UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q/A


(Amendment
No. 1)




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




For the
quarterly period ended June 30,
2010





Commission
file number: 0896898











U.S.
AEROSPACE, INC.


(Exact
name of registrant as specified in its charter)




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




10291
Trademark Street


Rancho
Cucamonga, CA 91730


(Address
of principal executive offices)




(909)
477-6504


(Registrant’s
telephone number, including area code)




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




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 o
                Accelerated
      filer oNon-accelerated
      filer o
                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
September 10, 2010, the Company had 32,227,640 shares of common stock, $0.10 par
value, issued and outstanding.











U.S.
AEROSPACE, INC.





INDEX


Page No.Explanatory
      Note
                    1Forward
      Looking Statements
                    1PART
      I - FINANCIAL INFORMATIONItem
      1. Financial Statements
                    F-1Condensed
      Consolidated Balance Sheets - June 30, 2010 (Unaudited) and December 31,
      2009
                    F-1Condensed
      Consolidated Statements of Operations (Unaudited) -Three and Six
      Months Ended June 30, 2010 and 2009
                    F-2Condensed
      Consolidated Statements of Cash Flows (Unaudited) -Six Months
      Ended June 30, 2010 and 2009
                    F-3Notes
      to Condensed Consolidated Financial Statements
                    F-4Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
                    2Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
                    5Item
      4T. Controls and Procedures
                    5PART
      II - OTHER INFORMATIONItem
      1. Legal Proceedings
                    6Item
      1.A. Risk Factors
                    6Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds
                    8Item
      5. Other Information
                    8Item
      6. Exhibits
                    9SIGNATURES
                    9





Explanatory
Note





We are
amending and restating in its entirety our Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 2010, originally filed with the Securities and
Exchange Commission on August 23, 2010.  We are restating our
unaudited consolidated financial statements, accompanying notes, and
management’s discussion and analysis in their entirety.





Forward-Looking
Statements




This
Amended Quarterly Report on Form 10-Q/A contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, and Section 21E
of the Securities Exchange Act of 1934. 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 report.


1


Part
I - Financial Information





ITEM
1.  FINANCIAL STATEMENTS





U.S.
AEROSPACE, INC.  AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


June
30, 2010 and December 31, 2009


Unaudited





June
      30, 2010
              
              
              December
      31, 2009ASSETSCurrent
      AssetsCash
              
              $
              28,141
              
              
              $
              157,633Accounts
      receivable,
              
              
              134,861
              
              
              
              71,120Loan
      receivable from employees
              
              
              228
              
              
              
              -Inventories
              
              
              262,462
              
              
              
              284,339Costs
      and estimated earnings in excess of billings on uncompleted
      contracts
              
              
              24,066
              
              
              
              5,725Deferred
      financing costs, current portion
              
              
              36,532
              
              
              
              150,251Prepaid
      expenses and other current assets
              
              
              239,196
              
              
              
              7,738Total
      current assets
              
              
              725,486
              
              
              
              676,806Property
      and equipment, net
              
              
              964,587
              
              
              
              716,864Goodwill
              
              
              2,401,342
              
              
              
              2,359,121Other
      intangible assets, net
              
              
              1,339,285
              
              
              
              1,446,429Deferred
      financing costs, long-term portion
              
              
              83,550
              
              
              
              92,338Other
      assets
              
              
              151,790
              
              
              
              151,790Total
      Assets
              
              $
              5,666,040
              
              
              $
              5,443,348LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      LiabilitiesBank
      overdraft
              
              $
              20,832
              
              
              $
              7,515Accounts
      payable and accrued liabilities
              
              
              5,945,511
              
              
              
              3,856,316Derivative
      liability
              
              
              -
              
              
              
              48,378Dividends
      payable
              
              
              217,900
              
              
              
              204,600Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
              
              
              -
              
              
              
              149,849Capital
      lease obligations
              
              
              918,881
              
              
              
              752,957Loan
      payable and accrued interest, net of discount of $0 at June 30, 2010 and
      $10,003 at December 31, 2009
              
              
              -
              
              
              
              145,563Notes
      payable and accrued interest
              
              
              -
              
              
              
              115,544Notes
      payable to related parties and accrued interest
              
              
              599,394
              
              
              
              545,356Convertible
      notes payable and accrued interest , net of discounts of $313,814 at June
      30, 2010 and $1,350,164 at December 31, 2009
              
              
              6,275,243
              
              
              
              4,341,613Total
      Liabilities
              
              
              13,977,761
              
              
              
              10,167,691Commitments
      and ContingenciesStockholders'
      DeficitCumulative,
      convertible, Series B preferred stock, $1 par value, 15,000,000 shares
      authorized, no shares issued and outstanding (liquidation preference of
      $25 per share)
              
              
              -
              
              
              
              -Cumulative,
      convertible, Series C preferred stock, $1 par value, 75,000 shares
      authorized, 26,880 shares issued and outstanding (liquidation preference
      of $672,000 at June 30, 2010 and December 31, 2009)
              
              
              26,880
              
              
              
              26,880Cumulative,
      convertible, Series D preferred stock, $25 par value, 75,000 shares
      authorized, 11,640 shares issued and outstanding (liquidation preference
      of $508,900 at June 30, 2010 and  $495,600 at December 31,
      2009)
              
              
              291,000
              
              
              
              291,000Common
      stock, $0.10 par value, 250,000,000 shares authorized;
      24,977,640  shares issued and outstanding at June 30, 2010 and
      22,430,211 at December 31, 2009
              
              
              2,497,765
              
              
              
              2,243,022Deferred
      equity compensation
              
              
              
              
              
              
              (29,169
              )Notes
      receivable from stockholders
              
              
              (584,691
              )
              
              
              (584,691
              )Additional
      paid-in capital
              
              
              21,474,070
              
              
              
              20,167,283Accumulated
      deficit
              
              
              (32,016,745
              )
              
              
              (26,838,668
              )Total
      Stockholders' Deficit
              
              
              (8,311,721
              )
              
              
              (4,724,343
              )Total
      Liabilities and Stockholders' Deficit
              
              $
              5,669,040
              
              
              $
              5,443,348





See
accompanying notes to the condensed consolidated financial
statements.


F-1


U.S.
AEROSPACE, INC.  AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


For
the Three and Six Months Ended June 30, 2010 and 2009


Unaudited




For
      the Three Months Ended
                      June
      30,
                  
                  
                  For
      the Six Months Ended
                      June
      30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Net
      revenues
                  
                  $
                  694,315
                  
                  
                  $
                  1,359,630
                  
                  
                  $
                  1,252,005
                  
                  
                  $
                  2,414,332Cost
      of sales
                  
                  
                  592,864
                  
                  
                  
                  1,193,730
                  
                  
                  
                  1,285,512
                  
                  
                  
                  2,012,623Gross
      profit (loss)
                  
                  
                  101,451
                  
                  
                  
                  165,900
                  
                  
                  
                  (33,507
                  )
                  
                  
                  401,709Operating
      expenses:Consulting
      and other compensation
                  
                  
                  1,858,290
                  
                  
                  
                  77,158
                  
                  
                  
                  2,056,638
                  
                  
                  
                  139,773Salaries
      and related
                  
                  
                  231,740
                  
                  
                  
                  83,409
                  
                  
                  
                  478,661
                  
                  
                  
                  236,496Selling,
      general and administrative
                  
                  
                  330,190
                  
                  
                  
                  135,967
                  
                  
                  
                  728,928
                  
                  
                  
                  367,988Total
      operating expenses
                  
                  
                  2,420,220
                  
                  
                  
                  296,534
                  
                  
                  
                  3,264,227
                  
                  
                  
                  744,257Operating
      loss
                  
                  
                  (2,318,769
                  )
                  
                  
                  (130,634
                  )
                  
                  
                  (3,297,734
                  )
                  
                  
                  (342,548
                  )Other
      income (expenses), net:Other
      income
                  
                  
                  109,153
                  
                  
                  
                  
                  
                  
                  
                  109,153Gain
      on write-off of accounts payable
                  
                  
                  10,175
                  
                  
                  
                  -
                  
                  
                  
                  15,507
                  
                  
                  
                  5,681Gain
      on disposal of assets
                  
                  
                  6,025
                  
                  
                  
                  -
                  
                  
                  
                  196,779
                  
                  
                  
                  -Gain
      (loss) on valuation of derivative liabilities
                  
                  
                  -
                  
                  
                  
                  225,075
                  
                  
                  
                  (11,253
                  )
                  
                  
                  (1,575,903
                  )Interest
      expense
                  
                  
                  (1,204,023
                  )
                  
                  
                  (952,461
                  )
                  
                  
                  (2,177,229
                  )
                  
                  
                  (1,620,856
                  )Total
      other expenses, net
                  
                  
                  (1,078,670
                  )
                  
                  
                  (727,386
                  )
                  
                  
                  (1,867,043
                  )
                  
                  
                  (3,191,078
                  )Net
      loss
                  
                  $
                  (3,397,439
                  )
                  
                  $
                  (858,020
                  )
                  
                  
                  (5,164,777
                  )
                  
                  
                  (3,533,626
                  )Preferred
      Stock Dividends
                  
                  
                  (13,300
                  )
                  
                  
                  (41,275
                  )
                  
                  
                  (13,300
                  )
                  
                  
                  (41,275
                  )Net
      loss applicable to common stockholders
                  
                  
                  (3,410,739
                  )
                  
                  
                  (899,295
                  
                  
                  
                  (5,178,077
                  )
                  
                  
                  (3,574,901Basic
      and diluted net loss available to common stockholders per common
      share
                  
                  $
                  (0.14
                  )
                  
                  $
                  (0.06
                  )
                  
                  
                  (0.21
                  )
                  
                  
                  (0.23
                  )Basic
      and diluted weighted average common shares outstanding
                  
                  
                  24,692,849
                  
                  
                  
                  15,344,654
                  
                  
                  
                  24,117,622
                  
                  
                  
                  15,344,654




See
accompanying notes to the condensed consolidated financial
statements.




