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 June 30, 2009




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





Commission
file number: 000-09459





NEW
CENTURY COMPANIES, INC.


(Exact
name of registrant as specified in its charter)




Delaware
            061034587(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)





Not
applicable


(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  No x





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  o    No o





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 o  No x





As of
July 28, 2009, the Company had 15,344,654 shares of common stock, $0.10 par
value, issued and outstanding.





NEW
CENTURY COMPANIES, INC.





INDEX





Page No.PART
      I - FINANCIAL INFORMATIONItem
      1. Financial Statements
                      
                      F-1Condensed
      Consolidated Balance Sheets - June 30, 2009 (Unaudited) and December 31,
      2008
                      
                      F-1Condensed
      Consolidated Statements of Operations (Unaudited) -Three
      and Six Months Ended June 30, 2009 and 2008
                      
                      F-2Condensed
      Consolidated Statements of Cash Flows (Unaudited) -Six
      Months Ended June 30, 2009 and 2008
                      
                      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
                      
                      8Item
      4T. Controls and Procedures
                      
                      9PART
      II - OTHER INFORMATIONItem
      1. Legal Proceedings
                      
                      11Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds
                      
                      11Item
      3. Defaults Upon Senior Securities
                      
                      11Item
      4. Submission of Matters to a Vote of Security
Holders
                      
                      11Item
      5. Other Information
                      
                      11Item
      6. Exhibits
                      
                      11SIGNATURES
                      
                      12


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








NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY


CONDENSED
CONSOLIDATED BALANCE SHEETS


June
30, 2009 and December 31, 2008





(Unaudited)June 30,
                    
                    
                    December 31,2009
                    
                    
                    2008ASSETSCurrent
      AssetsCash
                    
                    $
                    -
                    
                    
                    $
                    31,889Contract
      receivables, net of allowance of $0 and $24,000 for June 30, 2009 and
      December 31, 2008, respectively
                    
                    
                    11,906
                    
                    
                    
                    237,787Inventories
                    
                    
                    422,856
                    
                    
                    
                    564,022Costs
      and estimated earnings in excess of billings on uncompleted
      contracts
                    
                    
                    60,790
                    
                    
                    
                    416,664Deferred
      financing costs
                    
                    
                    283,433
                    
                    
                    
                    252,305Prepaid
      expenses and other current assets
                    
                    
                    160,182
                    
                    
                    
                    168,668Total
      current assets
                    
                    
                    939,167
                    
                    
                    
                    1,671,335Property
      and Equipment, net
                    
                    
                    152,225
                    
                    
                    
                    186,906Deferred
      Financing Costs, net
                    
                    
                    113,862
                    
                    
                    
                    233,702Total
      Assets
                    
                    $
                    1,205,254
                    
                    
                    $
                    2,091,943LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      LiabilitiesBank
      overdraft
                    
                    $
                    44,553
                    
                    
                    $
                    15,329Accounts
      payable and accrued liabilities
                    
                    
                    1,643,751
                    
                    
                    
                    1,417,464Dividends
      payable
                    
                    
                    500,550
                    
                    
                    
                    459,275Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
                    
                    
                    84,402
                    
                    
                    
                    1,388,348Capital
      lease obligation, current portion
                    
                    
                    24,044
                    
                    
                    
                    27,874Derivative
      liability
                    
                    
                    4,080,953
                    
                    
                    
                    1,975,298CAMOFI
      Convertible note payable, net of discount of $1,423,780 at June 30, 2009
      and $2,089,443 at December 31, 2008, respectively
                    
                    
                    1,403,501
                    
                    
                    
                    737,838CAMHZN
      Convertible note payable, net of discount of $239,535 at June 30, 2009 and
      $350,090 at December 31, 2008, respectively
                    
                    
                    510,465
                    
                    
                    
                    399,910CAMOFI
      Convertible Note, net of discount of $96,039
                    
                    
                    605,161
                    
                    
                    
                    -CAMHZN
      Convertible Note, net of discount of $23,896
                    
                    
                    149,904
                    
                    
                    
                    -Total
      current liabilities
                    
                    
                    9,047,284
                    
                    
                    
                    6,421,336Long
      Term LiabilitiesCapital
      lease obligation, long term portion
                    
                    
                    -
                    
                    
                    
                    9,804Total
      liabilities
                    
                    
                    9,047,284
                    
                    
                    
                    6,431,140Commitments
      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)
                    
                    
                    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 $291,000)
                    
                    
                    291,000
                    
                    
                    
                    291,000Common
      stock, $0.10 par value, 50,000,000 shares authorized; 15,344,654 shares
      issued and outstanding at June 30, 2009 and December 31,
    2008
                    
                    
                    1,534,466
                    
                    
                    
                    1,534,466Notes
      receivable from stockholders
                    
                    
                    (564,928
                    )
                    
                    
                    (564,928
                    )Deferred
      equity compensation
                    
                    
                    (64,167
                    )
                    
                    
                    (101,667
                    )Additional
      paid-in capital
                    
                    
                    7,390,021
                    
                    
                    
                    7,355,007Accumulated
      deficit
                    
                    
                    (16,455,302
                    )
                    
                    
                    (12,879,955
                    )Total
      stockholders' deficit
                    
                    
                    (7,842,030
                    )
                    
                    
                    (4,339,197
                    )Total
      Liabilities and Stockholders' deficit
                    
                    $
                    1,205,254
                    
                    
                    $
                    2,091,943





See
accompanying notes to the condensed consolidated financial
statements.


F-1







NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


For
the Three and Six Months Ended June 30, 2009 and 2008


(Unaudited)








For the Three Months Ended June 30,
                  
                  
                  For the Six Months Ended June 30,As Restated
                  
                  
                  
                  
                  
                  As Restated2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008CONTRACT
      REVENUES
                  
                  $
                  1,359,630
                  
                  
                  $
                  1,434,676
                  
                  
                  $
                  2,414,332
                  
                  
                  $
                  2,961,278COST
      OF SALES
                  
                  
                  1,193,730
                  
                  
                  
                  1,363,614
                  
                  
                  
                  2,012,623
                  
                  
                  
                  2,672,093GROSS
      PROFIT
                  
                  
                  165,900
                  
                  
                  
                  71,062
                  
                  
                  
                  401,709
                  
                  
                  
                  289,185OPERATING
      EXPENSESConsulting
      and other compensation
                  
                  
                  77,158
                  
                  
                  
                  73,998
                  
                  
                  
                  139,773
                  
                  
                  
                  345,382Salaries
      and related
                  
                  
                  83,409
                  
                  
                  
                  74,123
                  
                  
                  
                  236,496
                  
                  
                  
                  127,619Selling,
      general and administrative
                  
                  
                  135,967
                  
                  
                  
                  278,441
                  
                  
                  
                  367,988
                  
                  
                  
                  716,470TOTAL
      OPERATING EXPENSES
                  
                  
                  296,534
                  
                  
                  
                  426,562
                  
                  
                  
                  744,257
                  
                  
                  
