UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31,September 30, 2008
 
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
 
Commission file number: 000-09459

NEW CENTURY COMPANIES, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
061034587
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
98319835 Romandel Ave.
Santa Fe Springs, CA 90670
 (Address of principal executive offices)
 
(562) 906-8455
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes xNo 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
o
Non-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 oNo x
 
As of May 12,November 17, 2008, the Company had 14,119,65615,344,656 shares of common stock, $0.10 par value, issued and outstanding.
  
Documents incorporated by reference: None


NEW CENTURY COMPANIES, INC.

INDEX

Page No.
PART I - FINANCIAL INFORMATION
 
Page No.
   
Item 1. Financial Statements  
   
Condensed Consolidated Balance Sheets - March 31,
September 30, 2008 (Unaudited) and December 31, 2007  F-1
   
Condensed Consolidated Statements of Operations (Unaudited) -
Three and Nine Months Ended March 31,September 30, 2008 and 2007  F-2
   
Condensed Consolidated Statements of Cash Flows (Unaudited) - Three
Nine Months Ended March 31,September 30, 2008 and 2007  F-3
   
Notes to Condensed Consolidated Financial Statements  F-4
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 12
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 57
   
Item 4.4T. Controls and Procedures 57
   
PART II - OTHER INFORMATION
  
   
Item 1. Legal Proceedings 98
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 98
   
Item 3. Defaults Upon Senior Securities 98
   
Item 4. Submission of Matters to a Vote of Security Holders 98
  
Item 5. Other Information9
Item 6. Exhibits9
 
SIGNATURES 9
 10
EXHIBITS 

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

 
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
 
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETSHEETS
March 31,September 30, 2008 and December 31, 2007
(Unaudited)
 
ASSETS
     
 
March 31,
 
December 31,
  
September 30, 2008
 
December 31,
 
 
2008
 
2007
  
2008
 
2007
 
      
(unaudited)
   
ASSETS
 
          
Current Assets
          
Cash $- $281,729  $4,348 $281,729 
Contract receivables, net  499,054  438,876   50,679  438,876 
Inventories, net  715,207  886,107   669,116  886,107 
Costs and estimated earnings in excess of billings on uncompleted contracts  593,432  570,797   522,755  570,797 
Deferred financing costs  328,433  358,292 
Deferred financing costs, current portion  164,178  358,292 
Prepaid expenses and other current assets  237,050  14,183   415,430  229,104 
              
Total current assets  2,373,176  2,549,984   1,826,506  2,764,905 
              
Property and Equipment, net
  248,335  269,092   207,384  269,092 
Deferred Financing Costs, net
  -  59,715 
Deferred Financing Costs, long-term portion
  192,369  59,715 
              
Total Assets $2,621,511 $2,878,791  $2,226,259 $3,093,712 
              
              
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES AND STOCKHOLDERS' DEFICIT
       
              
Current Liabilities
              
Bank Overdraft $31,661 $18,962 
Bank overdraft $6,607 $18,962 
Accounts payable and accrued liabilities  1,923,486  2,074,666   983,992  2,074,666 
Dividends payable  376,725  376,725   418,000  376,725 
Billings in excess of costs and estimated earnings on uncompleted contracts  498,114  88,025   449,165  88,025 
Notes payable, net of current portion  26,144  25,597 
Convertible notes payable, net of discount of 923,610 for March 31, 2008 and $1,175,504 for December 31, 2007  1,643,057  1,391,163 
Capital lease obligation, current portion  27,274  25,597 
Deffered gain on forgiveness of debt, current portion  550,927  - 
Convertible (2007 only) notes payable, net of discount of $322,424       
at September 30, 2008 and $1,175,504 at December 31, 2007, current portion  201,542  1,391,163 
Convertible notes payable, net of discount of $30,878       
at September 30, 2008 and $0 at December 31, 2007, current portion  269,122  - 
Warrant liability  99,655  - 
              
Total current liabilities  4,499,187  3,975,138   3,006,284  3,975,138 
              
Long Term Liabilities
              
Notes payable, long term portion  30,934  37,679 
Capital lease obligation, long-term portion  16,992  37,679 
Deffered Gain on forgiveness of debt, long-term portion  457,461  - 
Convertible (2007 only) notes payable, net of discount of $268,686       
for September 30, 2008 and $0 for December 31, 2007, long-term portion  2,075,943  - 
Convertible notes payable, net of discount of $25,732       
for September 30, 2008 and $0 for December 31, 2007, long-term portion  274,268  - 
              
Total long term liabilities  30,934  37,679   2,824,664  37,679 
              
Commitments and Contingencies
              
              
Stockholders' Equity
       
Cumulative, 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 $910,000)  26,880  26,880 
Cumulative, convertible, Series D preferred stock, $25 par value, 75,000 shares authorized, 11,640 shares issued and outstanding (liquidation preference of $416,000)  291,000  291,000 
Common stock, $0.10 par value, 50,000,000 shares authorized; 14,119,656 and 13,744,654 shares issued and outstanding for March 31, 2008 and December 31, 2008, respectivelly  1,411,966  1,374,466 
Stockholders' Deficit
       
Cumulative, 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 $910,000)  26,880  26,880 
Cumulative, convertible, Series D preferred stock, $25 par value,       
75,000 shares authorized, 11,640 shares issued and outstanding       
(liquidation preference of $416,000)  291,000  291,000 
Common stock, $0.10 par value, 50,000,000 shares authorized;       
15,344,656 and 13,744,654 shares issued and outstanding       
at September 30, 2008 and December 31, 2008, respectivelly  1,534,466  1,374,466 
Subscriptions receivable  (462,500) (462,500)  (462,500) (462,500)
Notes receivable from stockholders  (545,165) (545,165)  (545,165) (545,165)
Deferred consulting fees  (209,578) (334,921)
Additional paid-in capital  9,786,281  9,748,781   9,410,905  9,628,781 
Accumulated deficit  (12,207,494) (11,232,567)  (13,860,275) (11,232,567)
              
Total stockholders' equity  (1,908,610) (1,134,026)
Total stockholders' deficit  (3,604,689) (919,105)
              
Total Liabilities and Stockholders' equity $2,621,511  2,878,791 
Total liabilities and stockholders' deficit $2,226,259 $3,093,712 

See accompanying notes to the condensed consolidated financial statements.

F-1

NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended March 31,September 30, 2008 and 2007
(Unaudited)

  
For the Three Months Ended September 30,
 
For the Nine Months Ended
September 30,
 
  
2008
 
2007
 
2008
 
2007
 
          
          
CONTRACT REVENUES
 $997,890 $1,414,269 $3,959,168 $7,199,885 
              
COST OF SALES
 $1,328,845  1,448,830  4,000,938  5,338,205 
              
GROSS PROFIT
  (330,955) (34,561) (41,770) 1,861,680 
              
OPERATING EXPENSES
             
Consulting and other compensation  121,058  160,555  466,440  802,873 
Salaries and related  86,239  85,368  213,858  312,338 
Selling, general and administrative  128,665  177,306  845,135  545,677 
TOTAL OPERATING EXPENSES
  335,962  423,229  1,525,433  1,660,888 
              
OPERATING INCOME (LOSS)
  (666,917) (457,790) (1,567,203) 200,792 
              
OTHER INCOME (EXPENSES)
             
Gain on writeoff of accounts payable  -  62,012  60,205  55,053 
Liquidated damages  -  (55,417)    (55,417)
Loss on valuation of derivative liability  (37,899) -  (37,899) - 
Interest expense  (57,387) (475,188) (1,041,538) (1,662,702)
              
TOTAL OTHER EXPENSES
  (95,286) (468,593) (1,019,232) (1,663,066)
              