F-2


U.S.
AEROSPACE, INC.  AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


For
the Six Months Ended June 30, 2010 and 2009


Unaudited




For
      the Six Months Ended June 30,2010
                  
                  
                  2009Cash
      flows from operating activities:Net
      loss
                  
                  
                  (5,164,777
                  )
                  
                  
                  (3,533,626
                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                  
                  
                  288,386
                  
                  
                  
                  34,681Gain
      on write-off of accounts payable
                  
                  
                  (15,507
                  )
                  
                  
                  (5,681
                  )Gain
      on disposal of assets
                  
                  
                  (196,779
                  )
                  
                  
                  -Loss
      on settlement of loan payable
                  
                  
                  21,434
                  
                  
                  
                  -Amortization
      of deferred financing costs
                  
                  
                  122,507
                  
                  
                  
                  233,712Amortization
      of stock-based consulting fees
                  
                  
                  338,649
                  
                  
                  
                  37,500Amortization
      of debt discount
                  
                  
                  1,671,353
                  
                  
                  
                  1,136,035Estimated
      fair value of common stock and options issued for services
                  
                  
                  219,319
                  
                  
                  
                  35,014Loss
      on valuation of  derivative liabilities
                  
                  
                  11,253
                  
                  
                  
                  1,575,903Changes
      in operating assets and liabilities:Accounts
      receivable
                  
                  
                  (63,969
                  )
                  
                  
                  225,881Loan
      receivable from employees
                  
                  
                  (3,278
                  )
                  
                  
                  -Inventories
                  
                  
                  21,877
                  
                  
                  
                  141,166Costs
      and estimated earnings in excess of billings on uncompleted
      contracts
                  
                  
                  (18,341
                  )
                  
                  
                  355,874Prepaid
      expenses and other current assets
                  
                  
                  (3,958
                  )
                  
                  
                  8,489Accounts
      payable, accrued liabilities and accrued interest
                  
                  
                  2,541,279
                  
                  
                  
                  281,520Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
                  
                  
                  (149,849
                  )
                  
                  
                  (1,303,946
                  )Net
      cash used in operating activities
                  
                  
                  (377,218
                  )
                  
                  
                  (777,481
                  )Cash
      flows from investing activities:Contribution
      from partner
                  
                  
                  50,000Net
      cash provided by investing activities  :
                  
                  
                  50,000Cash
      flows from financing activities:Bank
      overdraft
                  
                  
                  13,317
                  
                  
                  
                  29,224Proceeds
      from issuance of convertible notes payable, net
                  
                  
                  350,000
                  
                  
                  
                  730,000Principal
      payments on notes payable to related parties
                  
                  
                  (2,600
                  )
                  
                  
                  -Proceeds
      from issuance of notes payable to related parties
                  
                  
                  44,138
                  
                  
                  
                  -Principal
      payments on notes payable and capital leases
                  
                  
                  (207,224
                  )
                  
                  
                  (13,732
                  )Net
      cash provided by financing activities
                  
                  
                  197,631
                  
                  
                  
                  745,592Net
      (decrease) increase  in cash
                  
                  
                  (129,492
                  )
                  
                  
                  (31,889
                  )Cash
      at beginning of period
                  
                  
                  157,633
                  
                  
                  
                  31,889Cash
      at end of period
                  
                  $
                  28,141
                  
                  
                  $
                  -Supplemental
      schedule of cash flow information:Interest
      paid
                  
                  $
                  27,087
                  
                  
                  $
                  -Supplemental
      disclosure of non-cash financing and investing activities:Debt
      discount recorded on convertible notes payable
                  
                  $
                  625,000
                  
                  
                  $
                  479,752Conversion
      of convertible notes payable
                  
                  $
                  25,600
                  
                  
                  $
                  -Purchase
      of property and equipment through capital lease
                  
                  $
                  479,488
                  
                  
                  $
                  -Payment
      of accounts payable with proceeds from convertible notes
      payable
                  
                  $
                  125,000
                  
                  
                  $
                  -Repayment
      of loan payable with proceeds from convertible notes
    payable
                  
                  $
                  150,000
                  
                  
                  $
                  -Estimated
      fair value of warrants issued in connection with consulting service
      agreement
                  
                  $
                  420,000
                  
                  
                  $
                  -Reclassification
      of the estimated fair value of warrants from derivative liabilities
      to additional paid-in capital
                  
                  $
                  59,631
                  
                  
                  $
                  -Addition
      to goodwill for adjustment in net liabilities assumed in
      acquisition
                  
                  $
                  42,221
                  
                  
                  $
                  -Accrued
      cumulative dividends on preferred stock
                  
                  $
                  13,300
                  
                  
                  $
                  41,275Cash
      exercise of stock options
                  
                  $
                  73,600
                  
                  
                  $
                  -




See
accompanying notes to the condensed consolidated financial
statements.


F-3


U.S.
AEROSPACE, INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009










1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




Organization
and Nature of Operations




U.S.
Aerospace, Inc. (“U.S. Aerospace” or, collectively with its wholly-owned
subsidiaries, the “Company”) was incorporated in Delaware on August 1,
1980.  Precision Aerostructures, Inc. (“PAI”), a California
corporation, was acquired as a subsidiary on October 9, 2009 (see Note
3).  PAI supplies aircraft assemblies, structural components, and
highly engineered, precision-machined details for commercial and military
aircraft.





Effective
August 27, 2010, the Company sold its unprofitable remanufacturing subsidiary,
New Century Remanufacturing, Inc. (“NCR”), to the Company’s former directors,
David Duquette and Josef Czikmantori, for $1 and an indemnity from all of NCR’s
liabilities.  As such, the Company is no longer in the machine tool
business, and is focused solely on aerospace and defense.





The
Company is an emerging world-class supplier on projects for the U.S. Department
of Defense, U.S. Air Force, prime defense contractors, aerospace companies, and
commercial aircraft manufacturers.  The Company trades on the
Over-the-Counter Bulletin Board under the symbol "USAE".





Principles
of Consolidation




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





Segments
of an Enterprise and Related Information





The
Company has adopted the authoritative guidance for disclosures about segments of
an enterprise and related information. The guidance requires the Company to
report information about segments of its business in annual financial statements
and requires it to report selected segment information in its quarterly reports
issued to stockholders.  The guidance also requires entity-wide
disclosures about the products and services an entity provides, the material
countries in which it holds assets and reports revenues and its major customers.
The Company’s two reportable segments are managed separately based on
fundamental differences in their operations.  At June 30, 2010, the
Company operated in the following two reportable segments (see Note
10):





(a)
Multiaxis structural aircraft components and


(b) CNC
machine tool remanufacturing.





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





Basis
of Presentation





The
accompanying unaudited condensed consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the U.S.
Securities and Exchange Commission (the "SEC"). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
(“GAAP”) have been omitted pursuant to such SEC rules and regulations;
nevertheless, the Company believes that the disclosures are adequate to make the
information presented not misleading. These financial statements and the notes
hereto should be read in conjunction with the financial statements, accounting
policies and notes thereto included in the Company's Annual Report on Form 10-K
for the year ended December 31, 2009, filed with the SEC. In the opinion of
management, all adjustments necessary to present fairly, in accordance with
GAAP, the Company's consolidated financial position as of June 30, 2010, and the
consolidated results of operations and cash flows for the interim periods
presented, have been made.  Such adjustments consist only of normal
recurring adjustments.  The results of operations for the three and
six months ended June 30, 2010 are not necessarily indicative of the results for
the full year ending December 31, 2010. Amounts related to disclosure of
December 31, 2009 balances within these interim condensed consolidated
financial statements were derived from the audited 2009 consolidated financial
statements and notes thereto.


F-4




The
accompanying condensed consolidated financial statements have been prepared
assuming the Company will continue as a going concern, which contemplates, among
other things, the realization of assets and satisfaction of liabilities in the
normal course of business.  As of and for the six months ended June
30, 2010, the Company had substantial net loss, accumulated deficit, working
capital deficit, had events of default on its CAMOFI and CAMHZN debt (see Note
5), and was in default on several payables (see Note 6). These factors
raised substantial doubt about the Company's ability to continue as a going
concern. The Company intends to fund its capital expenditures, working capital
and other cash requirements through ongoing operations.  Any
significant decrease in sales or increase in expenses may require the Company to
curb operations or contemplated plans for continued growth, or to seek
additional funds in the form of debt or equity financing which the Company
believes are available to it.  The successful outcome of future
activities cannot be assured.  In response to these issues, the
Company has taken the following actions since new Directors joined in April
2010:





·
            Reorganized
      the Company under a new board of directors comprised of experts in the
      field of government contracting, financial, accounting, and
      legal


·
            Adopted
      improved corporate governance procedures to further ensure timely and
      accurate disclosure to stockholders and formed various committees such as,
      Nominating & Governance Committee, Audit Committee, and Compensation
      Committee


·
            Adopted
      a Code of Ethics, applicable to all Company officers, directors and
      employees, including senior financial
officers


·
            Restructured
      and renegotiated the Company’s existing debts, including a one-year
      extension of  the senior secured
debt


·
            Decreased
      cost of operations with the divesture non-performing subsidiary NCR, and
      received full indemnity on all liabilities and other issues (See Note
      10)


·
            Increased
      PAI’s production with existing
contracts


·
            Retained
      the assistance of outside independent financial advisors to identify and
      secure financial support for the Company’s business plan that focuses and
      defines what directions of growth should be targeted within the aerospace
      & defense industry, both domestically and
    internationally


·
            Expanded
      the Company’s international relationships with established companies in
      China and Ukraine, which have resulted
in:


§
            a.)
      submitting a bid for the KC-X Tanker Modernization Program in partnership
      with Antonov


§
            b.)
      enhanced our component manufacturing and pricing capabilities through our
      partnership with AVIC International Holding
  Corporation


·
            Changed
      the name of the Company to U.S. Aerospace, Inc., to reflect the new
      branding and business focus of the
Company


·
            Launched
      a new interactive website at www.USAerospace.com where shareholders,
      partners and customers can be updated on Company developments through a
      host of social media platforms linked throughout the
    website.




