                    %Consulting
      and other compensation
                  
                  
                  217Salaries
      and related
                  
                  
                  79Selling,
      general and administrative
                  
                  
                  72





The
increase in consulting and other compensation is due primarily to $87,499
amortization of 3,000,000 warrants issued to a consultant during the three
months ended March 31, 2010. All operating expenses increased due to additional
costs related to the operations of Precision Aerostructures, Inc which was
acquired in October 2009.





FINANCIAL
CONDITION, LIQUIDITY, CAPITAL RESOURCES





The net
decrease in cash during the three months ended March 31, 2010 was $150,428. The
cash used in operating activities was $403,584. This was due mainly to a net
loss of $1,794,433 offset by non-cash expenses of $708,381 related to
amortization of debt discount, $147,143 in stock issued for services and
$146,148 of depreciation and amortization. Other operating activities that used
cash were mainly an increase in accounts receivable of $60,968 and inventories
of $16,727.  These were offset by an increase of accounts payable,
accrued liabilities and interest of $550,653.





No cash
was used in investing activities.  $479,488 of equipment was purchased
through a capital lease.





Cash
provided by financing activities was $253,156 mainly from the issuance of
convertible notes with net proceeds of $350,000 offset by principal payments on
notes and capital leases of $141,662.


5





The net
increase during the three months ended March 31, 2009 was $236,206. The increase
was due to $700,000 proceeds for the three months ended March 31, 2009 compared
with $350,000 proceeds for the three months ended March 31, 2010 from the
issuance of convertible notes payable.





Going
Concern





The
accompanying condensed consolidated financial statements have been prepared
assuming the Company will continue as a going concern, which contemplates, among
other things, the realization of assets and satisfaction of liabilities in the
normal course of business. As of and for the three months ended March 31, 2010,
the Company had a net loss of approximately $1,794,000, an accumulated deficit
of approximately $28,633,000, working capital deficit of approximately
$10,582,000 and was in default on several notes payable (see Note 6) and had
events of default on its CAMOFI and CAMHZN debt (see Note
5).   These factors raise substantial doubt about the Company's
ability to continue as a going concern. The Company intends to fund operations
through anticipated increased sales which management believes may be
insufficient to fund its capital expenditures, working capital and other cash
requirements for the year ending December 31, 2010. Therefore, the Company will
be required to seek additional funds to finance its long-term operations in the
form of debt and equity financing which the Company believes is available to
it.  The successful outcome of future activities cannot be determined
at this time and there is no assurance that if achieved, the Company will have
sufficient funds to execute its intended business plan or generate positive
operating results.




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




·
            continued its aggressive program
      for selling its products;




·
            continued to implement plans to
      further reduce operating costs;
and




·
            is seeking investment capital
      through the public and private
markets.




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





INFLATION
AND CHANGING PRICES





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





CRITICAL
ACCOUNTING POLICIES





The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States of America
requires management to make judgments, assumptions and estimates that affect the
amounts reported in our condensed consolidated financial statements and the
accompanying notes. The amounts of assets and liabilities reported on our
balance sheet and the amounts of revenues and expenses reported for each of our
fiscal periods are affected by estimates and assumptions, which are used for,
but not limited to, the accounting for revenue recognition, accounts receivable,
doubtful accounts and inventories. Actual results could differ from these
estimates. The accounting policies stated below are significantly affected by
judgments, assumptions and estimates used in the preparation of the condensed
consolidated financial statements. See Note 1 for significant accounting
policies.


6





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





ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not
applicable.





ITEM
4. CONTROLS AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures





We
conducted an evaluation under the supervision and with the participation of our
management, including our Chief Executive Officer, who is also our Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. The term “disclosure controls and
procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
and Exchange Act of 1934, as amended (“Exchange Act”), means controls and other
procedures of a company that are designed to ensure that information required to
be disclosed by the company in the reports it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission’s rules and forms.
Disclosure controls and procedures also include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company’s management, including its
principal executive and principal financial officers, or persons performing
similar functions, as appropriate, to allow timely decisions regarding required
disclosure. Based on this evaluation, our Chief Executive Officer concluded as
of March 31, 2010 that our disclosure controls and procedures were not effective
at the reasonable assurance level due to the material weaknesses discussed
immediately below.