LOSS BEFORE PROVISION FOR
             
INCOME TAXES
  (762,203) (926,383) (2,586,435) (1,462,274)
              
PROVISION FOR INCOME TAXES
  -  -  -  - 
              
NET LOSS
 $(762,203)$(926,383)$(2,586,435)$(1,462,274)
              
Preferred Stock Dividends $(41,275)$27,350 $(41,275)$27,350 
              
NET LOSS APPLICABLE
             
TO COMMON STOCKHOLDERS
 $(803,478) (899,033)$(2,627,710) (1,434,924)
              
Basic and diluted net loss available to
             
common stockholders per common share
 $(0.05) (0.07)$(0.18)$(0.11)
              
Basic and diluted weighted average common
             
shares outstanding
  15,344,656  13,440,580  14,478,506  12,698,246 
  
2008
 
2007
 
      
CONTRACT REVENUES
 $1,526,602 $3,185,469 
        
COST OF SALES
  1,308,479  2,000,230 
        
GROSS PROFIT
  218,123  1,185,239 
        
OPERATING EXPENSES
       
Consulting and other compensation  271,384  429,363 
Salaries and related  53,496  116,634 
Selling, general and administrative  438,029  173,276 
TOTAL OPERATING EXPENSES
  762,909  719,273 
        
OPERATING INCOME (LOSS)
  (544,786) 465,966 
        
OTHER INCOME (EXPENSES)
       
Gain on writeoff of accounts payable  56,628  12,553 
Loss on disputed accounts payable  -  (24,241)
Interest expense*  (486,769) (465,241)
        
TOTAL OTHER EXPENSES
  (430,141) (476,929)
        
LOSS BEFORE PROVISION FOR  INCOME TAXES
  (974,927) (10,963)
        
PROVISION FOR INCOME TAXES
  -  - 
        
NET LOSS
 $(974,927)$(10,963)
        
NET LOSS APPLICABLE  TO COMMON STOCKHOLDERS
 $(974,927)$(10,963)
        
Basic and diluted net loss available to common stockholders per common share
 $(0.07)$(0.00)
        
Basic and diluted weighted average common shares outstanding
  14,033,089  11,983,543 

* Interest includes $144,001 additional penalties and interest on defaulted convertible note, debt discount amortization of $251,894 and deferred financing cost amortization of $89,573 for the quarter ended March 31, 2008, and $84,000 interest, debt discount amortization of $291,667, and deferred financing cost amortization of $89,573 for the quarter ended March 31, 2007, all related to $3.8 million convertible notes issued in the first quarter of 2006.

See accompanying notes to the condensed consolidated financial statements.

F-2

NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the ThreeNine Months Ended March 31,September 30, 2008 and 2007
(Unaudited) 
  
2008
 
2007
 
      
Cash flows from operating activities:     
Net loss $(974,927)$(10,963)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:       
Depreciation and amortization of property and equipment  20,757  28,578 
Gain on write off of accounts payable  56,628  12,553 
Loss on disputed accounts payable  -  (24,241)
Amortization of deferred financing cost  89,574  89,574 
Amortization of debt discount  251,894  291,667 
Amortization of deferred consulting fees  125,343  98,977 
Estmated fair market value of common stock issued for consulting services and related change in fair value  75,000  247,500 
Changes in operating assets and liabilities:       
Contracts receivable  (60,178) (170,151)
Inventories  170,900  (212,874)
Costs and estimated earnings in excess of billings on uncompleted contracts  (22,635) 288,333 
Prepaid expenses and other current assets  (222,867) 12,801 
Notes receivable from stockholders  -  (7,000)
Accounts payable and accrued liabilities  (207,810) 19,719 
Billings in excess of costs and estimated earnings on uncompleted contracts  410,089  (53,201)
        
Net cash (used in) provided by operating activities   (288,232)  611,272 
        
Cash flows from financing activities:       
Restricted cash    -  123,898 
Bank overdraft    12,699  15,318 
Principal payments on notes payable    (6,196) (486,000)
        
Net cash provided by (used in) financing activities    6,503  (346,784)
        
Net (decrease) increase in cash    (281,729) 264,488 
        
Cash at beginning of period    281,729  53,318 
        
Cash at end of period   $- $317,806 
 
  
2008
 
2007
 
      
Cash flows from operating activities:     
Net loss $(2,586,435)$(1,462,274)
Adjustments to reconcile net loss to net cash       
(used in) provided by operating activities:       
Depreciation and amortization of property and equipment   61,708  95,659 
Gain on write off of accounts payable   (60,205) 55,053 
Amortization of deferred financing cost   216,298  268,722 
Amortization of debt discount and deferred gain    1,589,270  1,100,380 
Amortization of deferred stock-based consulting fees  208,254  696,116 
Estmated fair market value of common stock issued for consulting services         
and related change in fair value  96,710  - 
Loss on valuation of Derivative Liability   37,899  - 
Bad debt expense   2,260  - 
        
Changes in operating assets and liabilities:        
Contracts receivable  385,937  (365,832)
Inventories  216,991  (369,683)
Costs and estimated earnings in excess of billings on uncompleted contracts  48,042  555,473 
Prepaid expenses and other current assets  (274,579) (1,697) 
Notes and interest accrued on notes receivable from stockholders  -  (28,000)
Accounts payable and accrued liabilities  (1,067,903) 100,859 
Billings in excess of costs and estimated earnings on uncompleted contracts  361,140  (168,453)
        
Net cash (used in) provided by operating activities  (764,613) 476,323 
        
Cash flows from investing activities:       
Purchases of property and equipment  -  (32,225)
        
Net cash used in investing activities  -  (32,225)
        
Cash flows from financing activities:       
Restricted cash  -  123,898 
Bank overdraft  (12,355) 21,733 
Proceeds from issuance of convertible notes payable  600,000  - 
Principal payments on notes payable  (100,413) (624,500)
        
Net cash provided by (used in) financing activities  487,232  (478,869)
        
Net (decrease) increase in cash  (277,381) (34,771)
        
Cash at beginning of period  281,729  53,318 
        
Cash at end of period $4,348 $18,547 
        
Supplemental disclosure of non-cash financing and investing activities:       
        
Accrued cumulative dividends on preferred stock $41,275 $42,400 
        
Reversal of accrued dividends older than four years on preferred stock $- $(69,750)
        
Conversion of notes payable and interest to common stock $- $424,317 
        
Common stock and warrants issued for deferred financing costs $102,500 $- 
        
Conversion of Series C preferred stock to common stock $- $1,500 
        
Debt discount balance on convertible notes payable $647,720 $1,427,397 
        
Deferred gain balance on convertible notes payable $1,008,388 $- 
See accompanying notes to the condensed consolidated financial statements.
F-3

NEW CENTURY COMPANIES, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31,SEPTEMBER 30, 2008 AND 2007
 

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
 
Organization Andand Nature Ofof Operations
 
New Century Companies, Inc. and its wholly owned subsidiary, New Century Remanufacturong,Remanufacturing, Inc., (collectively, the "Company"), a California corporation, was incorporated March 1996 and is located in Southern California. The Company provides after-market services, including rebuilding, retrofitting and remanufacturing of metal cutting machinery. Once completed, a remanufactured machine is "like new" with state-of-the-art computers and the cost to the Company's customers is substantially less than the price of a new machine.
 
The Company currently sells its services by direct sales and through a network of machinery dealers across the United States. Its customers are generally medium to large sized manufacturing companies in various industries where metal cutting is an integral part of their businesses. The Company grants credit to its customers who are predominately located in the western United States.
 
The Company trades on the OTC Bulletin Board under the symbol "NCNC.OB".
 
Principles Ofof Consolidation
 
The condensed consolidated financial statements include the accounts of New Century Companies, Inc. and its wholly owned subsidiary, New Century Remanufacturing, Inc.. All significant intercompany accounts and transactions have been eliminated in consolidation.
 