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




Reclassifications




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


F-5





Inventories




All of
the inventories are at NCR and the 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, NCR evaluates
its ending inventories for excess quantities and obsolescence. Among other
factors, NCR considers historical demand and forecasted demand in relation to
the inventory on hand and market conditions when determining obsolescence and
net realizable value. Provisions are made to reduce excess or obsolete
inventories to their estimated net realizable values. Once established,
write-downs are considered permanent adjustments to the cost basis of the excess
or obsolete inventories. As of June 30, 2010, inventories consist of $159,624 of
work-in-process and $102,838 of finished goods.





Revenue
Recognition





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





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





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





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





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





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





In
accordance with U.S. accounting standards, revenue is recorded net of an
estimate for markdowns and price concessions. Such reserve is based on
management's evaluation of historical experience, current industry trends and
estimated costs. As of June 30, 2010, NCR estimated the markdowns and price
concessions and concluded amounts are immaterial and did not record any
adjustment to revenues.





F-6




Use
of Estimates


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





Warranty





NCR
provides a warranty on certain products sold. Estimated future warranty
obligations related to certain products and services are provided by charges to
operations in the period in which the related revenue is recognized. At June 30,
2010 and December 31, 2009, the warranty obligation balance was approximately
$136,000 and $137,000, respectively. Amounts charged to warranty expense in the
accompanying condensed consolidated statements of operations was approximately
$1,000 and $4,000 for the three and six months ended June 30, 2010 and $0 for
the three and six months ended June 30, 2009, respectively.





Concentration
of Credit Risks





Cash is
maintained at various financial institutions. The Federal Deposit Insurance
Corporation (“FDIC”) insures accounts at each financial institution for up to
$250,000. At times, cash may be in excess of the FDIC insured limit. The Company
did not have any uninsured bank balances at June 30, 2010 and December 31, 2009.
The Company has not experienced any losses in such accounts and believes it is
not exposed to any significant credit risks on cash.





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





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





Management
reviews the collectability of receivables periodically and believes that the
allowance for doubtful accounts for the three and six months ended June 30, 2010
and the year ended December 31, 2009 is adequate. There was no allowance for
doubtful accounts at June 30, 2010 and December 31, 2009.





During
the three and six months ended June 30, 2010, sales to one customer approximated
44% and 56% of net revenues. Further, there was one customer that accounted for
approximately 85% of accounts receivable at June 30, 2010.





During
the three and six months ended June 30, 2009, sales to four customers accounted
for approximately 96% and 72% of net revenues.





Basic
and Diluted Loss per Common Share





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


F-7





Common
stock equivalents, representing convertible Preferred Stock, convertible debt,
options and warrants totaling approximately 156,116,000 and 74,320,847 for June
30, 2010 and 2009, respectively, are not included in the computation of diluted
loss per share as they would be anti-dilutive.





Stock
Based Compensation





The
Company uses the fair value method of accounting for employee stock compensation
cost. Share-based compensation cost is measured at the grant date based on the
fair value of the award and is recognized as expense on a straight-line basis
over the requisite service period, which is the vesting period.  For
the three and six months ended June 30, 2010, $79,590
of  employee  and director share-based compensation expense
was recognized in the accompanying condensed consolidated statements of
operations.  For the three and six months ended June 30, 2009, $35,014
of employee share-based compensation expense was recognized in the accompanying
condensed consolidated statements of operations.





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





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




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





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





There
were no plan options granted, and 1,200,000 options were exercised or expired
during the three and six months ended June 30, 2010.   There were
2,100,000 shares available for grant at June 30, 2010.




All plan
options outstanding have vested as of June 30, 2010 and are as
follows:





Number
                  of Shares
              
              
              Weighted
                  Average
                  Exercise
                  Price
              
              
              Weighted
                  Average
                  Remaining
                  Contractual
                  Term in
                  Years
              
              
              Aggregate
                  Intrinsic
                  Value (1)Vested
              
              
              6,200,000
              
              
              $
              0.13
              
              
              
              1.92
              
              
              $
              -





(1)
            Represents
      the approximate difference between the exercise price and the closing
      market price of the Company's common stock at the end of the reporting
      period (as of June 30, 2010 the market price of the Company's common stock
      was $0.06).


F-8





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





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





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





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





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





Non-Plan
Options





On April
7, 2010, the Company issued 10,000,000 stock options that were not under the
2000 Stock Option Plan. These options were issued to newly hired non-employee
directors and to a marketing consultant. The options have an exercise price of
$0.13 per share and a term of five years, with a weighted average remaining life
of 4.77 years,  One half of the options vest at the end of the first
year and one half of the options vest at the end of the second year. The fair
value of the options at grant date was approximately $1,273,000 which is being
amortized into compensation expense over the vesting period. At June 30, 2010,
$116,980 was expensed.





A
Black-Scholes model was used to calculate the fair value with the following
parameters: stock price of $0.13 per share, exercise price of $0.13 per share,
risk free rate of 3.52%, stock volatility of 204.39% and no
dividend.





Deferred
Financing Costs




Direct
costs of securing debt financing are capitalized and amortized over the term of
the related debt. When a loan is paid in full, any unamortized financing costs
are removed from the related accounts and charged to operations. During the
three and six months ended June 30, 2010  the Company amortized
approximately $61,000 and $122,000, respectively, of deferred financing costs to
interest expense in the accompanying condensed consolidated statements of
operations. During the three and six months ended June 30, 2009  the
Company amortized approximately $117,000 and $234,000, respectively, of deferred
financing costs to interest expense in the accompanying condensed consolidated
statements of operations.





Fair
Value Measurements





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





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





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





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


F-9





Determining
which category an asset or liability falls within the hierarchy requires
significant judgment. The Company evaluates its hierarchy disclosures each
quarter.  The Company does not have any liabilities that are measured
at fair value as of June 30, 2010.




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





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





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





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





During
the six months ended June 30, 2010 and 2009, the Company recognized other
expense of $11,253 and $1,575,903, respectively, related to recording derivative
liabilities at fair value.  At June 30, 2010 and December 31, 2009,
the derivative liability balance was $0 and $48,378, respectively.




Beneficial
conversion feature and warrant-related derivatives were valued using the
Black-Scholes Option Pricing Model with the following assumptions during the
period ended June 30, 2010: dividend yield of 0%; volatility of 204% and a risk
free interest rate of 0.13% for the beneficial conversion feature and 3.77% for
the warrants.





The
following table summarizes the activity related to the derivative liability
during the period ended June 30, 2010 at which time the liability is
0:




Derivative
      liability – December 31, 2009
                  
                  $
                  48,378Derivative
      liability reduced for reclassification of warrants to
    equity
                  
                  
                  (59,631
                  )Change
      in fair value of derivative liability
                  
                  
                  11,253Total
      derivative liability – June 30, 2010
                  
                  $
                  0





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





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


F-10





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





Significant
Recent Accounting Pronouncements





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





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





2.
CONTRACTS IN PROGRESS





Contracts
in progress at NCR, which has been subsequently sold (see Note 10) which include
completed contracts not completely billed approximate the following as of June
30, 2010 and December 31, 2009:





(Unaudited)
                      June 30, 2010
                  
                  
                  December 31, 2009Cumulative
      costs to date
                  
                  $
                  26,000
                  
                  
                  $
                  3,166,000Cumulative
      gross profit to date
                  
                  
                  24,000
                  
                  
                  
                  2,611,000Cumulative
      revenue earned
                  
                  
                  49,000
                  
                  
                  
                  5,777,000Less
      progress billings to date
                  
                  
                  (25,000
                  )
                  
                  
                  (5,921,000
                  )Net
      under (over) billings
                  
                  $
                  24,000
                  
                  
                  $
                  (144,000
                  )





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





(Unaudited)
                  June
      30, 2010
              
              
              December
      31, 2009Costs
      and estimated earnings in excess of billings on uncompleted
      contracts
              
              $
              24,000
              
              
              $
              6,000Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
              
              
              -
              
              
              
              (150,000
              )Net
      under (over) billings
              
              $
              24,000
              
              
              $
              (144,000
              )




F-11




3.
ACQUISITION OF PRECISION AEROSTRUCTURES, INC.


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





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





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





The terms
of the purchase were the result of arms-length negotiations.  There was no
material relationship between the Company, on the one hand, and PAI or Cabral,
on the other hand.  Cabral is currently our President and a member of our
Board of Directors





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


Three Months
                      Ended
                      June 30, 2009
                  
                  
                  Six Months
                      Ended June 30,
                      2009Net
      revenues
                  
                  $
                  1,663,019
                  
                  
                  $
                  2,851,116Net
      loss
                  
                  $
                  (999,071
                  )
                  
                  $
                  (3,980,142
                  )Weighted
      average common share outstanding:Basic
      and diluted
                  
                  
                  20,344,654
                  
                  
                  
                  20,344,654Loss
      per share:Basic
      and diluted
                  
                  $
                  (0.05
                  )
                  
                  $
                  (0.20
                  )





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





4. 
GOODWILL AND OTHER INTANGIBLE ASSETS




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




The
changes in the carrying amount of goodwill for the period ended June 30, 2010
are as follows:





Balance,
      December 31, 2009
                    
                    $
                    2,359,121Addition
      of goodwill for adjustment to net liabilities assumed in
      acquisition
                    
                    
                    42,221Balance,
      June 30, 2010
                    
                    $
                    2,401,342


F-12





The
Company recorded a purchase price adjustment to goodwill of $42,221 related to
the balance of capital lease obligations assumed upon acquisition in the six
months ended June 30, 2010.