                  1,189,471OPERATING
      LOSS
                  
                  
                  (130,634
                  )
                  
                  
                  (355,500
                  )
                  
                  
                  (342,548
                  )
                  
                  
                  (900,286
                  )OTHER
      INCOME (EXPENSES)Gain
      on writeoff of accounts payable
                  
                  
                  -
                  
                  
                  
                  3,577
                  
                  
                  
                  5,681
                  
                  
                  
                  60,205(Loss)
      / gain on valuation of derivative liabilities
                  
                  
                  225,075
                  
                  
                  
                  1,287,654
                  
                  
                  
                  (1,575,903
                  )
                  
                  
                  2,588,416Interest
      expense
                  
                  
                  (952,461
                  )
                  
                  
                  (497,382
                  )
                  
                  
                  (1,620,856
                  )
                  
                  
                  (984,151
                  )TOTAL
      OTHER INCOME (EXPENSES)
                  
                  
                  (727,386
                  )
                  
                  
                  793,849
                  
                  
                  
                  (3,191,078
                  )
                  
                  
                  1,664,470INCOME
      (LOSS) BEFORE PROVISION FOR  INCOME TAXES
                  
                  
                  (858,020
                  )
                  
                  
                  438,349
                  
                  
                  
                  (3,533,626
                  )
                  
                  
                  764,184PROVISION
      FOR INCOME TAXES
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -NET
      INCOME ( LOSS)
                  
                  $
                  (858,020
                  )
                  
                  $
                  438,349
                  
                  
                  $
                  (3,533,626
                  )
                  
                  $
                  764,184Preferred
      Stock Dividends
                  
                  $
                  (41,275
                  )
                  
                  $
                  (41,275
                  )
                  
                  $
                  (41,275
                  )
                  
                  $
                  (41,275
                  )NET
      INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS
                  
                  $
                  (899,295
                  )
                  
                  $
                  397,074
                  
                  
                  $
                  (3,574,901
                  )
                  
                  $
                  722,909Basic
      net income (loss) available to common stockholders per common
      share
                  
                  $
                  (0.06
                  )
                  
                  $
                  0.03
                  
                  
                  $
                  (0.23
                  )
                  
                  $
                  0.05Diluted
      net income (loss) available to common stockholders per common
      share
                  
                  $
                  (0.06
                  )
                  
                  
                  0.01
                  
                  
                  
                  (0.23
                  )
                  
                  $
                  0.02Basic
      weighted average common shares outstanding
                  
                  
                  15,344,654
                  
                  
                  
                  15,344,656
                  
                  
                  
                  15,344,654
                  
                  
                  
                  15,344,656Diluted
      weighted average common shares outstanding
                  
                  
                  15,344,654
                  
                  
                  
                  45,450,838
                  
                  
                  
                  15,344,654
                  
                  
                  
                  45,450,838








F-2


NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


For
the Six Months Ended June 30, 2009 and 2008


(Unaudited)





As Restated2009
                
                
                2008Cash
      flows from operating activities:Net
      (loss) income
                
                $
                (3,533,626
                )
                
                $
                764,184Adjustments to reconcile net
      (loss) income to net cash used in operating
      activities:Depreciation
      and amortization of property and equipment
                
                
                34,681
                
                
                
                41,232Bad
      debt expense
                
                
                -
                
                
                
                27,259Gain
      on write off of accounts payable
                
                
                (5,681
                )
                
                
                (60,205
                )Amortization
      of deferred financing costs
                
                
                233,712
                
                
                
                180,960Estimated
      fair value of options issued to employees
                
                
                35,014
                
                
                
                -Amortization
      of stock-based consulting fees and employee compensation
                
                
                37,500
                
                
                
                251,165Amortization
      of BCF and debt discount
                
                
                1,136,035
                
                
                
                503,788(Gain)
      / loss on valuation of derivatives liabilities
                
                
                1,575,903
                
                
                
                (2,588,416
                )Changes
      in operating assets and liabilities:Contracts
      receivable
                
                
                225,881
                
                
                
                20,717Inventories
                
                
                141,166
                
                
                
                232,377Costs
      and estimated earnings in excess of billings on uncompleted
      contracts
                
                
                355,874
                
                
                
                135,363Prepaid
      expenses and other current assets
                
                
                8,486
                
                
                
                (264,416
                )Accounts
      payable and accrued liabilities
                
                
                281,520
                
                
                
                202,406Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
                
                
                (1,303,946
                )
                
                
                241,013Net
      cash used in operating activities
                
                
                (777,481
                )
                
                
                (312,573
                )Cash
      flows from financing activities:Bank
      overdraft
                
                
                29,224
                
                
                
                47,665Proceeds
      from issuance of convertible notes payable, net of financing
      costs
                
                
                730,000
                
                
                
                -Principal
      payments on notes payable and capital lease
                
                
                (13,632
                )
                
                
                -Deferred
      financing cost
                
                
                -
                
                
                
                (16,821
                )Net
      cash provided by financing activities
                
                
                745,592
                
                
                
                30,844Net
      change  in cash
                
                
                (31,889
                )
                
                
                (281,729
                )Cash
      at beginning of period
                
                
                31,889
                
                
                
                281,729Cash
      at end of period
                
                $
                -
                
                
                $
                -Supplemental
      disclosure of non-cash financing and investing activities:Accrued
      cumulative dividends on preferred stock
                
                $
                41,275
                
                
                $
                41,275Debt
      discount recorded on convertible notes payable
                
                $
                479,752
                
                
                $
                2,755,107Stock
      and warrants Issued for Financing Costs
                
                $
                -
                
                
                $
                102,500








See
accompanying notes to the condensed consolidated financial
statements.


F-3


NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008 (As Restated)








1.
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES





Organization
And Nature Of Operations





New
Century Companies, Inc. and its wholly owned subsidiary, New Century
Remanufacturing, Inc., (collectively, the "Company"), a California corporation,
was incorporated March 1996 and is located in Southern California. The Company
provides after-market services, including rebuilding, retrofitting and
remanufacturing of metal cutting machinery. Once completed, a remanufactured
machine is "like new" with state-of-the-art computers and the cost to the
Company's customers is substantially less than the price of a new
machine.





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





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





Principles
Of Consolidation





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





Basis
Of Presentation





The
accompanying unaudited interim 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, 2008, filed with the
SEC. In the opinion of management, all adjustments necessary to present fairly,
in accordance with GAAP, the Company's financial position as of June 30, 2009,
and the 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 and six months
ended June 30, 2009 are not necessarily indicative of the results for the full
year ending December 31, 2009. Amounts related to disclosure of
December 31, 2008 balances within these interim condensed consolidated
financial statements were derived from the audited 2008 consolidated financial
statements and notes thereto.