Basis Ofof Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared by the Company, pursuant to the rules and regulations of the United States Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted pursuant to such SEC rules and regulations; nevertheless, the Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements and the notes hereto should be read in conjunction with the consolidated financial statements, accounting policies and notes thereto included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2007, filed with the SEC. In the opinion of management, all adjustments necessary to present fairly, in accordance with GAAP, the Company's financial position as of March 31,September 30, 2008, and the results of operations and cash flows for the interim periods presented, have been made. Such adjustments consist only of normal recurring adjustments. The results of operations for the three and nine months ended March 31,September 30, 2008 are not necessarily indicative of the results for the full year ending December 31, 2008. Amounts related to disclosure of December 31, 2007 balances within these interim condensed consolidated financial statements were derived from the audited 2007 consolidated financial statements and notes thereto.
Reclassifications
The Company has reclassified the presentation of current prior-year information to conform to the current presentation.

F-4
Going Concern

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. The Company has losses from operations year to date of approximately $1,567,000, an accumulated deficit of approximately $12,207,000$13,860,000 and was also in default on its convertible debt.a negative working capital balance of approximately $1,180,000. These factors, among others, raisesraise substantial doubt about the Company's ability to continue as a going concern. The Company intends to fund operations through anticipated increased sales along with renegotiated or new debt and equity financing arrangements whicharrangements. Currently, the Company's management believes may be insufficientattracted additional funding in the form of secured debt. However, there is no guarantee that the capital raised is sufficient to fund its capital expenditures, working capital and other cash requirements for the year ending December 31, 2008. Therefore, the Company will be required to seek additional funds to finance its long-term operations.
F-4
In response to these problems, management has taken the following actions:
·
The Company continues its aggressive program for selling inventory.
·The Company continues to implement plans to further reduce operating costs.
·The Company is seeking investment capital through the public and private markets.
·The Company has successfully restructured its debt, eliminating the penalties and interest for past default and extending the repayment term (See Note 3).
·The Company's management also attracted additional funding in the form of secured debt (See Note 3).

The successful outcome of future activities cannot be determined at this time and there is no assurance that if achieved, the Company will have sufficient funds to execute its intended business plan or generate positive operating results.

In response to these problems, management has taken the following actions:
·The Company continues its aggressive program for selling inventory.
·The Company continues to implement plans to further reduce operating costs.
·The Company is seeking investment capital through the public and private markets.

The condensed consolidated financial statements do not include any adjustments related to recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
 
Inventory
 
Inventories are stated at the lower of cost or net realizable value. Cost is determined under the first-in, first-out method. Inventories represent cost of work in process on units not yet under contract. Cost includes all direct material and labor, machinery, subcontractors and allocations of indirect overhead. As of March 31, 2008, the company’s inventory was determined to be approximately $715,000 net, based on approximately $82,000 cost of labor, $486,000 cost of materials, $42,000 cost of subcontracted services, $391,000 allocated indirect overhead cost, offset by a $286,000 reserve for estimated markdowns on inventory costs. At
Inventory costs as of September 30, 2008 and December 31, 2007 the company’s inventory was determined to be approximately $1,172,000 net, based on approximately $86,000 cost of labor, $615,000 cost of materials, $61,000 cost of subcontracted services, $410,000 allocated indirect overhead cost, offset by a $286,000 reserve for estimated markdowns on inventory costs.2007:

  
September 30,
2008
 
December 31,
2007
 
      
Cost of labor $75,000 $86,000 
Cost of materials  462,000  615,000 
Cost of subcontracted services  42,000  61,000 
Allocation of indirect overhead cost  376,000  410,000 
      
Gross inventory $955,000 $1,172,000 
      
Reserve for estimated markdowns on inventory costs  (286,000) (286,000)
      
Net inventory $669,000 $886,000 
 
F-5
 
Revenue Recognition
 
The Company's revenues consist primarily of contracts with customers. The Company uses the percentage-of-completion method of accounting to account for long-term contracts and, therefore, takes into account the cost, estimated earnings and revenue to date on fixed-fee contracts not yet completed. The percentage-of-completion method is used because management considers total cost to be the best available measure of progress on the contracts. Because of inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change within the near term. The Company recognizes revenue on contracts pursuant to StatementsAICPA Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.”

For revenues from stock inventory the Company follows Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition", which outlines the basic criteria that must be met to recognize revenue other than revenue on contacts, and provides guidance for presentation of this revenue and for disclosure related to these revenue recognition policies in financial statements filed with the SEC.
 
For contracts, the amount of revenue recognized at the financial statement date is the portion of the total contract price that the cost expended to date bears to the anticipated final cost, based on current estimates of cost to complete. It is not related to the progress billings to customers. Contract costs include all materials, direct labor, machinery, subcontract costs and allocations of indirect overhead.
 
Because contracts may extend over a period of time, changes in job performance, changes in job conditions and revisions of estimates of cost and earnings during the course of the work are reflected in the accounting period in which the facts that require the revision become known. At the time a loss on a contract becomes known, the entire amount of the estimated ultimate loss is recognized in the financial statements.
 
Contracts that are substantially complete are considered closed for financial statement purposes. Costs incurred and revenue earned on contracts in progress in excess of billings (under billings) are classified as a current asset. Amounts billed in excess of costs and revenue earned (over billings) are classified as a current liability.
 
The Company accounts for shipping and handling fees and costs in accordance with Emerging Issues Task Force ("EITF") Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs." Shipping and handling fees and costs incurred by the Company are immaterial to the operations of the Company and are included in cost of sales.
 
In accordance with Statements of Financial Accounting Standards ("SFAS") No. 48, "Revenue Recognition when Right of Return Exists," revenue is recorded net of an estimate for markdowns, price concessions and warranty costs. Such reserve is based on management's evaluation of historical experience, current industry trends and estimated costs. As of March 31,September 30, 2008, the Company estimated the markdowns, price concessions and warranty costs and concluded amounts are immaterial and did not record any adjustment to revenues.

F-6
 
Basic Andand Diluted Loss Perper Common Share

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

Common stock equivalents, representing convertible Preferred Stock,preferred stock, convertible debt, options and warrants totaling approximately 5,637,00010,101,000 at March 31,September 30, 2008 and 6,192,972 at December 31, 2007 are not included in the diluted loss per share as they would be anti-dilutive. Accordingly, diluted and basic loss per common share are the same at March 31,September 30, 2008 and December 31, 2007.
F-6
 
Stock Based Compensation

Equity Instruments That Are Issued To Employees

Effective January 1, 2006, we adopted the fair value method of accounting for employee stock compensation cost pursuant to SFAS No. 123-R, “Share-Based PaymentsPayments”. Prior to that date, the Company used the intrinsic value method under Accounting Policy Board Opinion No. 25 to recognize compensation cost.
 
Under the modified prospective method of adoption for SFAS No. 123-R, the compensation cost recognized by the Company beginning January 1, 2006 includes compensation cost for all equity incentive awards granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123-R. The Company had no equity incentive awards granted prior to January 1, 2006 that were not yet vested. Accordingly, no compensation expense$0 and $86,400 inof share-based compensation expense was recognized in the accompanying condensed consolidated financial statements of operations for the three monthsmonth periods ended March 31,September 30, 2008 and 2007.2007, respectively. $0 and $259,200 of share-based compensation expense was recognized in the accompanying condensed consolidated financial statements for the nine month periods ended September 30, 2008 and 2007, respectively.

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.

On November 13, 2006, the Company granted 2,000,000 options to key employees. At March 31,September 30, 2008, the Company had 1,050,0002,200,000 options available for future issuance under their equity compensation plans.