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




Other
intangible assets consist of the following as of June 30,
2010:





Estimated Useful
                  Life (Years)
              
              Gross Carrying
                  Amount
              
              
              Accumulated
                  Amortization
              
              
              Net Carrying
                  AmountCustomer
      relationships
              
              Seven
              
              $
              1,500,000
              
              
              $
              (160,715
              )
              
              $
              1,339,285





Amortization
of other intangible assets was $53,572 and $107,144 for the three and six months
ended June 30, 2010. There was no amortization for the three and six months
ended June 30, 2009.  During the six months ended June 30, 2010 the
Company did not acquire or dispose of any intangible assets.





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





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





5.
NOTES PAYABLE





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




The
Company entered into various convertible debt financings with CAMOFI Master LDC
(“CAMOFI”) and CAMHZN Master LDC (“CAMZHN”) prior to January 1, 2009 under the
Amended 12% CAMOFI Convertible Note (“Amended 12% CAMOFI Note) and 15% CAMHZN
Convertible Note (“15% CAMHZN Note”) (collectively, the “Notes”), which mature
in July 2011, as amended.  As of December 31, 2008, the amounts due
under the Notes to CAMOFI and CAMHZN were $2,834,281 and $750,000,
respectively.  In connection with the Notes, the Company issued
warrants and stock to CAMOFI and warrants to CAMHZN.  The debt
discounts as of December 31, 2008 related to the Notes, which includes amounts
for the conversion options, warrants and stock, to CAMOFI and CAMHZN were
$2,089,443 and $350,090, respectively.  The debt discounts as of
December 31, 2009 related to the amounts borrowed prior to 2009 from CAMOFI and
CAMHZN were $753,619 and $127,128, respectively.  The debt discounts
as of June 30, 2010 related to the amounts borrowed prior to 2009 from CAMOFI
and CAMHZN were $87,169 and $13,424, respectively.





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





2009





During
2009, the Company borrowed $1,199,600 from CAMOFI and $298,400 from CAMHZN under
the Notes, which mature in July 2011, as amended.  The debt discounts,
which includes amounts for the conversion options, as of December 31, 2009
related to the 2009 borrowings from CAMOFI and CAMHZN were $375,535 and $93,882,
respectively.  The debt discounts as of June 30, 2010 related to the
2009 borrowings from CAMOFI and CAMHZN were $36,513and $9,126, respectively. In
connection with extending the maturity date of the Notes in August 2009, the
Company issued 800,000 and 200,000 warrants to CAMOFI and CAMHZN,
respectively.  The fair value of the warrants on the date of issuance
was $80,000 and was recorded as interest expense.


F-13





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





2010





During
the first half of 2010, the Company borrowed $500,000 from CAMOFI and $125,000
from CAMHZN under the Notes and recorded debt discounts related to the
conversion options and warrants issued for the same amounts as
borrowed.  The Company received proceeds of $350,000, net of amounts
paid directly to a lender and to vendors by the note
holder.   The Notes are due in July 2011, as amended, and bear
interest at 15% per annum.  The debt discounts as of June 30, 2010
related to these borrowings from CAMOFI and CAMHZN were $134,066 and $33,516,
respectively.





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





At June
30, 2010, the Company incurred events of default on the Notes, which
subsequently have been cured or waived.  The last monthly contractual
payment on the CAMOFI note was made in October 2008 and no payments have been
made on the CAMHZN Note which were scheduled to begin on September 1,
2008.  As a result, these are events of default under the terms of the
agreement. Under the terms of the agreement, if any event of default occurs, the
full principal amount of the note, together with interest and other amounts
owing in respect thereof, to the date of acceleration shall become, at the note
holder’s election, immediately due and payable in cash. The note holders have
yet to elect to exercise the default provisions. As of June 30, 2010 and
December 31, 2009, the principal balances and the debt discounts are presented
in the Convertible Notes Table, below.





(Unaudited)
                  June 30, 2010
              
              
              December 31, 2009CONV
      NOTES
              
              CAMOFI
              
              
              CAMHZN
              
              
              CAMOFI
              
              
              CAMHZNPrincipal
              
              $
              4,513,401
              
              
              $
              1,168,280
              
              
              $
              4,033,881
              
              
              $
              1,048,400Discount
      – warrants
              
              
              (35,085
              )
              
              
              (12134
              )
              
              
              (38,814
              )
              
              
              (16,160
              )Discount
      – conversion options
              
              
              (210,435
              )
              
              
              (52,820
              )
              
              
              (1,068,542
              )
              
              
              (204,850
              )Discount
      – stock issued with notes
              
              
              (12,228
              )
              
              
              -
              
              
              
              (21,798
              
              
              
              -Notes
      presented net of debt discounts
              
              $
              4,255,653
              
              
              $
              1,112,214
              
              
              $
              2,904,727
              
              
              $
              827,390





As of
June 30, 2010 and December 31, 2009, the Company has recorded $907,376 and
$609,496, respectively, in accrued interest on the Notes.





During
the three and six months ended June 30, 2010, the Company amortized debt
discounts of approximately $973,000 and $1,671,000, respectively, to interest
expense related to the Notes. During the three and six months ended June 30,
2009, the Company amortized debt discounts of approximately $751,000 and
$776,000, respectively, to interest expense related to the Notes.





Micro
Pipe Note Payable





On
November 12, 2009, the Company entered into an agreement with Micro Pipe Fund I,
LLC for the receipt of a Secured Loan of $150,000 (the “Micro Pipe
Loan”).  The loan accrued interest at a rate of 2% per month and
matured on January 5, 2010.  In connection with the Micro Pipe Loan,
the Company granted 500,000 immediately vested five year warrants with a term of
five years and an exercise price of $0.20 (“Micro Pipe Warrants”), which were
cancelled effective January 31, 2010.


F-14


Before
being cancelled, the Micro Pipe Warrants had an exercise feature that was the
same as the anti-dilution provision in the CAMOFI Warrants (See Note 5).
Consequently, the warrants were also treated as a derivative
liability.  The Company recorded at issuance a $108,101 derivative
liability for the Micro Pipe warrants.  As discussed in Note 1, the
anti-dilution provision of the warrants was cancelled effective January 31,
2010.  As a result of the cancellation of the anti-dilution provision,
the fair value of the warrant on such date ($59,631) was reclassified from
derivative liability to additional paid-in capital.  As of June 30,
2010 and December 31, 2009, the fair value of the warrant derivative was
determined to be $0 and $48,378, respectively.  For the six months
ended June 30, 2010, the Company recorded a change in fair value of the warrant
derivative liability that resulted in a loss of $11,253, which is included in
gain or loss on valuation of derivative liabilities in the accompanying
condensed consolidated statements of operations.




The
initial Micro Pipe Warrants derivative liability of $108,101 represented a
discount from the face amount of the note payable. Such discount was amortized
to interest expense over the term of the note. During the six months ended June
30, 2010, the Company amortized the balance of $10,003 to interest expense in
the accompanying condensed consolidated statements of operations.





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





In May
2010, the Company repaid the Micro Pipe loan with proceeds from the Convertible
Notes issued to CAMOFI and to CAMZHN.  In addition, the Company issued
250,000 shares of its common stock, valued at $45,000 (based on the closing
market price on the effective date) in settlement of accrued interest and
cancellation of warrants.





6. EQUITY
TRANSACTIONS





Common
Stock, Warrants and Options





Issuance
of Common Stock





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





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





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





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





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





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


F-15





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





On April
5, 2010, David Duquette and Josef Czikmantori, who were then the sole members of
the board of directors of the Company, submitted to the Company’s transfer agent
notice of exercise of options to purchase shares of common stock on a cashless
basis.  They were issued an aggregate of 736,000 shares of the
Company’s common stock at an exercise price of $0, based on the purported
cashless exercise of 800,000 options.