Material
Weaknesses





(1)  
We had not effectively implemented comprehensive entity-level internal controls,
as evidenced by the following deficiencies:





· We did not establish
an independent Audit Committee who are responsible for the oversight of the
financial reporting process, nor was an Audit Committee Charter
defined.  At the current time we do not have any independent members
of the Board who could comprise this committee.





· We did not establish
an adequate Whistle Blower program for  the receipt, retention, and
treatment of complaints received by the issuer regarding accounting, internal
accounting controls, or auditing matters; and the confidential, anonymous
submission by employees of the issuer of concerns regarding questionable
accounting or auditing matters to the Audit Committee and Board of
Directors.





· We did not have an
individual on our Board, nor on the Audit Committee, who meets the “Financial
Expert” criteria.





· We did not maintain
documentation evidencing quarterly or other meetings between the Board, senior
financial managers and our outside general counsel.  Such meetings
include reviewing and approving quarterly and annual filings with the Securities
and Exchange Commission and reviewing on-going activities to determine if there
are any potential audit related issues which may warrant involvement and
follow-up action by the Board.





· We did not follow a
formal fraud assessment process to identify and design adequate internal
controls to mitigate those risks not deemed to be acceptable.





· We did not conduct annual
performance reviews or evaluations of our management and staff
employees.


7





(2)  
We did not have a sufficient complement of personnel with appropriate training
and experience in GAAP, as evidenced by the following deficiencies:





· We do not have a
formally trained Chief Financial Officer who is responsible for the oversight of
the accounting function.  Currently the CEO is responsible for this
function, but has not had formal accounting or auditing experience.





· The Controller is
the only individual with technical accounting experience in our company but is
limited in the exposure to SEC filings and disclosures and is not a full-time
employee of the Company.





· We have not
consulted with other outside parties with accounting experience to assist us in
the SEC filings and disclosures. As a result, our independent registered public
accounting firm recorded numerous adjusting entries.





(3) We
did not adequately segregate the duties of different personnel within our
accounting group due to an insufficient complement of staff and inadequate
management oversight.





(4)  
We did not adequately design internal controls as follows:





·
            The controls identified in the
      process documentation were not designed effectively and had no evidence of
      operating effectiveness for testing
  purposes.


·
            The controls identified in the
      process documentation did not cover all the risks for the specific
      process.


·
            The controls identified in the
      process documentation did not cover all applicable assertions for the
      significant accounts.





(5)  
Due to the material weaknesses identified at our entity level we did not test
whether our financial activity level controls or our information technology
general controls were operating sufficiently to identify a deficiency, or
combination of deficiencies, that may result in a reasonable possibility that a
material misstatement of the financial statements would not be prevented or
detected on a timely basis.





On April
7, 2010, the Board of Directors took major steps in correcting these
deficiencies and created an Audit Committee, a Compensation Committee and
Governance Committee.




CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING





There
have been no significant changes in the Company's internal control over
financial reporting during the Company's most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting. Inherent limitations exist
in any system of internal control including the possibility of human error and
the potential of overriding controls. Even effective internal controls can
provide only reasonable assurance with respect to financial statement
preparation. The effectiveness of an internal control system may also be
affected by changes in conditions.





PART
II.  OTHER INFORMATION





Item
1.     Legal Proceedings





None.





Item
2.     Unregistered Sales of Equity Securities and Use
of Proceeds





None.





Item
3.     Defaults Upon Senior Securities





Starting
January 5, 2010, the Company has been in default on the Micro Pipe Loan. As of
March 31, 2010, the Company’s default principal and interest aggregate
to $164,566.


8





Item
5.     Other Information





None.





Item
6.     Exhibits





Exhibit
31.1 Certification required by Rule 13a-14(a) or Rule 15d-14(d) and under
Section 302 of the Sarbanes-Oxley act of 2002





Exhibit
32.1 Certification required by Rule 13a-14(a) or Rule 15d-14(d) and under
Section 906 of the Sarbanes-Oxley act of 2002


9




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 hereunto
duly authorized.




U.S.
      Aerospace, Inc.May
      24, 2010
                        By:
                        /s/
      David DuquetteName:
      David DuquetteTitle:
      Chief Executive
Officer


10