There areis no share-based compensation resulting from the application of SFAS No. 123-R to options granted outside of the Company's Stock Option Plan for the three or nine months ended March 31,September 30, 2008 and 2007. Share-based compensation recognized as a result of the adoption of SFAS No. 123-R use the Black ScholesBlack-Scholes option pricing model for estimating fair value of options granted.

F-7

In accordance with SFAS No. 123-R, 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 effect of adjusting the forfeiture rate for all expense amortization after December 31, 2007 is recognized in the period the forfeiture estimate is changed.

At March 31, 2008, the Company estimated (using the Black Scholes pricing model) the fair value of options granted andchanged, no variance has been found. Therefore, the effect of forfeiture adjustments atchanges occurred in the period ended March 31, 2008 was not applicable.September 30, 2008.
F-7
 
Options outstanding that have vested and are expected to vest as of March 31,September 30, 2008 are as follows:

   Weighted Weighted Average      Weighted   
   Average Remaining Aggregate    Weighted Average   
 Number of Exercise Contractual Intrinsic    Average Remaining Aggregate 
 Shares Price Term in Years Value (1)  Number of Exercise Contractual Intrinsic 
          Shares Price Term in Years 
Value (1)
 
Vested (2)  3,950,000 $0.20  0.74 $
—
   2,800,000 $0.19  2.57 $— 
Expected to vest  —       $
—
   —  —  — $— 
Total  3,950,000       $
—
   2,800,000  0.19  2.57 $— 
 
(1) -
These values calculatesare calculated as the difference between the exercise price and $0.20,$0.09, the closing market price of the Company's common stock on March 31,September 30, 2008 as quoted on the Over-the-Counter Bulletin Board under the symbol "NCNC.OB" for all in-the-money options outstanding.
 
(2) -
IncludeIncludes 800,000 options that became fully vested on March 14, 2008 and are valued at $120,000 based on the stock market price of the shares at the contract date.

F-8
 
The Company’s policy for optionsOptions outstanding that are expected to vest are net of estimated future forfeitures which are estimated when compensation costs are recognized in accordance with the provisions of SFAS No. 123-R, which are estimated when compensation costs are recognized. Additional information with respect to stock option activity is as follows:

   Outstanding Options 
   Outstanding Options  Shares   Weighted Aggregate 
 Shares   Weighted Aggregate  Available Number of Average Intrinsic 
 Available Number of Average Intrinsic  for Grant Shares Exercise Price 
Value (1)
 
 for Grant Shares Exercise Price Value (1)          
December 31, 2007  1,050,000  3,950,000 $0.20 $79,000   1,050,000  3,950,000 $0.20 $79,000 
             
Grants  —  —  —      —  —  —    
Exercises  —  —  —      —  —  —    
Cancellations  —  —  —      1,150,000  1,150,000 $0.25        
March 31, 2008  1,050,000  3,950,000 $0.20 $— 
September 30, 2008  2,200,000  2,800,000 $0.19 $— 
                         
Options exercisable at:                        
March 31, 2008     
3,950,000
 
$
0.20
    
September 30, 2008    2,800,000 $0.19   
December 31, 2007
     
3,150,000
 
$
0.22
        3,950,000 $0.20   
 
(1) -
Represents the added value as difference between the exercise price and the closing market price of the Company's common stock at the end of the reporting period (as of March 31,September 30, 2008 and December 31, 2007, the market price of the Company's common stock was $0.20$0.09 and $0.22, respectively). for all in-the-money options outstanding.
 
F-8
Equity Instruments That Are Issued To Other Than Employees

The Company follows SFAS No. 123-R (as interpreted by EITF Issue No. 96-18, "Accounting for Equity Instruments That Are Issued To Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services") to account for transactions involving services provided by third parties where the Company issues equity instruments as part of the total consideration. Pursuant to paragraph 7 of SFAS No. 123 (R), the Company accounts for such transactions using the fair value of the consideration received (i.e. the value of the goods or services) or the fair value of the equity instruments issued, whichever is more reliably measurable. The Company applies EITF Issue No. 96-18 in transactions when the value of the goods and/or services are not readily determinable and the fair value of the equity instruments is more reliably measurable and the counterparty receives equity instruments in full or partial settlement of the transactions using the following methodology:
 
a) For transactions where goods have already been delivered or services rendered, the equity instruments are issued on or about the date the performance is complete (and valued on the date of issuance).
 
b) For transactions where the instruments are issued on a fully vested, non-forfeitable basis, the equity instruments are valued on or about the date of the contract.
 
c) For any transactions not meeting the criteria in (a) or (b) above, the Company re-measures the consideration at each reporting date based on its then current stock value.

During the three and nine month periods ended September 30, 2008, the Company did not grant any options.

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.

On June 26, 2008, in connection with restructuring of the CAMOFI convertible note, the Company issued 1,450,000, 5 year warrants, 725,000 with an exercise price of $0.10 and 725,000 with an exercise price of $0.20.

On August 8, 2008, the Company issued a new convertible note to CAMHZN Master LDC (“CAMHZN”) for $600,000 (See Note 3.2. bellow) . In connection with the note, the Company issued 1,000,000, 7 year warrants with an exercise price of $0.07.

The following is a status of the warrants outstanding at December 31, 2007 and the changes during the nine months ended September 30, 2008:
      Outstanding Warrants 
         Weighted    
      Weighted  Average    
      Average  Remaining  Aggregate 
   Warrants  Exercise  Contractual  Intrinsic 
      Price  Term in Years  
Value (1)
 
December 31, 2007  6,378,728 $0.57  5.17 $— 
             
Grants  2,450,000 $0.12  5.61    
Exercises  —  —      
Cancellations  5,006,190 $0.55  0.26    
September 30, 2008  3,822,538 $0.31  4.92 $— 
              
Warrants exercisable at:             
September 30, 2008  3,822,538 $0.31       
December 31, 2007  6,378,728 $0.57       
(1) -
Represents the 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 September 30, 2008 and December 31, 2007, the market price of the Company's common stock was $0.09 and $0.22, respectively) for all in-the-money options outstanding.
F-9
 
Deferred Financing Costs

Note Payable

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 accountsaccounts.

In June 2008, in connection with the CAMOFI debt reduction as discussed in Note 3, the Company entered into a contract with a third party for financial services. The Company issued 300,000 shares of common stock valued at $36,000, based on the market price of the shares on the date of the agreement. The fee is capitalized and chargedamortized over the term of the related debt.

In August 2008, the Company issued a $600,000, 2 year convertible note to operations. CAMHZN Master LDC. As discussed in Note 3 in connection with the note, the Company incurred $50,000 in legal and closing fees. The fees are capitalized and amortized over the term of the related debt.

During the three months ended March 31,September 30, 2008 and 2007, the Company amortized approximately $35,000 and $90,000 each reporting period,of deferred financing costs, respectively, to interest expense.
Stock Purchase Warrants Issued With Notes Payable
In 2006, the Company granted warrants in connection with the issuance of certain notes payable. Under Accounting Principles Board Opinion No. 14, "Accounting for Convertible Debt and Debt Issued With Stock Purchase Warrants," the relative estimated fair value of such warrants represents a discount from the face amount of the notes payable. Such discounts are amortized to interest expense over the term of the notes. During the threenine months ended March 31,September 30, 2008 and 2007, the Company amortized approximately $158,000$216,000 and $183,000,$269,000 of deferred financing costs, respectively, to interest expense. At September 30, 2008, the unamortized portion of deferred financing costs for the CAMOFI note payable is approximately $242,000, and the unamortized portion of deferred financing costs for the CAMHZN convertible note payable is approximately $46,000.