In
February 2008, the Company entered into a one year contract with a third party
for corporate consulting and marketing services valued at $30,000. The fee was
paid in the form of 150,000 shares of the Company’s common stock and valued
based on the stock market price of the shares at the contract date. The value of
the common stock on the date of the transaction was recorded as a deferred
charge and was amortized to operating expense over the life of the agreement.
During the three months and six months ended June 30, 2009, consulting fees
under this contract of $2,500 and $5,000, respectively, were amortized to
consulting and other compensation in the accompanying condensed consolidated
statements of operations. As of June 30, 2009 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
and during the three months and six months ended June 30, 2010, $11,669 and
$29,169, respectively, was amortized to consulting and other compensation in the
accompanying condensed consolidated statements of operations.  During
the three and six months ended June 30, 2009, $18,000 and $35,000 was amortized
to consulting and other compensation in the accompanying condensed consolidated
statements of operations.  At June 30, 2010 and December 31, 2009, the
remaining deferred consulting fees totaled $0 and $29,169,
respectively.





STOCK
OPTIONS





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





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





There
were 10,000,000 options granted, 800,000 options exercised and 400,000 forfeited
during the six months ended June 30, 2010. There were no options granted,
exercised or cancelled during the six months ended June 30, 2009.  The
10,000,000 options granted during the six months ended June 30, 2010 were
outside the Plan.





WARRANTS





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





On
January 19, 2010, in connection with a 12-month strategic advisory consulting
services agreement, the Company issued an immediately vested warrant to purchase
3,000,000 shares of the Company’s common stock.  The warrant is for a
term of seven years, and has an exercise price of $0.000001 per
share. The estimated fair value of the warrants of $420,000 was capitalized
as a deferred charge on the date of grant and will be amortized to operating
expense ratably over the term of the consulting agreement.  During the
six months ended June 30, 2010, the Company amortized $192,500 which is included
in consulting and other compensation in the accompanying condensed consolidated
statements of operations.


F-16





During
the quarter ended March 31, 2010, the Company issued CAMOFI and CAMHZN warrants
to purchase a total of 976,000 and 244,000 shares, respectively, of the
Company’s common stock. The warrants were issued on various dates, are
immediately vested, have a term of seven years and an exercise price of
$0.000001.  The relative fair values of the warrants totaling $132,738
were recorded as a debt discount upon issuance (see Note 5).





In April
and May of 2010, the Company issued CAMOFI and CAMHZN warrants to purchase a
total of 275,000 and 260,000 shares, respectively, of the Company’s common
stock. The warrants were issued on various dates, are immediately vested, have a
term of seven years and an exercise price of $0.000001.  The relative
fair values of the warrants totaling approximately $17,600 were recorded as a
debt discount upon issuance (see Note 5).




The
following represents a summary of all warrant activity for the six months ended
June 30, 2010:





Outstanding WarrantsNumber of
                  Shares
              
              
              Weighted
                  Average
                  Exercise
                  Price
              
              
              Aggregate
                  Intrinsic
                  Value(1)Outstanding
      at January 1, 2010
              
              
              12,497,538
              
              
              $
              0.12
              
              
              $
              -Grants
      (2)
              
              
              4,754,545
              
              
              $
              0.000001
              
              
              $
              -Exercise
              
              
              -
              
              
              $
              -
              
              
              $
              -Cancelled
              
              
              (500,000
              )
              
              $
              0.20
              
              
              $
              -Outstanding
      at June 30, 2010 (3)
              
              
              16,752,083
              
              
              $
              0.09
              
              
              $
              477,767Exercisable
      at June 30, 2010 (3)
              
              
              13,752,053
              
              
              $
              0.08
              
              
              $
              477,767


(1)
            Represents
      the approximate added value as difference between the exercise price and
      the closing market price of the Company's common stock at the end of the
      reporting period (as of June 30, 2010, the market price of the Company's
      common stock was $0.06).


(2)
            All
      of the warrants issued are exercisable at June 30,
  2010.


(3)
            The
      warrants outstanding and exercisable at June 30, 2010 have a
      weighted-average contractual remaining life of 4.14 years and 5.31 years,
      respectively. The 3,000,000 warrants not exercisable at June 30, 2010 were
      issued in connection with the acquisition of PAI in 2009.  See
      Note 3 for a description of the vesting terms of the
    warrant.




7. RELATED PARTY
TRANSACTIONS





At June
30, 2010 and December 31, 2009, the Company had loans to two stockholders
approximating $585,000, including accrued interest. These loans were originated
in 1999 and no additional amounts have been loaned to the stockholders. The
loans accrued interest at 5% and are due on demand. The Company has included the
notes receivable from stockholders in stockholders’ deficit as such amounts have
not been repaid during 2010 or 2009.  The Company did not accrue any
interest for the six months ended June 30, 2010 as it was determined that future
interest amounts would be uncollectible.





At June
30, 2010 and December 31, 2009, the Company has loans from various employees
totaling $80,644 and $39,106, respectively, which are included in notes payable
to related parties in the condensed consolidated balance sheet. The loans are
non-interest bearing and are due on demand.





In
connection with the acquisition of PAI (see Note 3), the Company issued a
promissory note to Cabral in the amount of $500,000. Interest on the note
accrues at 5% per annum and all principal and interest is due only on and paid
from the proceeds of any equity financing of the Company with gross proceeds of
at $2,000,000 provided that the investors in such financing permit the proceeds
thereof to be used for such purpose.  During the three and six months
ended June 30, 2010, $6,251 and $12,500 of interest expense was recorded in the
accompanying condensed consolidated statements of operations.  At June
30, 2010 and December 31, 2009, the Company has accrued $18,750 and $6,250 in
interest, respectively.


F-17





8.
COMMITMENTS AND CONTINGENCIES





Service
Agreements





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





Capital
Lease





During
the six months ended June 30, 2010, the PAI purchased property and equipment
under a capital lease totaling $479,488.  The terms of the lease are
monthly principal payments of $25,000 and interest payments of 6% per annum on
the remaining principal balance beginning on February 5, 2010.  The
payments are due every 30 days for up to 120 days.  At the end of the
120 days, PAI is required to pay the total remaining balance plus accrued
interest.  PAI was also required to pay $35,000 upon signing the
capital lease agreement.  In addition, the Company issued 100,000
shares to the lender (see Note 6) to settle past penalties and
interest.  Subsequent to June 30, 2010, the Company renegotiated this
obligation reducing the monthly obligation to $15,000 and extending the maturity
beyond one year.





Legal





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




Delinquent
Income Taxes





At June
30, 2010 and December 31, 2009, PAI has accrued approximately $352,000 related
to penalties and interest in connection with delinquent income taxes related to
PAI’s Federal and State income tax returns for the years ended December 31, 2007
and 2006. PAI has included the accrued amounts in accounts payable and accrued
liabilities and the related expense in selling, general and administrative
expense in the accompanying condensed consolidated statements of
operations.  The related returns were filed in April
2009.





Delinquent
Payroll Taxes





At June
30, 2010 and December 31, 2009, PAI has accrued approximately $1,257,000 and
$1,187,000, respectively, for payroll taxes incurred but not yet remitted for
employee compensation and estimated penalties and interest. PAI has included the
accrued amounts in accounts payable and accrued liabilities in the accompanying
condensed consolidated balance sheets and the related expense in salaries and
related expenses in the accompanying condensed consolidated statements of
operations.





Delinquent
Sales Taxes





At June
30, 2010 and December 31, 2009, NCR has accrued approximately $132,000 and
$127,000, respectively, for sales taxes not yet remitted and estimated penalties
and interest in connection with the sales tax incurred but not yet remitted for
the period October 1, 2007 to December 31, 2008 and January 1, 2008 to March 31,
2008.  NCR has included the accrued amounts in accounts payable and
accrued liabilities in the accompanying condensed consolidated balance sheets
and the related expense in selling, general and administrative expenses in the
accompanying condensed consolidated statements of operations.  NCR has
yet to file a return for the aforementioned quarterly sales tax periods. NCR has
subsequently been sold, and the Company has received an indemnity for these
liabilities (see Note 10).


F-18





Tax
Lien





On April
3, 2009, PAI received notice from the IRS of a federal tax lien filing for
amounts totaling $71,713. The lien attaches to all property owned by PAI and any
property acquired in the future by PAI.





On May
19, 2010, PAI received notice from the California Employment Development
Department of a state tax lien filing for amounts totaling
$43,177.  The lien attaches to all property owned by PAI and any
property acquired in the future by PAI.





Indemnities
and Guarantees





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





9.
SEGMENT REPORTING





At June
30, 2010 the Company’s operations are classified into two principal reportable
segments that provide different products or services. Subsequently, NCR, the CNC
machine tool remanufacturing business has been sold (see Note 10). Separate
management of each segment is required because each business unit is subject to
different marketing, production, and technology strategies. At June 30, 2010,
the Company operated in the following two reportable segments:





(a)           CNC
machine tool remanufacturing and


(b)           Multiaxis
structural aircraft components.