F-4


Reclassifications





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





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 June 30, 2009, the Company has an accumulated
deficit of approximately $16,455,000, had recurring losses, a working capital
deficit of approximately $8,108,000, and was also in default on its convertible
notes. 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 along with renegotiated or new debt and equity
financing arrangements which management believes may be insufficient to fund its
capital expenditures, working capital and other cash requirements for the year
ending December 31, 2009. Therefore, the Company will be required to seek
additional funds to finance its long-term operations.  The successful
outcome of future activities cannot be determined at this time and there is no
assurance that if achieved, the Company will have sufficient funds to execute
its intended business plan or generate positive operating results.




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


·
            The Company continues its
      aggressive program for selling
machines.


·
            The Company continues to
      implement plans to further reduce operating
  costs.


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


·
            The Company is seeking strategic
      acquisition candidates.





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





Inventory





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.





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 Statements of Position 81-1, “Accounting for Performance
of Construction-Type and Certain Production-Type Contracts”, and, therefore,
takes into account the cost, estimated earnings and revenue to date on fixed-fee
contracts not yet completed. The percentage-of-completion method is used because
management considers total cost to be the best available measure of progress on
the contracts. Because of inherent uncertainties in estimating costs, it is at
least reasonably possible that the estimates used will change within the near
term.


F-5


For
contracts, the amount of revenue recognized at the 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
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 Staff Accounting Bulletin
("SAB") No. 104, "Revenue Recognition", which outlines the basic criteria that
must be met to recognize revenue other than revenue on contacts, 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 accounts for shipping and handling fees and costs in accordance with
EITF Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs."
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 Statements of Financial Accounting Standards ("SFAS") No. 48,
"Revenue Recognition when Right of Return Exists," revenue is recorded net of an
estimate for markdowns, price concessions and warranty costs. Such reserve is
based on management's evaluation of historical experience, current industry
trends and estimated costs. As of June 30, 2009, the Company estimated the
markdowns, price concessions and warranty costs and concluded amounts are
immaterial and did not record any adjustment to revenues.





Basic
And Diluted Loss Per Common Share





Basic net
earnings (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding for the period. Diluted net
income (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 period.





Common
stock equivalents, representing convertible Preferred Stock, convertible debt,
options and warrants totaling approximately 74,320,847 shares at June 30, 2009
are not included in the diluted loss per share as they would be anti-dilutive.
Common stock equivalents, representing convertible Preferred Stock, convertible
debt, options and warrants totaling approximately 30,106,000 are included in the
diluted income per share at June 30, 2008.





Stock
Based Compensation





Effective
January 1, 2006, we adopted the fair value method of accounting for employee
stock compensation cost pursuant to SFAS No. 123(R), “Share-Based
Payments.” Under the fair value recognition provisions of SFAS 123(R),
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
and six months ended June 30, 2009 and 2008, $35,014 and $0, respectively, of
share-based compensation expense was recognized in the accompanying condensed
consolidated statements of operations.


F-6


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.





There is
no share-based compensation resulting from the application of SFAS No. 123R to
options granted outside of the Company's Stock Option Plan for the three and six
months ended June 30, 2009 and 2008. Share-based compensation recognized as a
result of the adoption of SFAS No. 123R use the Black Scholes option pricing
model for estimating fair value of options granted.





In
accordance with SFAS No. 123R, 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 our 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 six months ended June
30, 2009.  There are 900,000 shares available for grant at June 30,
2009.




All
options outstanding have vested as of June 30, 2009 and are as
follows:





WeightedWeighted
                    
                    
                    AverageAverage
                    
                    
                    Remaining
                    
                    
                    AggregateNumber of
                    
                    
                    Exercise
                    
                    
                    Contractual
                    
                    
                    IntrinsicShares
                    
                    
                    Price
                    
                    
                    Term in Years
                    
                    
                    Value (1)Vested
                    
                    
                    4,100,000
                    
                    
                    $
                    0.15
                    
                    
                    
                    1.49
                    
                    
                    $
                    —




(1)
            Represents the 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 June 30,
      2009 and December 31, 2008, the market price of the Company's common stock
      was $0.07 and $0.05,
respectively).


F-7


The
Company follows SFAS No. 123(R) (as interpreted by EITF Issue No. 96-18,
"Accounting for Equity Instruments That Are Issued To Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services") to account for
transactions involving services provided by third parties where the Company
issues equity instruments as part of the total consideration. Pursuant to
paragraph 7 of SFAS No. 123 (R), the Company accounts for such transactions
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. The Company applies EITF Issue No. 96-18 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, using 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.





The
following table summarizes information related to stock options outstanding and
exercisable at June 30, 2009:





Exercise
      Price
                                
                                Number
      of
                                  Options
                                  outstanding
                                
                                
                                Weighted
                                  Average
                                  Remaining
                                  Contractual
                                  Life
      (Years)
                                
                                
                                Weighted
                                  Average
                                  Exercise
                                  Price$
      0.075-0.083
                                
                                
                                1,300,000
                                
                                
                                
                                0.24
                                
                                
                                $
                                0.08$
      0.15-0.20
                                
                                
                                2,800,000
                                
                                
                                
                                1.25
                                
                                
                                $
                                0.194,100,000
                                
                                
                                
                                
                                
                                
                                $
                                0.15


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.





The
following is a status of the warrants outstanding at June 30, 2009 and December
31, 2008:


Outstanding WarrantsWeighted
                          
                          
                          AggregateNumber of
                          
                          
                          Average
                          
                          
                          IntrinsicShares
                          
                          
                          Exercise Price
                          
                          
                          Value (1)December
      31, 2008
                          
                          
                          5,586,824
                          
                          
                          $
                          0.21
                          
                          
                          $
                          —Grants
                          
                          
                          —
                          
                          
                          
                          ——
                          
                          
                          
                          —Exercises
                          
                          
                          —
                          
                          
                          
                          —Cancellations/
      Terminated
                          
                          
                          —
                          
                          
                          
                          —Outstanding
      and Exercisable atJune
      30, 2009
                          
                          
                          5,586,824
                          
                          
                          $
                          0.21
                          
                          
                          
                          —


(1)
Represents the 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 June 30, 2009 and December 31, 2008, the market price of the
Company's common stock was $0.07 and $0.05, respectively).


F-8


The
following table summarizes information related to warrants outstanding and
exercisable at December 31, 2009:





Exercise Price
                                
                                Number of
                                  Warrants
                                  outstanding
                                
                                
                                Weighted
                                  Average
                                  Remaining
                                  Contractual
                                  Life (Years)
                                
                                
                                Weighted
                                  Average
                                  Exercise
                                  Price$
      0.60-0.70
                                
                                
                                1,372,538
                                
                                
                                
                                0.72
                                
                                
                                $
                                0.64$
      0.07
                                
                                
                                4,214,286
                                
                                
                                
                                3.39
                                
                                
                                $
                                0.075,586,824
                                
                                
                                
                                
                                
                                
                                $
                                0.21





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 interest expense. During
the three months ended June 30, 2009 and 2008, the Company amortized
approximately $117,000 and $90,000, respectively, to interest expense. During
the six months ended June 30, 2009 and 2008, the Company amortized approximately
$234,000 and $181,000, respectively, to interest expense.