Real Estate Lease

Beneficial Conversion Feature Of Convertible Notes PayableOn April 1
The convertible feature of certain notes payable providesst, 2008, the company entered into a commercial lease agreement to lease its premises for a rate of conversion that is below market value. Such feature is normally characterized as a "Beneficial Conversion Feature" ("BCF").ten years. Pursuant to EITF Issue No. 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratio"the lease, the Company incurred a brokerage fee of approximately $72,500. This cost is capitalized and EITF No. 00-27, "Application of EITF Issue No. 98-5 To Certain Convertible Instruments," the estimated fair value of the BCF is recorded in the consolidated financial statements as a discount from the face amount of the notes. Such discounts are amortized to interest expense over the term of the notes. lease.

During the three months ended March 31,September 30, 2008, and 2007, the Company amortized approximately $94,000 and $109,000, respectively,$1,800 to interestrent expense. At September 30, 2008, the unamortized portion of deferred brokerage fees for the lease is approximately $69,000.
 
Income Taxes

We adopted the provisions of Financial Standards Accounting Board Interpretation No. 48 Accounting for Uncertainty in Income Taxes ("FIN 48") an interpretation of FASB Statement of Accounting Standards No. 109 ("SFAS 109") on January 1, 2007. The implementation of FIN 48 did not result in any adjustment to the Company's beginning tax positions. The Company continues to fully recognize its tax benefits which are offset by a valuation allowance to the extent that it is more likely than not that the deferred tax assets will not be realized. As of March 31,September 30, 2008, the Company did not have any unrecognized tax benefits. The Company files a Consolidated Federal income tax return in the U.S. The Company files a separate income tax return in the State of California. The Company is no longer subject to U.S. Federal tax examinations for the years before 2004, and to the State of California for the years before 2003.
F-10

Significant Recent Accounting Pronouncements
 
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS No. 141(R) retains the fundamental requirements in SFAS No. 141, Business Combinations, that the acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each business combination. SFAS No. 141(R) requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrollingnon-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in SFAS No. 141(R). In addition, SFAS No. 141(R) requires acquisition costs and restructuring costs that the acquirer expected but was not obligated to incur to be recognized separately from the business combination, therefore, expensed instead of part of the purchase price allocation. SFAS No. 141(R) will be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early adoption is prohibited. The Company expects to adopt SFAS No. 141(R) to any business combinations with an acquisition date on or after January 1, 2009.

F-10

In December 2007, the FASB issued SFAS No. 160, NoncontrollingNon-controlling Interests in Consolidated Financial Statements, an amendment to ARB No. 51. SFAS No. 160 changes the accounting and reporting for minority interests, which will be recharacterized as noncontrollingnon-controlling interests and classified as a component of equity. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Early adoption is prohibited. The Company is currently evaluating the impact SFAS No. 160 may have on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS No. 157 does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after December 15, 2007. The adoption of SFAS No. 157 did not have a significant impact on the Company’s financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 expands the scope of specific types of assets and liabilities that an entity may carry at fair value on its statement of financial position, and offers an irrevocable option to record the vast majority of financial assets and liabilities at fair value, with changes in fair value recorded in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 159 did not have a significant impact on the Company’s financial statements.

On May 9, 2008, the FASB issued Staff Position ("FSP") Accounting Principals Board Option (APB) 14-1, Accounting for  Convertible  Debt  Instruments  That May Be Settled in Cash upon Conversion (Including  Partial Cash  Settlements),  which clarifies that  convertible  debt instruments that may be settled in cash upon conversion  (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14,  Accounting for  Convertible  Debt and Debt Issued  with Stock  Purchase  Warrants.  The FSP specifies that issuers of such  instruments  should  separately  account for the liability  and equity  components  in a manner that will  reflect  the  entity's nonconvertible   debt  borrowing  rate  when  interest  cost  is  recognized  in subsequent  periods.  FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years.  The Company has not completed its evaluation of the impact of the effect, if any, the adoption of FSP APB 14-1 would have.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force, or “EITF”), 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.

Reclassifications
Certain items as previously reported by the Company with respect to the period ended December 31, 2007 have been reclassified to conform to the presentation of such items for the period ended September 30, 2008.
F-11
 
2. CONTRACTS IN PROGRESS

Contracts in progress which include completed contracts not completely billed, approximate:

 March 31, 2008 December 31, 2007  September 30, 2008 December 31, 2007 
          
Cumulative costs to date $4,124,000 $7,007,000  $5,911,000 $6,940,000 
Cumulative gross profit to date  3,466,000  7,893,000   4,167,000  7,893,000 
              
Cumulative revenue earned  
7,590,000
  
14,900,000
   10,078,000  14,833,000 
Less progress billings to date  
(7,494,000
)
 
(14,350,000
)
  (10,004,000) (14,350,000)
              
Net under billings 
$
95,000
 $550,000  $74,000 $483,000 
 
F-11

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

 March 31, 2008 December 31, 2007  September 30, 2008 December 31, 2007 
          
Costs and estimated earnings in excess of billings on uncompleted contracts $
593,000
 $571,000  $523,000 $571,000 
Billings in excess of costs and estimated earnings on uncompleted contracts  (498,000) (88,000)  (449,000) ( 88,000)
              
Net under billings $
95,000
 $
483,000
  $74,000 $483,000 



3.DEBT FINANCING TRANSACTIONS

3.1. CAMOFI Master LDC (“CAMOFI”) CONVERTIBLE DEBTDebt
 
The Company’sOn February 28, 2006, the Company issued a 12% senior convertible debt financing withpromissory note to CAMOFI is in default. Contractual payments on the note have not been made since July 2007 andMaster LDC. As of June 26, 2008 an aggregate to $3,646,889of $3,800,890 principal, interest and penalties. Forpenalties were due under the note.

Pursuant to a letter agreement dated June 26, 2008 (the “Letter Agreement”) between New Century Companies, Inc. (the “Company”) and CAMOFI Master LDC (“CAMOFI”), CAMOFI agreed to waive certain penalties and default interest which have been accrued under the transaction documents previously entered into with CAMOFI, including a 12% Senior Secured Convertible Promissory Note due February 20, 2009 in the original principal amount of $3,500,000, Security Agreement, an Amended and Restated Registration Rights Agreement, and a Subsidiary Guaranty. The waiver is subject to the Company’s performance of its obligations under the Letter Agreement and the execution of further documentation to be prepared in connection with the Letter Agreement. Pursuant to the Letter Agreement, the Company issued an amended and restated Note (the “Amended Note”) in the principal amount of $2,950,000 with a new maturity date of August 1, 2010.

Additionally, under the Letter Agreement, the Company issued 725,000 shares of common stock and 725,000 five year warrants with an exercise price of $0.10 and 725,000 five year warrants with an exercise price of $0.20. Commencing on August 1, 2008, and continuing thereafter on the first business day of every month for the next twenty-four months, the Company has the obligation to pay to CAMOFI the amount of $70,000, allocated first to the payment of interest and second to the payment of principal on the Amended and Restated Note. On or before August 1, 2010, the Company shall pay to CAMOFI all amounts still outstanding under the Amended and Restated Note, whether of principal, interest or otherwise.
F-12
The transaction qualified as Troubled Debt Restructuring under SFAS No. 15 due to the company’s current financial difficulties and the concessions granted by CAMOFI.  In accordance with SFAS No. 15, no gain on the forgiveness of interest and penalties was recognized as the carrying value of the note did not exceed the future cash payment at the time of transaction.  The fair value of the warrants was approximately $161,000 based on the Black-Scholes pricing model, and the fair value of the stock given to CAMOFI was approximately $73,000, aggregating to $233,000 which was recorded as a reduction to the note.  The remaining forgiveness of the interest and penalties of $624,000 was recorded as a deferred gain.

The assumptions used in the Black-Scholes pricing model for this transaction were as following, risk free rate of 3.44%, expected life of 5 years and an implied volatility of 187%.  