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





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


F-19





Three
                    Months
                    Ended
                    June 30, 2010
                
                
                Three
                    Months
                    Ended
                    June 30, 2009
                
                
                Six Months
                    Ended
                    June 30, 2010
                
                
                Six Months
                    Ended
                    June 30, 2009Net
      revenue from external customers:CNC
      machine tool remanufacturing
                
                
                317,758
                
                
                
                1,359,630
                
                
                $
                477,805
                
                
                $
                2,414,332Multiaxis
      structural aircraft components
                
                
                376,557
                
                
                
                
                
                
                
                774,200
                
                
                
                -Total
      net revenue from external customers:
                
                
                694,315
                
                
                
                1,359,630
                
                
                
                1,252,005
                
                
                
                2,414,332Operating
      loss:CNC
      machine tool remanufacturing
                
                
                (2,149,504
                )
                
                
                (130,634
                )
                
                
                (2,962,210
                )
                
                
                (342,548
                )Multiaxis
      structural aircraft components
                
                
                (169,265
                )
                
                
                
                
                
                
                (335,524
                )
                
                
                -Total
      operating loss:
                
                
                (2,318,769
                )
                
                
                (130,634
                )
                
                
                (3,297,734
                )
                
                
                (342,548
                )Depreciation
      and amortization from operations:CNC
      machine tool remanufacturing
                
                
                20,650
                
                
                
                20,651
                
                
                
                41,302
                
                
                
                34,681Multiaxis
      structural aircraft components
                
                
                121,588
                
                
                
                
                
                
                
                247,084
                
                
                
                -Total
      depreciation and amortization expense:
                
                
                142,238
                
                
                
                20,651
                
                
                
                288,386
                
                
                
                34,681Interest
      expense:CNC
      machine tool remanufacturing
                
                
                1,190,518
                
                
                
                (952,461
                )
                
                
                2,128,476
                
                
                
                1,620,856Multiaxis
      structural aircraft components
                
                
                13,505
                
                
                
                
                
                
                
                48,753
                
                
                
                -Total
      interest expense:
                
                
                1,204,023
                
                
                
                (952,461
                )
                
                
                2,177,229
                
                
                
                1,620,856Net
      loss:CNC
      machine tool remanufacturing
                
                
                (3,333,107
                )
                
                
                (858,020
                )
                
                
                (5,090,112
                )
                
                
                (3,533,626
                )Multiaxis
      structural aircraft components
                
                
                (64,332
                )
                
                
                
                
                
                
                (74,665
                )
                
                
                -Total
      loss from continuing operations:
                
                
                (3,397,439
                )
                
                
                (858,020
                )
                
                
                (5,164,777
                )
                
                
                (3,533,626
                )Identifiable
      assets:CNC
      machine tool remanufacturing
                
                
                
                
                
                
                
                
                
                
                862,028Multiaxis
      structural aircraft components
                
                
                
                
                
                
                
                
                
                
                4,807,062Total
      identifiable assets:
                
                
                
                
                
                
                
                
                
                
                5,669,090





10.
SUBSEQUENT EVENTS - Disposition of Subsidiary





Effective
August 27, 2010, the Company sold its unprofitable remanufacturing subsidiary,
New Century Remanufacturing, Inc. (“NCR”), to the Company’s former directors,
David Duquette and Josef Czikmantori, for $1 and an indemnity from all of NCR’s
liabilities.  As such, the Company is no longer in the machine tool
business and is focused solely on aerospace and defense.





The
Company expects to record a gain of approximately $610,000 based on the sale of
the net liabilities of NCR.





The
operations associated with NCR and the gain on sale will be classified as income
(loss) from discontinued operations subsequent to the date of
sale.  Prior to reclassification, the operations associated with this
transaction were classified into the Company’s “CNC machine tool
remanufacturing” segment.





Summarized
balance sheet information for NCR as of August 16, 2010 is set forth
below:




11.  SUBSEQUENT EVENTS -
Other





Strategic
Cooperation Agreements





On July
1, 2010, the Company entered into a Strategic Cooperation Agreement with Antonov
Company.  Established in 1946, Antonov is a state-owned commercial
company, with design, engineering, construction, manufacturing, maintenance,
hangar and servicing facilities in Kiev, Ukraine, where it also operates Antonov
Airlines and Antonov Airport.  Antonov is responsible for the design
and manufacturing of dozens of different types of aircraft, including the
world’s first and second largest aircraft, the AN-225 Mriya and AN-124 Condor
strategic airlifters, and the AN-148 and AN-158 commercial airliners. The
legendary Antonov Design Bureau is renowned for its expertise in the design and
construction of large military transport aircraft.  Our partnership
with Antonov has resulted in U.S. Aerospace, Inc:




F-20




·
            Participation
      in the KC-X Tanker Modernization Program for the U.S. Air Force competing
      with Boeing and EADS;


·
            Bidding
      for projects to the U.S. Department of Defense, U.S. Air Force, and
      licensed U.S. defense contractors;
and


·
            Sale
      of Antonov aircraft, products and services in the
  U.S.





Under the
terms of the agreement, Antonov will be responsible for design, construction and
manufacture of aircraft.  The Company will be responsible for
coordinating the bidding process, negotiating and contracting with customers,
and coordinating with defense sub-contractors for specialized
systems.  Each party shall bear its own costs incurred through
performance under the agreement, and it will terminate if no projects have been
awarded within five years or upon mutual written agreement of the
parties.





On August
18, 2010, the Company entered into a Strategic Cooperation Agreement with Supply
Chain Management & Procurement of AVIC International Holding Corporation, a
leading Chinese conglomerate with more than $7 billion in assets, 30,000
employees, and $5 billion in revenue.  Our partnership with AVIC
provides for the collaboration in the manufacture, research and technology,
importing and exporting of aircraft components and equipment.  Under
the agreement, AVIC will supply all personnel, materials, facilities and other
resources, including subcontractors, necessary to perform the work and the
Company will remit payment based on agreed upon terms for the certain
projects.  The Partnership with AVIC enhances our precision component
manufacturing capabilities and advances our ability to perform and secure work
the Company has previously turned away or did not pursue because it was not
previously capable to fulfill.





The above
discussion represents the factors influencing our business execution and long
term focus to become a leading supplier of precision component parts and defense
contracting firm within the aerospace industry by implementing and adopting the
economic principals of globalization.  U.S. Aerospace, Inc. intends to
leverage the design, manufacturing, and operations of its strategic partners to
gain a competitive advantage necessary to meet the growing demands of government
and commercial aerospace customers.   By aligning our core
strengths with recognized aerospace leaders throughout the globe, the Company
believes it will be in a superior position to be awarded future projects from
the government and commercial sectors and anticipates achieving profitable
growth in an increasingly competitive environment served primarily by Boeing,
EADS, Lockheed Martin, Northrop Grumman, among others.





Merger





On July
1, 2010, the Company entered into an Agreement and Plan of Merger, pursuant to
which it has agreed to issue to American Defense Investments, LLC and TUSA
Acquisition Corporation an aggregate of 383,793 shares of Series E Convertible
Preferred Stock, each of which is convertible into 500 shares of our common
stock, and votes together with the common stock as a single class on an
as-converted basis, to acquire their company and its relationships with Antonov
and associated goodwill.  Additionally, the preferred stock has
non-dilution protection for subsequent issuances of common stock, including
any conversion of currently outstanding warrants and convertible
debt.





Tanker
Bid





On July
9, 2010, the Company submitted a response to the Request for Proposal from the
U.S. Air Force for the KC-X Tanker Modernization Program. If the Company’s bid
is successful, the aircraft components will be built by Antonov Company in
Ukraine, with final assembly by us in the U.S. The U.S. Air Force claimed that
the bid was untimely and failed to consider it.  On August 2, 2010,
the Company submitted a bid protest to the General Accounting Office (“GAO”),
which is expected to make a decision on the protest.  We have always
anticipated that the RFP will be a long and complex process, and we do not
intend to comment on interim developments as they occur. We remain confident
that the AN-112KC aircraft meets all RFP requirements at the lowest price, and
should be selected in a fair and open competition.




F-21




Convertible
Note Issuance





Effective
July 27, 2010, the Company obtained an aggregate of $500,000 in financing from
Hutton International SPE, LLC and current lenders, CAMOFI Master LDC and CAMHZN
Master LDC, pursuant to 15% Senior Secured Convertible Notes due July 31, 2011.
The notes are convertible into shares of common stock at $0.13 per share, the
closing sale price on July 27, 2010.





Extension
of the Maturity of Existing Convertible Notes





On July
27, 2010, the Company also entered into an agreement with CAMOFI and CAMHZN to
extend the term of their existing notes to July 31, 2011.





Issuance
of Common Stock





On August
20, 2010, we instructed the transfer agent to issue 5 million shares and agreed
to issue an additional 10 million shares to Omnicom Holdings pursuant to a
stipulated settlement in an action filed by Omnicom for a $1.5 million
commission claimed due in connection with the Company’s agreement with Antonov.
Based upon the likelihood of such amount being due to the consultant and the
nature of its services being substantially complete at June 30, 2010, the
Company recorded $1,500,000 as selling, general and administrative expenses and
accrued such amount at June 30, 2010.





On August
20, 2010 the Company issued 1 million shares of common stock to two consultants
who coordinate the Company’s efforts with Antonov Company in Kiev, Ukraine, and
agreed to issue an additional 1 million shares if they meet designated
performance criteria.





Change
in Auditors





On August
25, 2010, the client-auditor relationship between us and KMJ Corbin &
Company LLP ceased. On August 31, 2010, Rose, Snyder & Jacobs, a Corporation
of Certified Public Accountants, was engaged as our principal independent
registered public accountant to audit our financial statements for the fiscal
year ended December 31, 2010. The change in our auditors was approved by the
Audit Committee of our Board of Directors.





The audit
report of KMJ Corbin on our financial statements, as of and for the fiscal year
ended December 31, 2009 did not contain any adverse opinion or disclaimer of
opinion, nor were such reports qualified or modified as to uncertainty, audit
scope or accounting principles, except that it contained an explanatory
paragraph which noted that there was substantial doubt as to our ability to
continue as a going concern due to our operating loss, accumulated deficit,
working capital deficit and events of default on our secured debt at that
time.