Fair
Value Measurements





The
Company adopted  SFAS No. 157, “Fair Value Measurements”, in the
first quarter of fiscal 2008.  SFAS 157 was amended in
February 2008 by the Financial Accounting Standards Board (“FASB”) Staff
Position (“FSP”) FAS No. 157-1, “Application of FASB Statement
No. 157 to FASB Statement No. 13 and Its Related Interpretive
Accounting Pronouncements That Address Leasing Transactions”,and by FSP FAS 157-2,
“Effective Date of FASB Statement No. 157”,which delayed the Company’s
application of SFAS 157 for nonrecurring nonfinancial assets and liabilities
until January 1, 2009. FAS 157 was further amended in October 2008 by
FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market
for That Asset Is Not Active”,which clarifies the
application of SFAS 157 to assets participating in inactive
markets.





Implementation
of SFAS 157 did not have a material effect on the Company’s results of
operations or financial position and had no effect on the Company’s existing
fair-value measurement practices. However, SFAS 157 requires 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.





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. Beginning January 1, 2009,
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. Liabilities measured at fair value on a recurring basis are summarized
as follows (unaudited):


F-9





June
      30,Level 1
                    
                    
                    Level 2
                    
                    
                    Level 3
                    
                    
                    2009Fair
      value of derivative liability
                    
                    
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    4,080,953
                    
                    
                    $
                    4,080,953Total
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    4,080,953
                    
                    
                    $
                    4,080,953




The Company has no assets that are
measured at fair value on a recurring basis. There were no assets or liabilities
measured at fair value on a non-recurring basis during the six months ended
June 30, 2009.





Accounting for Derivative
Instruments




In
connection with the issuance of certain convertible notes payable (see Note 3),
the notes provided for a conversion into shares of the Company's common stock at
a rate which was determined to be variable. The Company determined that the
variable conversion feature was an embedded derivative instrument pursuant to
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended. 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 agreements and at fair value as of
each subsequent balance sheet date. In addition, under the provisions of
Emerging Issues Task Force ("EITF") Issue No. 00-19, "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock," as a result of entering into the debenture agreements, the Company was
required to classify all other non-employee options and warrants as derivative
liabilities and record them at their fair values at each balance sheet date. Any
change in fair value was 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.




During
the six months ended June 30, 2009 and 2008, the Company recognized other
expense of $1,575,903 and other income of $2,588,416, respectively, related to
recording the derivative liability at fair value. At June 30, 2009 and December
31, 2008, the derivative liability balance was $4,080,953 and $1,975,298,
respectively.




Warrant-related
and conversion-related derivatives were valued using the Black-Scholes Option
Pricing Model with the following assumptions during the six months ended June
30, 2009 and 2008: dividend yield of 0%; volatility ranging from 178% to
670%(2009) and 160% to 187% (2008), respectively; and risk free interest rates
ranging from 0.19% to 2.54% (2009) and 0.10% to 2.21% (2008).


F-10


The
following table summarizes the activity related to the derivative liability
during the six months ended June 30, 2009:




Derivative
      liability - December 31, 2008
                  
                  $
                  2,025,298Derivative
      liability added during the year
                  
                  
                  479,752Change
      in fair value of derivative liability
                  
                  
                  1,575,903Total
      derivative liability - June 30, 2009
                  
                  $
                  4,080,953





Significant
Recent Accounting Pronouncements





In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
CodificationTMand the Hierarchy of Generally
Accepted Accounting Principles–a Replacement of FASB Statement No.
162("SFAS No. 168").The Codification
will become the source of authoritative U.S. GAAP.  The statement is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009.  The Company expects to adopt this standard
with the filing of its Quarterly Report on Form 10-Q for the period
ended September 30, 2009 and does not expect the standard to have a
material impact on the Company’s  consolidated financial
statements.




In
April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly(“FSP FAS
157-4”), which provides additional guidance for estimating fair value in
accordance with Statement of Financial Accounting Standards No. 157, Fair Value Measurements,
(“SFAS 157”).  FSP FAS 157-4 states that a significant decrease in the
volume and level of activity for the asset or liability when compared with
normal market activity is an indication that transactions or quoted prices may
not be determinative of fair value because there may be increased instances of
transactions that are not orderly in such market conditions.  The
adoption of FSP FAS 157-4 did not have a material impact on the Company’s
consolidated financial position, results of operations or
liquidity.




In
April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments (“FSP FAS 107-1 and APB 28-1”), which requires
disclosures about the fair value of the Company’s financial instruments for
which it is practicable to estimate that value, whether recognized or not
recognized in the balance sheets, in the interim reporting periods as well as in
the annual reporting periods. In addition, FSP FAS 107-1 and APB 28-1 requires
disclosures of the methods and significant assumptions used to estimate the fair
value of those financial instruments.  FSP FAS 107-1 and APB 28-1
became effective for the Company in its second quarter of fiscal
2009.  The adoption of FSP FAS 107-1 and APB 28-1 did not have a
material impact on the Company’s consolidated financial position, results of
operations or liquidity.




In
April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments (“FSP FAS 115-2 and FAS 124-2”), which
establishes a new method of recognizing and reporting other-than-temporary
impairments of debt securities and requires additional disclosures related to
debt and equity securities.  FSP FAS 115-2 and FAS 124-2 does not
change existing recognition and measurement guidance related to
other-than-temporary impairments of equity securities. FSP FAS 115-2 and FAS
124-2 became effective for the Company in its second quarter of fiscal
2009.  The adoption of FSP FAS 115-2 and FAS 124-2 did not have a
material impact on the Company’s consolidated financial position, results of
operations or liquidity.


F-11


Other
recent accounting pronouncements issued by the FASB (including the EITF) and the
American Institute of Certified Public Accountants did not or are not believed
by management to have a material impact on the Company’s present or future
consolidated financial statements.





2. CONTRACTS IN
PROGRESS





Contracts
in progress which include completed contracts not completely billed approximate
the following as of June 30, 2009 and December 31, 2008:





June 30, 2009
                      
                      
                      December 31, 2008Cumulative
      costs to date
                      
                      $
                      2,578,000
                      
                      
                      $
                      6,756,000Cumulative
      gross profit to date
                      
                      
                      2,050,000
                      
                      
                      
                      5,768,000Cumulative
      revenue earned
                      
                      
                      4,628,000
                      
                      
                      
                      12,524,000Less
      progress billings to date
                      
                      
                      (4,651,000
                      )
                      
                      
                      (13,495,000
                      )Net
      over billings
                      
                      $
                      (23,000
                      )
                      
                      $
                      (971,000
                      )





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





June 30, 2009
                    
                    
                    December 31, 2008Costs
      and estimated earnings in excess of billings on uncompleted
      contracts
                    
                    $
                    61,000
                    
                    
                    $
                    417,000Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
                    
                    
                    (84,000
                    )
                    
                    
                    (1,388,000
                    )Net
      over billings
                    
                    $
                    (23,000
                    )
                    
                    $
                    (971,000
                    )


F-12


3.
CONVERTIBLE DEBT





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





The
Company’s convertible debt financing, Amended 12% CAMOFI Convertible Note
(“Amended 12% CAMOFI Note”) and 15% CAMHZN Convertible Note (“15% CAMHZN Note”),
are in default.  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.  The Convertible Notes
aggregate to $3,897,213 principal and interest.  As of June 30, 2009
and December 31, 2008, the principal balances, accrued interest and the debt
discounts are presented in the table below.