CAMOFI also cancelled 3,476,190 warrants with a term of five years, which were issued on February 28, 2006 with an exercise price of $0.63 and 1,500,000 warrants dated December 19, 2006 with an exercise price of $0.35. The fair value of such warrants on June 26, 2008 was approximately $530,000, based on the Black-Scholes pricing model and was recorded as a deferred gain to be amortized to interest expense over the life of the debt.
Stock Purchase Warrants Issued and Cancelled in Connection with the CAMOFI Note
In 2006, the Company granted warrants in connection with the issuance of 12% Senior secured convertible promissory note. Under APB No. 14, "Accounting for Convertible Debt and Debt Issued With Stock Purchase Warrants," the relative estimated fair value of such warrants represents a discount from the face amount of the notes payable. Such discounts are amortized to interest expense over the term of the notes. During the three months ended March 31,September 30, 2008 and 2007, the Company amortized approximately $50,000 and $158,000, respectively, to interest expense. During the nine months ended September 30, 2008 and 2007, the Company amortized approximately $383,000 and $689,000, respectively, to interest expense.
Beneficial Conversion Feature Of CAMOFI Convertible Notes Payable Discontinued on June 26, 2008 for Restructured Debt
The convertible feature of certain notes payable provide for a rate of conversion that is below market value. Such feature is normally characterized as a "Beneficial Conversion Feature" ("BCF"). Pursuant to EITF Issue No. 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratio" and EITF No. 00-27, "Application of EITF Issue No. 98-5 To Certain Convertible Instruments," the estimated fair value of the BCF is recorded in the condensed consolidated financial statements as a discount from the face amount of the notes. Such discounts are amortized to interest expense over the term of the notes. During the three months ended September 30, 2008 and 2007, the Company amortized approximately $30,000 and $94,000, respectively, to interest expense. During the nine months ended September 30, 2008 and 2007, the Company amortized approximately $208,000 and $412,000, respectively, to interest expense. As part of the restructuring of the CAMOFI debt as discussed in Note 3, the CAMOFI debt no longer has a conversion feature. As of June 26, 2008, when the Company restructured the CAMOFI convertible note, the debt discount balance of approximately $672,000 is being amortized to interest expense over the maturity term of the note, August 10, 2008.
For the three and nine months ended September 30, 2008, $81,405 principal payments were made on the secured convertible notes payable.CAMOFI note. As of March 31,September 30, 2008 and December 31, 2007, the principal balance is approximately $2,869,000 and $2,567,000, respectively, which is presented net of debt discounts totaling approximately $924,000$591,000 and $1,176,000, respectively.
 
F-13
3.2. CAMHZN Master LDC (“CAMHZN”) Debt
On August 8, 2008, the Company issued a 15% Senior Secured Convertible Promissory Note to CAMHZN Master LDC in the principal amount of $600,000, with a maturity date of August 1, 2010, and a conversion price of $0.07.

Additionally, the Company granted 1,000,000 seven year warrants with an exercise price of $0.07 to CAMHZN Master LDC. 

Stock Purchase Warrants Issued in connection with CAMHZN Convertible Note Payable
Under APB No. 14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants," the relative estimated fair value of the warrants granted in connection with the issuance of the 15% Senior Secured Convertible Promissory Note represents a discount from the face amount of the notes payable. Such discounts are amortized to interest expense over the term of the notes. The fair value of the warrants given to CAMHZN was approximately $61,756 based on the Black-Scholes pricing model and was recorded as a reduction to the note. During the three months ended March 31,September 30, 2008, and 2007, the Company amortized approximately $252,000$5,146 to interest expense.

The assumptions used in the Black Scholes pricing model are as follows: closing stock price $0.07 per share, exercise price, $0.06 per share, estimated life 7 years, risk free rate 4.04% and $292,000, respectively,volatility 216%.

The warrants have been accounted for as a liability per EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled In, a Company’s Own Stock”. The warrants provide for net cash settlement in certain circumstances based upon the rights available to a holder of the warrants should the Company fail to deliver certificates upon exercise in a timely manner. As a liability, the warrants are fair valued each quarter and the gain or loss is recorded. For the three and nine months ended September 30, 2008, the Company recorded a loss on the valuation of $37,899.
The convertible feature of certain notes payable provide for a an effective rate of conversion that is below market value. Such feature is normally characterized as a "Beneficial Conversion Feature" ("BCF"). Pursuant to EITF Issue No. 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratio" and EITF No. 00-27, "Application of EITF Issue No. 98-5 To Certain Convertible Instruments," the estimated fair value of the BCF is recorded in the condensed consolidated financial statements as a discount from the face amount of the notes. The relative fair value of the proceeds allocated to Convertible Promissory Note after the fair value allocation to the Stock Purchase Warrants was $538,244. The effective conversion price is $0.63 per share and it is higher than the closing stock price on August 8, 2008. Therefore there is no intrinsic beneficial conversion feature.

During the three and nine months ended September 30, 2008, the Company accrued approximately $15,000 in interest expense.
For the three and nine months ended September 30, 2008, no principal payments were made on the CAMHZN note. As of September 30, 2008, the principal balance is 600,000, which is presented net of debt discounts including beneficial conversion features, to interest expense related to the convertible note payable to CAMOFI .and amortization of those discounts, approximately $56,610.

4.WAIVER OF REGISTRATION REQUIREMENT

On November 18, 2008 in a letter agreement, CAMHZN agreed to waive the liquidated damages payment per Section 2(b) of the Registration Rights Agreement for good and valuable consideration until February 16, 2009, when on or before that date, a registration statement will need to be declared effective by the SEC. If a registration statement is not declared effective by that date, then any and all liquidated damages required by Section 2(b) will be reinstated retroactive to August 8, 2008.

5. EQUITY TRANSACTIONS

Equity Compensation

In FebruaryJune 2008, the Company entered into a year19 day contract with a third party for public relations services valued at $30,000.$18,000. The fee was paid in the form of 150,000200,000 shares of the Company’s common stock based on the stock market price of the shares at the contract date. The value of the common stock on the date of the transaction was recorded as a deferred charge and was amortized to operating expense over the life of the agreement.

In February 2008, the Company entered into a one-year contract with a third party for public relations services valued at $30,000. The fee was paid in the form of 150,000 shares of the Company’s common stock and the value was based on the stock market price of the shares at the contract date. The fee was recorded as a deferred charge and is amortized to operating expense over the life of the agreement. At March 31,September 30, 2008, the remaining deferred consulting fees under this contract totaled $25,000.$10,000.

F-14
In February 2008, the Company entered into a three month contract with a third party for public relations services valued at $20,000. The fee was paid in the form of 100,000 shares of the Company’s common stock and the value was based on the stock market price of the shares at the contract date. The value of the common stock on the date of the transactionfee was recorded as a deferred charge and iswas amortized to operating expense over the life of the agreement. At March 31, 2008, the remaining deferred consulting fees under this contract totaled $10,000.
F-12

In March 2008, the Company entered into a one month contract with a third party for public and financial communication services valued at $25,000. The fee was paid in the form of 125,000 shares of the Company’s common stock and the value was based on the stock market price of the shares at the contract date. The fee was recorded as a deferred charge and was amortized to operating expense over the life of the agreement.

In May 2007, the Company issued 100,000 shares of common stock valued at $70,000 (based on the market price of the shares) to a third party for public investor relations services under a one year contract. The common stock was recorded at the estimated fair value of the common stock on the date of the transaction and was amortized over the life of the agreement and recorded as deferred compensation expense.

In June 2007, the Company issued 300,000 shares of common stock valued at $210,000 (based on the market price of the shares) to a third party for internet public investor relations services under a three year contract. The common stock was recorded as a deferred chargeat the estimated fair value of the common stock on the date of the transaction and is amortized to operating expense over the life of the agreement. At March 31,September 30, 2008, the remaining deferred consulting fees under this contract totaled $20,161.$116,667.