During
the fiscal year ended December 31, 2009, and the interim period through August
25, 2010, (1) we had no disagreements with KMJ Corbin on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
KMJ Corbin, would have caused KMJ Corbin to make reference to the subject matter
of the disagreement in connection with its report; and (2) there have been no
"reportable events" (as defined in Regulation S-K Item
304(a)(1)(v)).





F-22





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





The
following discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto appearing elsewhere in
this Report. 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 Report are qualified in their entirety by this
statement.





OVERVIEW





U.S.
Aerospace, Inc. is engaged in the production of aircraft assemblies, structural
components, and highly engineered, precision machined details on projects for
major aircraft manufacturers, aerospace companies, and defense
contractors.  The Company supplies structural aircraft parts for military
aircraft such as the P-3 Orion, and wide-body commercial airliners such as the
Boeing 747.




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




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





The
Company continues to incur operating losses for each of the periods ended June
30, 2010 and 2009. This was a result of a dramatic decrease in sales. The
Company's current strategy is to focus solely on aerospace and defense, to
increase orders through current customers and sales methods, and to partner with
leading aerospace and defense manufacturers throughout the world to jointly bid
and supply aircraft, parts and components to major defense contractors and the
U.S. military. However, significant growth will require additional funds in the
form of debt or equity, or a combination thereof. The Company's growth strategy
also includes strategic mergers in addition to growing the current business. A
significant acquisition will require additional financing.





HIGHLIGHTS





Since new
directors joined our Board of Directors in April 2010, we have instituted a new
business plan to increase our growth in the aerospace and defense
business.  We have sought and entered into Strategic Cooperation
Agreements with leading aircraft manufacturers to jointly bid on aerospace and
defense projects.  In addition, we have instituted new corporate
governance procedures, divested our non-profitable non-aerospace businesses,
restructured existing debt and brought it current, reached arrangements with
creditors to resolve prior payment issues, and obtained additional
financing.  These events along with other corporate issues have
resulted in the following:





·
            Reorganized
      the Company under a new board of directors comprised of experts in the
      field of government contracting, financial, accounting, and
      legal.


·
            Adopted
      improved corporate governance procedures to further ensure timely and
      accurate disclosure to stockholders and formed various committees such as,
      Nominating & Governance Committee, Audit Committee, and Compensation
      Committee


2





·
            The
      Board of Directors adopted a Code of Ethics, applicable to all Company
      officers, directors and employees, including senior financial
      officers


·
            Decreased
      our cost of operations with the divesture our non-performing division NCR,
      and received full indemnity on all liabilities and other
      issues


·
            Increased
      Precision Aerostructures’ production with existing
    contracts,


·
            Retained
      the assistance of outside independent financial advisors to identify and
      secure financial support for our business plan that focuses and defines
      what directions of growth should be targeted within the Aerospace &
      Defense industry, both domestically and
  internationally.


·
            Expanded
      our international relationships with established companies in China and
      Ukraine, which have resulted in:


§
            a.)
      submitting a bid for the KC-X Tanker Modernization Program in partnership
      with Antonov,


§
            b.)
      enhanced our component manufacturing and pricing capabilities through our
      partnership with AVIC International Holding
  Corporation.


·
            Changed
      our name to U.S. Aerospace, Inc. to reflect our new branding and business
      focus


·
            Launched
      a new interactive website at www.usaerospace.com where shareholders can be
      updated on Company developments through a host of social media platforms
      linked throughout the website.





RESULTS
OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 COMPARED TO JUNE
30, 2009.





Net Revenues.  We
generated net revenues of $694,315 and $1,252,005 for the three and six months
ended June 30, 2010 versus $1,359,630 and $2,414,332 for the same periods of
2009, which was a $665,315 or 49% decrease in the three months and a $1,162,327
or 48% decrease in the six months.  The decrease is the result of
lower sales due to the recession and a tighter credit market.





Gross (Loss)
Profit.  Gross (loss) profit for the three and
six months ended June 30, 2010, was $101,451 and $(33,507) versus
a gross profit of $165,900 and $401,709 for the three and six months ended June
30, 2009.  This is a decline of $64,449 or 39% and $435,216 or 108%
over the comparable periods. The decrease in gross profit is due to certain
continuing fixed overhead expenses necessary to maintain the level of
operations, which is not recovered because of the lower revenues.





Operating
Loss.  Operating loss for the three and six months ended June
30, 2010, was $2,318,769 and $3,297,734compared to
$130,634 and $342,548 for the three and six months ended June 30, 2009. The
increase in loss of $2,188,135 and $2,955,186, respectively, is primarily due to
an accrual of $1,500,000 for consulting services and an increase in operating
expenses largely due to the acquisition of PAI and secondarily to the decreased
revenues over the comparable periods.





Interest Expense and Debt Discount
Amortization.  Interest expense for the three and six months
ended June 30, 2010, was $1,204,023 and $2,177,229 as compared with $952,461 and
$1,620,856 for the three and six months ended June 30, 2009. The increase of 26%
and 34% respectively,  in interest expenses is due to additional
interest and discount amortization on ten new convertible notes for the six
months ended June 30, 2010 and eighteen convertible notes and one note payable
issued after the period ended June 30, 2009 (See Notes 5 and
6).




Operating Expenses.The
Company incurred total operating expenses of $2,420,220 and $3,264,227 for the
three and six months ended June 30, 2010 versus $296,534 and $744,257 for the
three and six months ended June 30, 2009, which was a $2,123,686 and a
$2,519,970 increase, respectively. In the three and six months ended June 30,
2010, compared with the three and six months ended June 30, 2009, all the
operating expenses increased as follow:





Three Months
                    Ended June 30,
                    2010 Increase %
                
                
                Six Months Ended
                    June 30, 2010
                    Increase %Consulting
      and other compensation
                
                
                2.308
                
                
                
                1,371Salaries
      and related
                
                
                178
                
                
                
                102Selling,
      general and administrative
                
                
                143
                
                
                
                98


3


The
increase in consulting and other compensation is due primarily to amortization
of 3,000,000 warrants issued to a consultant and 5,000,000 options issued for
marketing consulting during the six months ended June 30, 2010. All operating
expenses increased due to additional costs related to the operations of
Precision Aerostructures, Inc. which was acquired in October 2009.





FINANCIAL
CONDITION, LIQUIDITY, CAPITAL RESOURCES





As of
August 23, 2010, we had $311,458 in cash on hand, and were operating at or about
break even or positive on a cash flow basis. We have reached payment
arrangements with substantially all of our critical vendors to resolve
previously past due accounts.





The net
decrease in cash during the six months ended June 30, 2010 was $129,492. The
cash used in operating activities was $377,218. This was due mainly to a net
loss of $5,164,777 offset by non-cash expenses of $1,671,353 related to
amortization of debt discount, $219,319 in stock issued for services and
$288,386 of depreciation and amortization. Other operating activities that used
cash were mainly an increase in accounts receivable of $63,967 and a decrease in
billings in excess of costs of $149,849. These were offset by an increase of
accounts payable and accrued liabilities and interest of
$2,541,279.





Cash
was provided from investing activities of $50,000 from a contribution of a
partner related to the return of a deposit on equipment that was not
purchased.





Cash
provided by financing activities was $197,631mainly from
the issuance of convertible notes with net proceeds of $350,000 offset by
principal payments on notes and capital leases of $207,224.





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. For the six months ended June 30, 2009, $777,481 cash was used by
operating activities.





INFLATION
AND CHANGING PRICES





We do not
foresee any adverse effects on its earnings as a result of inflation or changing
prices.





CRITICAL
ACCOUNTING POLICIES





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




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


4





ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not
applicable.





ITEM
4. CONTROLS AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures





For the
period ended June 30, 2010, we conducted an evaluation under the supervision and
with the participation of our management, including our Chief Executive Officer,
who was 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, 2010 that our disclosure controls and
procedures were not effective at the reasonable assurance level due to the
material weaknesses discussed below.  Our Board of Directors has begun
taking major steps to correct these deficiencies, as outlined
below.





Corrections
of Material Weaknesses





We have
begun implementing comprehensive entity-level internal controls, which we had
not done as of June 30, 2010, as evidenced by the following
changes:




·
            We
      have established an independent Audit Committee responsible for the
      oversight of the financial reporting process, and an Audit Committee
      Charter has been defined.  We previously did not have any
      independent members of the Board who could comprise this
      committee.




·
            We
      have established a 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
      have three individuals on our Board, who serve on the Audit Committee, who
      meet the “Financial Expert”
criteria.




·
            We
      maintain documentation evidencing quarterly and other meetings between the
      Board, Audit Committee, 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 or Audit Committee.




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




·
            We
      are conducting performance reviews and evaluations of our management and
      staff employees.


5




We have
begun acquiring a sufficient complement of personnel with appropriate training
and experience in GAAP, as evidenced by the following changes:




·
            The
      Controller is still the only individual with technical accounting
      experience in our company and has limited in the exposure to SEC filings
      and disclosures, but now has assistance from the Audit Committee members
      and outside counsel.




We are
consulting with other outside parties with accounting experience to assist us in
the SEC filings and disclosures, including Audit Committee members and outside
counsel.  We were previously unable to do this and as a result, our
independent registered public accounting firm recorded numerous adjusting
entries.




We have
begun segregating the duties of different personnel within our accounting group,
which we were previously unable to do due to an insufficient complement of staff
and inadequate management oversight.