June 30, 2009
                      
                      
                      December 31, 2008CONV NOTES
                      
                      CAMOFI
                      
                      
                      CAMHZN
                      
                      
                      CAMOFI
                      
                      
                      CAMHZNPrincipal
                      
                      $
                      2,827,281
                      
                      
                      $
                      750,000
                      
                      
                      $
                      2,827,281
                      
                      
                      $
                      750,000Discount
      related to warrants liability
                      
                      
                      (81,340
                      )
                      
                      
                      (33,541
                      )
                      
                      
                      (119,369
                      )
                      
                      
                      (48,890
                      )Discount
      related to convertible option liability
                      
                      
                      (1,301,502
                      )
                      
                      
                      (205,994
                      )
                      
                      
                      (1,909,996
                      )
                      
                      
                      (301,200
                      )Discount
      related to stock issued with notes
                      
                      
                      (40,938
                      )
                      
                      
                      
                      
                      
                      
                      (60,078
                      )Notes
      presented net of debt discounts
                      
                      $
                      1,403,501
                      
                      
                      $
                      510,465
                      
                      
                      $
                      737,838
                      
                      
                      $
                      399,910Accrued
      Interest
                      
                      $
                      226,182
                      
                      
                      $
                      93,750
                      
                      
                      $
                      56,546
                      
                      
                      $
                      37,500





During
the three months ended June 30, 2009 and 2008, the Company amortized debt
discounts of approximately $751,000 and $252,000, respectively, to interest
expense related to the 12% and 15% Convertible Notes. During the six months
ended June 30, 2009 and 2008, the Company amortized debt discounts of
approximately $776,000 and $178,000, respectively, to interest expense related
to the 12% and 15% Convertible Notes.





The
Convertible Debt and Warrant Agreements include an anti-dilution feature and a
buy-in clause which cause the embedded conversion option and the warrants to be
treated as derivative liabilities which are valued on a quarterly basis and the
resulting change in fair value of the derivative liabilities are recorded as a
gain or loss upon valuation in the statement of operations.





In
connection with the Amended 12% CAMOFI Note, the Company issued 725,000 five
year warrants with an exercise price of $0.10 per share and 725,000 five year
warrants with an exercise price of $0.20 per share.  Due to the
anti-dilution feature in the warrant agreements, the warrants have a reduced
exercise price of $0.07 and adjusted total warrants of 3,214,286 at June 30,
2009 and December 31, 2008.  As of June 30, 2009 and December 31,
2008, the fair value of the warrant derivative liability was determined to be
$208,873 and $151,400 respectively.   Upon valuation, a gain of $1,305
was recorded for the three months ended June 30, 2009. For the six months ended
June 30, 2009, a total loss of $57,473 was recorded.





In
connection with the 15% CAMHZN Note, the Company issued 1,000,000 seven year
warrants with an exercise price of $0.07 per share.  As of June 30,
2009 and December 31, 2008, the fair value of the warrant derivative liability
was determined to be $68,474 and $50,000 respectively. Upon valuation, a loss of
$97 was recorded for the three months ended June 30, 2009. For the six months
ended June 30, 2009, a total loss of $18,474 was recorded.





The
Amended 12% CAMOFI and 15% CAMHZN Notes are both convertible into shares of
common stock at a conversion price of $0.07 per share (subject to adjustment
based on the anti-dilution feature). At June 30, 2009 and December 31, 2008, the
aggregate fair value CAMOFI conversion option derivative liabilities was
$2,466,896 and $1,515,634, respectively. Upon valuation, a gain of $55,924 was
recorded for the three months ended June 30, 2009. For the six months ended June
30, 2009, a total loss of $951,262 was recorded. At June 30, 2009 and December
31, 2008, the aggregate fair value of the CAMHZN conversion option derivative
liabilities was $654,400 and $308,264, respectively. Upon valuation, a gain of
$14,835 was recorded for the three months ended June 30, 2009. For the six
months ended June 30, 2009, a loss of $346,136 was recorded.


F-13


CAMOFI
AND CAMHZN Senior Secured Convertible Debt





On
February 18, 2009, the Company entered into an agreement with CAMOFI Master LDC
for the issuance of a Senior Secured Convertible Note for $701,200, maturing on
August 18, 2009. The Note can be converted at $0.07 per share at any time during
the term of the convertible note, subject to certain anti-dilution adjustments.
The note is secured by all of the assets of the Company.





On
February 18, 2009, the Company entered into an agreement with CAMHZN Master LDC
for the issuance of a Senior Secured Convertible Note for $173,800 maturing on
August 18, 2009. The Note can be converted at $0.07 per share at any time during
the term of the convertible note, subject to certain anti-dilution
adjustments.





The Notes
are convertible into shares of common stock with a conversion price of $0.07.
Per FAS 133 “Accounting for Derivative Instruments and Hedging Activities”, the
conversion option is a derivative liability. The Company recorded at issuance a
$384,460 derivative liability for the CAMOFI Note, and a $95,292 derivative
liability for the CAMHZN Note. The conversion option liability is revalued each
quarter. At June 30, 2009 the fair value was $546,784 for the CAMOFI Note, and
$135,526 for CAMHZN Note.  Upon valuation, a gain of $122,696 and
$30,412, respectively, was recorded for the CAMOFI and CAMHZN notes for the
three months ended June 30, 2009.  For the six months ended June 30,
2009, a loss of $162,324 and $40,234, respectively, was recorded for the CAMOFI
and CAMZHN notes.





The
Company recorded deferred financing costs at issuance of $116,200 on the CAMOFI
Note and $28,800 on the CAMHZN Note for the difference between the face amount
of the notes and the net proceeds received. In addition, the discounts resulting
from the conversion options of $384,460 on the CAMOFI Note and $95,292 on the
CAMHZN Note are amortized into interest expense ratably over the life of the
Notes. For the three months ended June 30, 2009, the Company recorded
amortization expense on the conversion option and issuance costs of $215,476 and
$74,985, respectively, on the CAMOFI Note and $53,649 and 18,585, respectively,
on the CAMHZN Note. For the six months ended June 30, 2009, the Company recorded
amortization expense on the conversion option and issuance costs of $288,421 and
$108,750, respectively, on the CAMOFI Note and $71,396 and $57,844,
respectively, on the CAMHZN Note.