In June 2007, the Company issued 15,000 shares of common stock valued at $10,500 (based on the market price of the shares) to a third party for public investor relations services under a 90 day contract. The common stock was recorded at the estimated fair value of the common stock on the date of the transaction and was amortized over the life of the agreement.

In June 2007, the Company issued 75,000 shares of common stock valued at $52,500 (based on the market price of the shares) to a third party for corporate consulting and market services under a 6 month contract. The common stock was recorded at the estimated fair value of the common stock on the date of the transaction and was amortized over the life of the agreement.
In February 2007, the Company issued 150,000 shares of common stock valued at $60,000, based on the market price of the shares on the date the services were completed, to a third party for investor marketing services under a one month contract. The fee aswas recorded as public company expense in the first quarter of 2007.

In February 2007, the Company issued 100,000 shares of common stock valued at $36,000, based on the market price of the shares on the date the services were completed, to a third party for financial consulting services under a 13 day contract. The fee aswas recorded as public company expense in the first quarter of 2007.

In February 2007, the Company issued 300,000 shares of common stock valued at $126,000, based on the market price of the shares on the date the services were completed, to a third party for investor relation services under a one month contract. The fee aswas recorded as public company expense in the first quarter of 2007.

In accordance with EITF 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” since the value of the services were not readily determinable on transactions that occurred in 2007 and the fair value of the equity instruments was more reliably measurable, the value of the services were based on the market price of the shares. Further, under these arrangements, the performance criteria required for a measurement date was not reached until the service period was completed. As a result, the Company was required to re-measure the consideration at each reporting date based on its then current stock value. During the three and nine months ended September 30, 2008, the Company recorded a decrease of approximately $0 and $10,000, respectively, on such services.

During the three months ended March 31,September 30, 2008 and 2007, the Company amortized approximately $125,000$40,000 and $99,000,$181,000, respectively, of consulting expense related to deferred consulting fees on such equity based compensation arrangements. During the nine months ended September 30, 2008 and 2007, the Company amortized approximately $219,000 and $259,000, respectively, of consulting expense related to deferred consulting fees on such equity based compensation arrangements.

As of March 31,September 30, 2008 and December 31, 2007, the unamortized portion of consulting fees on such equity based compensation arrangements approximate $210,000$127,000 and $234,000, respectively.

F-15
Dividends on preferred stockPreferred Stock

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

At March 31,September 30, 2008 and December 31, 2007, the Company had a total of 26,680 preferred sharesPreferred Series C shares and 11,640 preferred sharesPreferred Series D shares issued and outstanding. As of March 31,September 30, 2008 and December 31, 2007, the Company’sCompany has accumulated dividends payable has a balancein arrears of $376,725.$418,000 and $376,725, respectively. The Company did not declared ordeclare and does not intend to declare any dividends as of March 31,September 30, 2008.
 
6. SUBSEQUENT EVENT
F-13
Under the terms of the Company's Incentive Stock Option Plan ("ISOP"), on October 8, 2008, the Company granted 1,300,000 incentive stock options to its key employees under the Company’s ISOP. The options have an exercise price of $0.075, vest 50% on December 31, 2008, and 50% on April 8, 2009, and expire on April 6, 2010.

SFAS No. 123-R requires employee stock options and rights to purchase shares under stock participation plans to be accounted for under the fair value method and requires the use of an option pricing model for estimating fair value. Accordingly, share-based compensation is measured at the grant date, based on the fair value of the award. The exercise price of options is generally equal to the market price of the Company's common stock (defined as the closing price as quoted on the Over-the-Counter Bulletin Board administered by Nasdaq) on the date of grant. Accordingly, $97,500 of share-based compensation will be recognized in the financial statements based on vesting periods, as follows: $48,750 for the year ended December 31, 2008, and $48,750 for the year ended December 31, 2009.
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

OVERVIEW

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

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

2
A vertical turning machine permits the production of larger, heavier and more oddly shaped parts on a machine, which uses less floor space when compared to the traditional horizontal turning machine because the spindle and cam are aligned on a vertical plane, with the spindle on the bottom.

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

1

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

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

Our machines are utilized in a wide variety of industry segments as follows: aerospace, energy (both traditional and alternative), valves, fittings, oil and gas, machinery and equipment, and transportation. With the recent downturn in the aerospace industry, we have seen an increase in orders from new industries such as defense and medical industries.
 
The Company's current strategy is to expand its customer sales base with its present line of machine products. The Company's growth strategy also includes strategic acquisitions in addition to growing the current business. Plans for expansion are funded through current working capital from ongoing sales. A significant acquisition will require additional financing.
 

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31,SEPTEMBER 30, 2008 COMPARED TO MARCH 31,SEPTEMBER 30, 2007.

Revenues. The Company generated revenues of $1,526,602$997,890 for the three months ended March 31,September 30, 2008, which was a $1,658,469$416,379 or 52%29% decrease from $3,185,469$1,414,269 for the three months ended March 31,September 30, 2007. The decrease in revenues is theprimarily due to lower than usual customer orders. The decrease in machine orders is a direct result of lower then usual sales, athe U.S. economic crises and tighter credit market, and business interruption during relocation.markets.

Gross Profit. Gross profit for the three months ended March 31,September 30, 2008, was $218,123negative $330,955 or 14%negative 33% of revenues, compared to $1,185,239negative $34,561 or 37%negative 2% of revenues for the three months ended March 31,September 30, 2007, a 82%$296,394 decrease. The decrease in gross profit is due to the allocation of one time relocation expenses and standard quarterlycertain fixed overhead expenses applied to lower revenues.revenues and certain manufacturing inefficiencies as a result of the relocation of facilities in the first quarter of 2008.

Operating Loss. Operating loss for the three months ended March 31,September 30, 2008, was $544,786$666,917 compared to operating incomeloss of $465,966$457,790 for the three months ended March 31,September 30, 2007. The increase in loss of $1,010,752$209,127 is primarily due to decreased revenues and lower gross profit on jobs in progress for the quarter ended March 31,September 30, 2008. The Company incurred total operating expenses of $335,962 for the three month ended September 30, 2008, which was a $87,267 or 21% decrease from $423,229 for the three months ended September 30, 2007. The decrease in operating expenses is primarily due to 25% decrease in consulting and other compensation expenses, and secondarily due to 27% decrease in selling, general and administrative expenses. The decrease in these expenses is due to the management policy to reduce all the operating expenses when the Company have a material reduction in revenues.

Interest Expense, and Debt Discount Amortization.Amortization and Deferred Gain. Interest expense for the three months ended March 31,September 30, 2008, was $486,769$57,387 compared with $465,241$475,188 for the three months ended March 31,September 30, 2007. The increasedecrease of $21,528$417,801 or 88% in interest expenses is due to additionalrestructuring of $3.5 million convertible debt to $2.95 million during the three months ended September 30, 2008. The effect of restructuring debt is a lower interest expense on convertible notes.

Change in Fair Value of Derivative Liability. As of September 30, 2008, the decrease in fair value of the derivative liability associated with the warrants to purchase common stock, granted in connection with the $600,000 convertible debenture, was approximately $38,000. The increase in fair value was recorded as a loss in the Company Statement of Operation (See Note3 to the condensed consolidated financial statements). 
3
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO SEPTEMBER 30, 2007.

Revenues. The Company generated revenues of $3,959,168 for the nine months ended September 30, 2008, which was a $3,240,017 or 45% decrease from $7,199,185 for the nine months ended September 30, 2007. The decrease in revenues is primarily due to lower than usual customer orders. The decrease in machine orders is a direct result of the U.S. economic crises and penaltiestighter credit markets. Additionally, the decreased in revenues is due to business interruption caused by the relocation of the Company’s operations to a new facility.