We have
begun to design and implement internal controls as follows:




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




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




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




Due to
the prior 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





As set
forth above, there have been significant changes in the Company's internal
control over financial reporting during the Company's most recent fiscal quarter
that have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting. Inherent limitations
exist in any system of internal control including the possibility of human error
and the potential of overriding controls. Even effective internal controls can
provide only reasonable assurance with respect to financial statement
preparation. The effectiveness of an internal control system may also be
affected by changes in conditions.





PART
II.  OTHER INFORMATION





Item
1.  Legal Proceedings





On July
12, 2010, NCR’s landlord filed an unlawful detainer action against it in Los
Angeles County Superior Court, Fan v. New Century Remanufacturing,
Inc., et al., Case No. VC056735, to recover $391,000 in past due rent and
possession of its facilities in Santa Fe Springs, California.  The
case remains pending.  We have sold our interest in NCR and received
an indemnity from its management.  Litigation can be expensive and
unpredictable, and there can be no assurance regarding the outcome of any
case.  However, we do not believe we should have any material
liability in connection with this action.





Item
1A.  Risk Factors





In
addition to the risk factors set forth in our most recent annual report, recent
developments have resulted in further risks, including the risk factors listed
below. Risks and uncertainties in addition to those we describe below, that may
not be presently known to us, or that we currently believe are immaterial, may
also harm our business and operations. If any of these risks occur, our
business, results of operations and financial condition could be harmed, the
price of our common stock could decline, and future events and circumstances
could differ significantly from those anticipated in the forward-looking
statements contained in this report.


6





Our
responses to requests for proposals may be rejected or disqualified by the U.S.
Air Force or Department of Defense.





A
substantial portion of our new business focus depends on successfully submitting
responses to requests for proposals from the U.S. Air Force and Department of
Defense (“DoD”), which can be a difficult, costly and time consuming
process.  Each time we submit a response, the Air Force or DoD may
find that our proposal was not timely submitted, does not meet all mandatory RFP
requirements, that we do not have qualified subcontractors and teaming partners,
that we are not a capable and responsible contractor, that we have not obtained
or processed the classified information that is needed to prepare a proposal,
that we have not demonstrated that the company has the facility and personnel
clearances that are prerequisites to receiving, handling and storing classified
information, and that our failure to meet the proposal submittal deadline was
attributable to our failure to act diligently and promptly.  In
addition, the Air Force may determine that AVIC, Antonov or another partner is
not an acceptable subcontractor, that required teaming agreements have not been
entered into, and that using a Chinese, Ukranian or other commercial aircraft as
the basis for a proposal is unacceptable, that the aircraft we have bid is too
new or is not adequately designed, manufactured or certified, or that adequate
documentation, data and information have not been provided in support of the
bid.  For any or all of these reasons, the Air Force or DoD may not
select our bid, may disqualify our bid, or may refuse to consider it on the
merits, or at all.  The Air Force and DoD have broad discretion in
interpreting the requirements of any RFP.  Contesting any negative
determination would be time consuming, difficult and expensive, with uncertain
results, and even attempting such a challenge may exceed our limited
resources.  If we were successful in the bid, other bidders could
challenge the process, our capabilities, or the adequacy of our submissions,
which might also result in a denial or disqualification of our
bid.  If our bid is denied or disqualified for any reason, it would
have a material adverse effect on our business, results of operations and
financial condition.




We
are dependent on AVIC and Antonov to supply aircraft and components, and
information necessary for our RFP responses.





We are
dependent upon AVIC in China, Antonov Company in Ukraine, and potentially other
foreign partners to supply the aircraft and components for our commercial
bids and RFP responses, and to supply the information necessary for the bid
process.  Designing and manufacturing new aircraft, or modifying
existing aircraft to meet new requirements, is time consuming, difficult and
expensive, with uncertain results.  We cannot give any assurance that
the information supplied by AVIC, Antonov or others will be adequate or
sufficient to meet the RFP requirements, or that they will timely deliver the
planes if our bid is successful.  If they fail to perform for any
reason, we would likely be unable to win the bid or supply the planes if
selected, which would have a material adverse effect on our business, results of
operations and financial condition.





We
face competition from companies which may have greater resources or better
technologies than we do.





Our
business model necessitates bidding against large, established, well funded,
aerospace corporations.  For example, The Boeing Company and The
European Aeronautic Defense and Space Company N.V. (EADS), are bidding on the
RFP utilizing existing wide body commercial airliners as the basis for their
KC-X tanker proposals.  Our competitors’ designs will be advanced and
well developed, and the companies will invest considerable resources into
designing their aircraft and in preparing their responses to the
RFP.  Such companies will spend substantially more time, money and
effort preparing their RFP responses than we will, and it is highly likely that
their responses will be significantly more thorough, detailed and compliant than
our responses.  In addition, such companies have devoted substantial
effort to political lobbying with legislators and the DoD, and developing close
relationships with industry experts and members of the press.  These
advantages may prove insurmountable, and it may be impossible for us to compete
with their proposals, or even to submit a response deemed minimally acceptable
by the U.S. Air Force or DoD.  If any of these were the case, we could
be unsuccessful in our efforts to obtain bids, which would have a material
adverse effect on our business, results of operations and financial
condition.


7




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





On August
20, 2010 we issued 1 million shares of common stock to two consultants who
coordinate our efforts with Antonov Company in Kiev, Ukraine, and agreed to
issue an additional 1 million shares if they meet designated performance
criteria.  The issuance was exempt from registration as a transaction
by an issuer not involving any public offering.





On August
20, 2010, we instructed our transfer agent to issue 5 million shares and agreed
to issue an additional 10 million shares to Omnicom Holdings pursuant to a
stipulated settlement in an action filed by Omnicom for a $1.5 million
commission claimed due in connection with our agreement with
Antonov.  The issuance was exempt from registration pursuant to
Section 3(a)(10) of the Securities Act as an issuanceapproved
by a court after a hearing upon the fairness of its terms and
conditions.





Item
5.    Other Information





Entry
into a Material Definitive Agreement





On August
18, 2010, we entered into a Strategic Cooperation Agreement with Supply Chain
Management & Procurement of AVIC International Holding Corporation,
providing for us to jointly bid on potential projects, as well as other areas of
potential cooperation.  We have also entered into a Confidentiality
and Non-Circumvention Agreement with AVIC.





Completion
of Acquisition or Disposition of Assets





Effective
August 27, 2010, we sold our unprofitable remanufacturing subsidiary, New
Century Remanufacturing, Inc. (“NCR”), to our former directors, David Duquette
and Josef Czikmantori, for $1 and an indemnity from all of NCR’s
liabilities.  A copy of the Stock Purchase Agreement is attached as
Exhibit 10.1 to this report.





Departure
of Directors or Certain Officers; Election of Directors; Appointment of Certain
Officers; Compensatory Arrangements of Certain Officers





Effective
August 16, 2010, David Duquette and Josef Czikmantori resigned as officers and
directors of U.S. Aerospace, Inc.





Effective
August 23, 2010, Michael Cabral was appointed our President and Rosa Rios was
appointed our Controller, Principal Financial and Accounting Officer, and
Secretary.





Michael
C. Cabral, age 49, has over 30 years experience in the aerospace industry. Mr.
Cabral founded Precision Aerostructures, Inc., which holds multiple
certifications and is approved as a direct supplier to the United States
Department of Defense, in September 2006.  He has designed, engineered
and supplied precision aircraft assemblies, structural aircraft components, and
precision machined details for Lockheed Martin Corporation (NYSE: LMT), L-3
Communications Holdings, Inc. (NYSE: LLL), the Middle River Aircraft Systems
subsidiary of General Electric Company (NYSE: GE), and many other aerospace
companies, defense contractors, and aircraft manufacturers around the
world.  Mr. Cabral has been employed in various executive,
manufacturing and quality engineering capacities with McDonnell Douglas, The
Boeing Company (NYSE: BA), Hughes Helicopter Division, Honeywell International,
Inc. (NYSE: HON), Allied Signal Division, and Goodrich Corporation (NYSE: GR),
Rohr Industries Division, as well as serving with some of the country’s leading
aerospace engineering and manufacturing subcontractors.  He receives a
base salary of $5,000 per week plus standard benefits applicable to all
employees.





Rosa
Rios, age 29, has served as Controller of Precision Aerostructures since June
2008.  She previously served as a Senior Financial Analyst at The Walt
Disney Company from October 2007 until joining Precision
Aerostructures.  Ms. Rios served as Supervisor, Senior
Accountant, and Lead Audit Senior at CBIZ & Mayer Hoffman McCann, the
nation’s eighth largest accounting firm, from 2003 until joining
Disney.  At CBIZ, she conducted formal analyses of internal controls,
including systems documentation, evaluation, testing of financial statements and
other agreed upon procedures, performed audits in their entirety and managed a
team of staff, assisted government clients with implementation of new financial
reporting requirements.  Ms. Rios received a BS in Business
Administration with a concentration in Accounting from California State
University, Bakersfield.  She receives a base salary of $2,000 per
week plus standard benefits applicable to all employees


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Item
6.    Exhibits





Exhibit
10.1 Stock Purchase Agreement between U.S. Aerospace, Inc. and David Duquette
and Josef Czikmantori for purchase of New Century Remanufacturing,
Inc.





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
31.2 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





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




SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.




U.S.
      Aerospace, Inc.September
      10, 2010
            By:
            /s/ Michael C. CabralName:
      Michael C. CabralTitle:
      President (Principal Executive Officer)By:
            /s/ Rosa RiosName:  Rosa
      RiosController
      (Principal Financial
              and
      Accounting Officer)


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