4.
EQUITY TRANSACTIONS





Equity
Compensation





In
February 2008, the Company entered into a year contract with a third party for
public relations services valued at $30,000. The fee was paid in the form of
150,000 shares of the Company’s common stock 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 is amortized to operating
expense over the life of the agreement.  Consulting fees under this
contract of $2,500 were amortized to expense during the three months ended June
30, 2008. Consulting fees under this contract of $2,500 and $5,000 were
amortized to expense during the six months ended June 30, 2009 and June 30,
2008, respectively. As of June 30, 2009 the balance of deferred consulting fees
was fully amortized.





In
February 2008, the Company entered into a three month contract with a third
party for public relations services valued at $20,000. The fee was paid in the
form of 100,000 shares of the Company’s common stock 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 is amortized to
operating expense over the life of the agreement. Consulting fees under this
contract of $20,000 were amortized to expense during the six months ended June
30, 2008 and at June 30, 2008 the balance of deferred consulting fees was fully
amortized.


F-14


In March
2008, the Company entered into a one month contract with a third party for
public and financial communication services valued at $25,000. The fee was
paid in the form of 125,000 shares of the Company’s common stock 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 is
amortized to operating expense over the life of the agreement. Consulting fees
under this contract of $25,000  were amortized to expense during the
three and six months ended June 30, 2008 and at June 30, 2008 the balance of
deferred consulting fees was fully amortized.





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.  $18,000 was amortized to operating expense during the three
months ended June 30, 2009 and 2008.  $35,000 was amortized to
operating expense during the six months ended June 30, 2009 and 2008. At June
30, 2009 and December 31, 2008, the remaining deferred consulting fees totaled
$64,167 and $101,667, respectively.





Dividends
on preferred stock





The
preferred shares Series C and preferred shares Series D shares have a mandatory
cumulative dividend of $1.25 per share, which is payable on a semi-annual basis
in September and December each year to holders of record on November 30 and May
31. The preferred shareholders have certain liquidation preferences and do not
have voting rights.





At June
30, 2009 and December 31, 2008, the Company had a total of 26,680 preferred
shares Series C and 11,640 preferred shares Series D issued and outstanding. As
of June 30, 2009 and December 31, 2008, the Company’s accumulated dividends
payable of $500,550 and $459,275, respectively. The Company declared dividends
of $41,275 during the three and six months ended June 30, 2009.


F-15


5.
EARNINGS (LOSS) PER SHARE





The
following is a reconciliation of the numerators and denominators of the basic
and diluted earnings (loss) per share computations for the three and six months
ended June 30, 2008:





Three months ended June 30, 2008Income
                    
                    
                    
                    
                    
                    Per Share(Loss)
                    
                    
                    Shares
                    
                    
                    AmountNet
      income
                    
                    $
                    438,349Less:
      Preferred stock dividends
                    
                    
                    (41,275
                    )Basic
      income available to common shareholders
                    
                    $
                    397,074
                    
                    
                    
                    15,344,656
                    
                    
                    $
                    0.03Add:
      Preferred dividends
                    
                    
                    41,275Add:
      Interest on convertible debt
                    
                    
                    148,382
                    
                    
                    
                    -Add:
      Dilutive impact of convertible preferred stock
                    
                    
                    -
                    
                    
                    
                    582,000Add:
      Dilutive impact of convertible debt
                    
                    
                    -
                    
                    
                    
                    29,500,000Add:
      Dilutive impact of options and warrants
                    
                    
                    -
                    
                    
                    
                    24,182Diluted
      income available to common shareholders
                    
                    $
                    586,731
                    
                    
                    
                    45,450,838
                    
                    
                    $
                    0.01





Six months ended June 30, 2008Income
                    
                    
                    
                    
                    
                    Per Share(Loss)
                    
                    
                    Shares
                    
                    
                    AmountNet
      income
                    
                    $
                    764,184Less:
      Preferred stock dividends
                    
                    
                    (41,275
                    )Basic
      income available to common shareholders
                    
                    $
                    722,909
                    
                    
                    
                    15,344,656
                    
                    
                    $
                    0.05Add:
      Preferred dividends
                    
                    
                    41,275Add:
      Interest on convertible debt
                    
                    
                    299,403
                    
                    
                    
                    -Add:
      Dilutive impact of convertible preferred stock
                    
                    
                    -
                    
                    
                    
                    582,000Add:
      Dilutive impact of convertible debt
                    
                    
                    -
                    
                    
                    
                    29,500,000Add:
      Dilutive impact of options and warrants
                    
                    
                    -
                    
                    
                    
                    2,343,000Diluted
      income available to common shareholders
                    
                    $
                    1,063,587
                    
                    
                    
                    47,769,656
                    
                    
                    $
                    0.02


F-16


The
computation of diluted earnings per share does not assume conversion or exercise
of securities that may have an anti-dilutive effect on earnings per share.
Convertible preferred stock, convertible debt, stock options and warrants that
have not been included in the diluted income per share computation totaled
76,073,976 for the period ended June 30, 2009.





6.
RESTATEMENTS





June
30,2008





The
statement of operations and statement of cash flows for the three and six months
ended June 30, 2008 included herein were restated to reflect the effect of
changes to the original accounting for the CAMOFI Note issued in February
2006.  The original accounting did not record the separate derivative
for the conversion option and the warrants in accordance with FAS 133,
“Accounting for Derivative Instruments and Hedging Activities” and EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled In, a Company’s Own Stock”.





The
effect of these changes impacted the balance sheet and the statement of
operations from February 2006 through December 31, 2008. The balance sheet
effect is due to recording the conversion option and warrant liabilities and the
effect on the statement of operations is due to the gains and losses from the
quarterly fair value adjustments and an increase in interest expense.
Accordingly, the statement of operations for the three and  six months
ended June 30, 2008 has been restated as summarized below:





Effect of Correction
                              
                              As Previously Reported
                              
                              
                              Adjustment
                              
                              
                              As RestatedBalance
      Sheet as of June 30, 2008Conversion
      Option Liability
                              
                              
                              -
                              
                              
                              
                              3,021,989
                              
                              
                              
                              3,021,989Warrant
      Liability
                              
                              
                              -
                              
                              
                              
                              186,916
                              
                              
                              
                              186,916Accumulated
      Deficit
                              
                              
                              13,098,072
                              
                              
                              
                              1,203,869
                              
                              
                              
                              14,301,941Total
      Stockholders’ Deficit (equity)
                              
                              
                              3,022,952
                              
                              
                              
                              3,185,486
                              
                              
                              
                              6,208,438Statement
      of Operations for the three months ended June 30, 2008Marked-to-Market
      Gain (Loss)
                              
                              
                              -
                              
                              
                              
                              (515,057)
                              
                              
                              
                              (515,057)Net
      Income (Loss)
                              
                              
                              (849,305
                              )
                              
                              
                              1,241,827
                              
                              
                              
                              392,522Net
      Income (Loss) Available to common shareholders
                              
                              
                              (890,580)
                              
                              
                              
                              1,241,827
                              
                              
                              
                              351,247EPS
      - Basic
                              
                              
                              (0.06
                              )
                              
                              
                              0.08
                              
                              
                              
                              0.02EPS
      - Diluted
                              
                              
                              (0.06
                              )
                              
                              
                              0.08
                              
                              
                              
                              0.02Statement
      of Operations for the six months ended June 30, 2008Marked-to-Market
      Gain (Loss)
                              
                              
                              -
                              
                              
                              
                              785,705
                              
                              
                              
                              785,705Net
      Income (Loss)
                              
                              
                              (1,824,232
                              )
                              
                              
                              2,542,589
                              
                              
                              
                              718,357Net
      Income (Loss) Available to common shareholders
                              
                              
                              (1,865,507)
                              
                              
                              
                              2,542,589
                              
                              
                              
                              677,082EPS
      - Basic
                              
                              
                              (0.13
                              )
                              
                              
                              0.18
                              
                              
                              
                              0.05EPS
      - Diluted
                              
                              
                              (0.13
                              )
                              
                              
                              0.18
                              
                              
                              
                              0.05





March
31, 2009





The
statement of operations and statement of cash flows for the three months ended
June 30, 2009 included herein reflect the effect of changes to the original
accounting for the CAMOFI and CAMZHN notes issued in February 2009, certain
adjustments related to the Company’s contract accounting, a misclassification
error and for the valuation of the related derivative liabilities at March 31,
2009.


F-17


The
effect of these changes impacted the balance sheet and the statement of
operations from January 1, 2009 through March 31, 2009. The balance sheet effect
is due to adjusting the conversion option discount that was originally recorded
on the CAMOFI and CAMZHN notes issued in February 2009, the valuation of the
related derivative liabilities certain adjustments related to the Company’s
contract accounting, a misclassification error and for the valuation of the
related derivative liabilities at March 31, 2009 and the valuation of the
derivative liabilities associated with the 12% CAMOFI and 15% CAMZHN
notes.  The effect on the statement of operations is due to the gains
and losses from the revised quarterly fair value adjustments and an increase in
interest expense from the increased amortization expense related to the
adjustment of the conversion option discounts that were recorded on the CAMOFI
and CAMZHN notes issued in February 2009. Accordingly, the effect of the
restatements on the balance sheet at March 31, 2009 and statement of operations
for the three months ended March 31, 2009 has been summarized
below:




Effect of Correction
                    
                    As Previously Reported
                    
                    
                    Adjustment
                    
                    
                    As RestatedBalance
      Sheet as of March 31, 2009(1)
      Costs in Excess of Billings
                    
                    
                    15,551
                    
                    
                    
                    86,477
                    
                    
                    
                    102,028(2)
      Deferred financing costs
                    
                    
                    435,986
                    
                    
                    
                    108,750
                    
                    
                    
                    544,736(3)
      Billings in Excess of Costs
                    
                    
                    823,478
                    
                    
                    
                    (216,417)
                    
                    
                    
                    607,061(4)
      February 2009 Convertible Notes
                    
                    
                    464,984
                    
                    
                    
                    49,798
                    
                    
                    
                    514,782(5)
      Derivative Liability
                    
                    
                    4,885,000
                    
                    
                    
                    (578,972)
                    
                    
                    
                    4,306,028(6)Accumulated
      Deficit
                    
                    
                    16,701,824
                    
                    
                    
                    (1,040,414)
                    
                    
                    
                    15,661,410Statement
      of Operations for the three months ended March 31, 2009(7)
      Sales
                    
                    
                    1,298,458
                    
                    
                    
                    (243,756)
                    
                    
                    
                    1,054,702(8)
      Cost of sales
                    
                    
                    1,365,543
                    
                    
                    
                    (546,650)
                    
                    
                    
                    818,893(9)
      Marked-to-Market Gain (Loss)
                    
                    
                    (2,738,436)
                    
                    
                    
                    937,458
                    
                    
                    
                    (1,800,978)(10)
      Interest expense
                    
                    
                    (490,408)
                    
                    
                    
                    (199,938)
                    
                    
                    
                    (632,145)(11)
      Net Loss
                    
                    
                    (3,821,869)
                    
                    
                    
                    1,040,414
                    
                    
                    
                    (2,781,455)Net
      Loss Available to common shareholders
                    
                    
                    (3,821,869)
                    
                    
                    
                    1,040,414
                    
                    
                    
                    (2,781,455)EPS
      – Basic
                    
                    
                    (0.25
                    )
                    
                    
                    0.07
                    
                    
                    
                    (0.18)EPS
      - Diluted
                    
                    
                    (0.25
                    )
                    
                    
                    0.07
                    
                    
                    
                    (0.18)


F-18


(1)
              Adjustment
      in order to reconcile the Company’s balance sheet account to the Company’s
      contract accounting
worksheets.




(2)
              Represents
      the reclassification of $145,000 of financing costs in connection with the
      February 2009 notes, less amortization of
  $36,250.




(3)
              Adjustment
      in order to reconcile the Company’s balance sheet account to the Company’s
      contract accounting
worksheets.




(4)
              Adjustment
      reflects an increase of $278,486 of debt discount related to the valuation
      of the conversion options and an increase of $119,938 of amortization of
      such options, net of reclassification of financing costs of $108,750 noted
      in (1) above.




(5)
              Adjustment
      reflects an increase of $278,486 related to the valuation of the
      conversion options of the February 2009 notes and a decrease in the loss
      on fair value of $937,458 and corrections of $80,000 of misclassifications
      between the change in fair value and interest
  expense.




(6)
              and
      (11) The cumulative effect of adjustments (7) through
  (11).




(7)
              and
      (8) Adjustment in order to reconcile the Company’s P&L accounts to the
      Company’s contract accounting
worksheets.




(9)
              Adjustment
      reflects an increase of $278,466 in the valuation of the conversion
      options in connection with the February 2009 notes, a decrease in the
      valuation of all derivatives of $578, 972 and a decrease in the loss on
      fair value of $937,458.




(10)
              See
      (2) and (4) above.


F-19


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 condensed
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





The
Company is engaged in acquiring, re-manufacturing and selling pre-owned Computer
Numerically Controlled ("CNC") machine tools to manufacturing customers. The
Company provides rebuilt, retrofit and remanufacturing services for numerous
brands of machine tools. The remanufacturing of a machine tool, typically
consisting of replacing all components, realigning the machine, adding updated
CNC capability and electrical and mechanical enhancements, generally takes two
to four months to complete. Once completed, a remanufactured machine is a "like
new," state-of-the-art machine with a price ranging from $275,000 to $1,000,000,
which is substantially less then the price of an equivalent new machine. The
Company also manufactures original equipment CNC large turning lathes and
attachments under the trade name Century Turn.





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





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





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





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





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


4


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





The
Company's current strategy is to expand its customer sales base with its present
line of machine products. The Company's growth strategy also includes strategic
acquisitions in addition to growing the current business. Plans for expansion
are funded through current working capital from ongoing sales. A significant
acquisition will require additional financing.





RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2009 COMPARED TO JUNE 30,
2008.





Revenues.  The
Company generated revenues of $1,359,630 for the three months ended June 30,
2009, which was a $75,046 or 5% decrease from $1,434,676 for the
three  months  ended  June
30,  2008.  The decrease is the result of lower than usual
sales and a tighter credit market.





Gross Profit.  Gross
profit for the three  months  ended June
30,  2009,  was $165,900 or 12% of
revenues,  compared to $71,062 or 5% of revenues for the three months
ended June 30, 2008, a 133% increase. The increase in gross profit is due to
management strategy to lower cost of sales through reduction of overhead
expenses and cost of materials.





Operating
Expenses.  The Company incurred total operating expenses of
$296,534 for the three months ended June 30, 2009, which was a $130,028 or 30%
decrease from $426,562 for the three months ended June 30, 2008. In the three
months ended June 30, 2009, compared with the three months ended June 30, 2008,
all the operating expenses increased (decreased) as follow:





Increase/(Decrease)
                        %Consulting
      and other compensation
                      
                      
                      4Salaries
      and related
                      
                      
                      13Selling,
      general and administrative
                      
                      
                      (51
                      )





The
increase in salaries and related costs is due to the reclassification of certain
costs to compensation. Selling, general and administrative expenses decreased
due to management strategy to reduce operating expenses.





Operating
Loss.  Operating loss for the three months ended June 30, 2009,
was $130,634 compared to an operating loss of $355,500 for the three months
ended June 30, 2008. The decrease in loss of $224,866 is primarily due to
decreased cost of sales and decreased selling, general and administrative
expenses for the quarter ended June 30, 2009.





Interest
Expense and Debt Discount Amortization.  Interest expense for
the three months ended June 30, 2009, was $952,461 compared with $497,382 for
the three months ended June 30, 2008. The increase of $455,079, or 91%, in
interest expenses is due to additional interest on new convertible
loans.





Change in Fair Value of Derivative
Liabilities.In connection with its convertible notes, the Company
recorded conversion options and warrant derivative liabilities. The derivative
liabilities are reevaluated each reporting period. During the three months ended
June 30, 2009, we recorded a gain of $225,075 on the change in fair value due to
the decrease in our stock price from March 31, 2009.


5


RESULTS OF OPERATIONS FOR THE SIX
MONTHS ENDED JUNE 30, 2009 COMPARED TO JUNE 30, 2008.





Revenues.  The
Company generated revenues of $2,414,332 for the six months ended June 30, 2009,
which was a $546,946 or 18% decrease from $2,961,278 for the
six months ended June 30, 2008.  The decrease is
the result of lower then usual sales and a tighter credit market.





Gross Profit.  Gross
profit for the six months ended June 30, 2009, was 401,709
or 17% of revenues, compared to $289,185 or 10% of revenues for the six
months ended June 30, 2008.





Operating
Expenses.  The Company incurred total operating expenses of
$744,257 for the six months ended June 30, 2009, which was a $445,214 or 37%
decrease from $1,189,471 for the six months ended June 30, 2008. In the six
months ended June 30, 2009, compared with the six months ended June 30, 2008,
all the operating expenses increased (decreased) as follows:





Increase/(Decrease)
                    %Consulting
      and other compensation
                  
                  
                  (60
                  )Salaries
      and related
                  
                  
                  85Selling,
      general and administrative
                  
                  
                  (49
                  )





The
decrease in consulting and other compensation is due to the reduction in the
number of consulting contracts and the expiration of the existing contracts. The
increase in salaries and related costs is due to the reclassification of certain
costs to compensation. Selling, general and administrative expenses decreased
due to management strategy to reduce operating expenses.





Operating
Loss.  Operating loss for the six months ended June 30, 2009,
was $342,548 compared to $900,286 for the six months ended June 30, 2008. The
decrease in loss of $557,738 or 62% is primarily due to decreased consulting and
other compensation expenses and selling, general and administrative
expenses.





Interest
Expense and Debt Discount Amortization.  Interest expense for
the six months ended June 30, 2009, was $1,620,856 compared with $984,151 for
the six months ended June 30, 2008. The increase of $636,705 in interest
expenses is due to additional interest on new convertible loans.





Change in Fair Value of Derivative
Liabilities.In connection with its convertible notes, the Company
recorded conversion options and warrant derivative liabilities. The derivative
liabilities are reevaluated each reporting period. During the six months ended
June 30, 2009, we recorded a loss on the change in fair value of derivative
liabilities due to the increase in our stock price during the period, in
addition to recording $479,752 of additional derivatives during the
period.





FINANCIAL
CONDITION, LIQUIDITY, CAPITAL RESOURCES





The net
decrease in cash during the six months ended June 30, 2009 was
$31,889.





For
the six months ended June 30, 2009, the cash provided by financing activities
was $745,592, compared with $30,844 in the six months ended June 30, 2008. For
the six months ended June 30, 2009, $777,481 cash was used by operating
activities.


6


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. The Company has an accumulated deficit of
approximately $16,455,000, a net loss of approximately $3,534,000, a working
capital deficit of approximately $8,108,000 and was also in default on two of
its convertible notes. 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 along with renegotiated or new debt and
equity financing arrangements which management believes may be insufficient to
fund its capital expenditures, working capital and other cash requirements for
the year ending December 31, 2009. Therefore, the Company will be required to
seek additional funds to finance its long-term operations.  The
successful outcome of future activities cannot be determined at this time and
there is no assurance that if achieved, the Company will have sufficient funds
to execute its intended business plan or generate positive operating
results.





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


·
            The Company continues its
      aggressive program for selling
machines.


·
            The Company continues to
      implement plans to further reduce operating
  costs.


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


·
            The Company is seeking strategic
      acquisition candidates





The
condensed consolidated financial statements do not include any adjustments
related to recoverability and classification of asset carrying amounts 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 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 financial
statements:





Revenue
Recognition





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





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





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


7


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





Method
of Accounting for Long-Term Contracts





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





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





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





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





Other
Significant Accounting Policies





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


8


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 June 30, 2009 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.





(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.


9


The Accountant is the only individual with technical accounting experience in
our company but is limited in the exposure to SEC filings and
disclosures.





We have not consulted with other outside parties with accounting experience to
assist us in the SEC filings and disclosures prior to the December 31, 2008 10-K
filing during 2009.





(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.





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.


10





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
October 2008, the Company has been in default with all monthly payments on the
12% CAMOFI and 15% CAMHZN Convertible Note payable. As of June 30, 2009, the
Company’s default principal and interest aggregate
to $1,100,000.





Item
4.     Submission of Matters to a Vote of Security
Holders





None.





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


11


SIGNATURES





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





August
      14, 2009
                NEW
      CENTURY COMPANIES, INC./s/
      DAVID DUQUETTEName:  David
      DuquetteTitle:
      Chairman, President and
Director





In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Company and in the capacities and on the
dates indicated.





August
      14, 2009
                  /s/
      DAVID DUQUETTEName:  David
      DuquetteTitle:
      Chairman, President and DirectorAugust
      14, 2009
                  /s/
      JOSEF CZIKMANTORIName:
      Josef CzikmantoriTitle:
      Secretary and
Director


12