Gross Profit. Gross profit for the nine months ended September 30, 2008, was negative $41,770 or negative 1% of revenues, compared to $1,861,680 or 26% of revenues for the nine months ended September 30, 2007, a 102% decrease. The decrease in gross profit is due to certain fixed overhead expenses applied to lower revenues and increased cost of sales, both being due to the relocation into new manufacturing facilities in the first quarter of 2008. Additionally, a significant segment of our business is the remanufacturing and reconditioning of used machinery. As a result, there may be a variance in gross margin from initial contract booking as the machinery is remanufactured and the margin adjustments are realized on defaulteda monthly basis. These variances directly relate to the initial condition of the machinery that is being remanufactured.

Operating Loss. Operating loss for the nine months ended September 30, 2008, was $1,567,203 compared to operating income of $200,792 for the nine months ended September 30, 2007. The increase in loss of $1,767,995 is primarily due to one time relocation expenses and the decreased revenues and lower gross profit on jobs in progress for the nine months ended September 30, 2008 as a result of the relocation of the Company’s operations to a new facility. The Company incurred total operating expenses of $1,525,433 for the nine month ended September 30, 2008, which was a $135,455 or 8% decrease from $1,660,888 for the nine months ended September 30, 2007. The decrease in operating expenses is primarily due to 42% decrease in consulting and other compensation expenses, and secondarily due to 32% decrease in salaries and related expenses. These decreased expenses are due to the management policy to reduce all the operating expenses (salaries, consulting) when the Company have a material reduction in revenues. The decreases are offset by 55% increase in selling, general and administrative expenses caused by the relocation of the Company’s operations to a new facility in February 2008.

Interest Expense, Debt Discount Amortization and Deferred Gain. Interest expense for the nine months ended September 30, 2008, was $1,041,538 compared with $1,662,702 for the nine months ended September 30, 2007. The decrease of $621,164 or 37% in interest expenses is primarily due to restructuring of $3.5 million convertible debt to $2.95 million during the quarter ended September 30, 2007, and secondarily due to $278,000 of debt discount charged to interest expense related to the conversion of $350,000 of principal from the CAMOFI Note into the Company’s common stock during the third quarter ended September 30, 2007.

Change in Fair Value of Derivative Liability. As of September 30, 2008, the decrease in fair value of the derivative liability associated with the warrants to purchase common stock, granted in connection with the $600,000 convertible loan.debenture, was
approximately $38,000. The increase in fair value was recorded as a loss in the Company Statement of Operation (See Note3 to the condensed consolidated financial statements).

FINANCIAL CONDITION, LIQUIDITY, CAPITAL RESOURCES

The net cash decrease during the threenine months ended March 31,September 30, 2008 was $281,729.$277,381. The decrease is due to $288,232$764,613 net cash used in operating activities.

For the threenine months ended March 31,September 30, 2008, the cash provided by financing activities was $6,503,$487,232, compared with $346,784$478,869 cash used in financing activities in the threenine months ended March 31,September 30, 2007. In the nine months ended September 30, 2008, the cash provided was by issuance of a new convertible note in amount of $600,000. For the threenine months ended March 31,September 30, 2007, cash was used to make principal payments on convertible debt notes was 624,500, and for the CAMOFI loan. For the threenine months ended March 31,September 30, 2008, nocash used to make principal payments were made on the CAMOFI loan.convertible debt notes was $100,413.

24

GOING CONCERN

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. The Company has losses from operations year to date of approximately $1,567,000, an accumulated deficit of approximately $12,207,000$13,860,000 and was also in default on its convertible debt.a negative working capital balance of approximately $1,180,000. These factors, among others, raisesraise substantial doubt about the Company's ability to continue as a going concern. The Company intends to fund operations through anticipated increased sales along with renegotiated or new debt and equity financing arrangements whicharrangements. Currently, the Company's management believes may be insufficientattracted additional funding in the form of secured debt. However, there is no guarantee that the capital raised is sufficient to fund its capital expenditures, working capital and other cash requirements for the year ending December 31, 2008. Therefore, the Company will be required to seek additional funds to finance its long-term operations.

In response to these problems, management has taken the following actions:
·The Company continues its aggressive program for selling inventory.
·The Company continues to implement plans to further reduce operating costs.
·The Company is seeking investment capital through the public and private markets.
·The Company has successfully restructured its debt, eliminating the penalties and interest for past default and extending the repayment term (See Note 3).

The successful outcome of future activities cannot be determined at this time and there is no assurance that if achieved, the Company will have sufficient funds to execute its intended business plan or generate positive operating results.

In response to these problems, management has taken the following actions:
·The Company continues its aggressive program for selling inventory.
·The Company continues to implement plans to further reduce operating costs.
·The Company is seeking investment capital through the public and private markets.

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

INFLATION AND CHANGING PRICES

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

CRITICAL ACCOUNTING POLICIES

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

Revenue Recognition

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

3

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

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

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

Method of Accounting for Long-Term ContractsRevenue Recognition

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

The
5
For revenues from stock inventory the Company follows Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition", which outlines the basic criteria that must be met to recognize revenue other than revenue on contacts, and provides guidance for presentation of this revenue and for disclosure related to these revenue recognition policies in financial statements filed with the SEC.
For contracts, the amount of revenue recognized at the financial statement date is the portion of the total contract price that the cost expended to date bears to the anticipated final cost, based on current estimates of cost to complete. It is not related to the progress billings to customers. Contract costs include all materials, direct labor, machinery, subcontract costs and allocations of indirect overhead.

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

Contracts that are substantially complete are considered closed for consolidated financial statement purposes. RevenueCosts incurred and revenue earned on contracts in progress in excess of billings (under billings) isare classified as a current asset. Amounts billed in excess of costs and revenue earned (over billings) are classified as a current liability.
 
The Company accounts for shipping and handling fees and costs in accordance with Emerging Issues Task Force ("EITF") Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs." Shipping and handling fees and costs incurred by the Company are immaterial to the operations of the Company and are included in cost of sales.
In accordance with Statements of Financial Accounting Standards ("SFAS") No. 48, "Revenue Recognition when Right of Return Exists," revenue is recorded net of an estimate for markdowns, price concessions and warranty costs. Such reserve is based on management's evaluation of historical experience, current industry trends and estimated costs. As of September 30, 2008, the Company estimated the markdowns, price concessions and warranty costs and concluded amounts are immaterial and did not record any adjustment to revenues.

Inventory
 
Inventories are stated at the lower of cost or net realizable value. Cost is determined under the first-in, first-out method. Inventories represent cost of work in process on units not yet under contract. Cost includes all direct material and labor, machinery, subcontractors and allocations of indirect overhead. As of March 31, 2008, the company’s inventory was determined(See Note 1 to be approximately $715,000 net, based on approximately $82,000 cost of labor, $486,000 cost of materials, $42,000 cost of subcontracted services, $391,000 overhead cost, offset by a $286,000 reserve for estimated markdowns on inventory costs.

4
Condensed Consolidated Financial Statements, Inventory section)
 
Other Significant Accounting Policies

Other significant accounting policies not involving the same level of measurement uncertainties as those discussed above, are nevertheless important to an understanding of the financial statements. The policies related to consolidation and loss contingencies require difficult judgments on complex matters that are often subject to multiple sources of authoritative guidance. Certain of these matters are among topics currently under reexamination by accounting standards setters and regulators. Although no specific conclusions reached by these standards setters appear likely to cause a material change in our accounting policies, outcomes cannot be predicted with confidence. Also see Note 1 of Notes to Condensed Consolidated Financial Statements, Summary of Significant Accounting Policies, which discusses accounting policies that must be selected by management when there are acceptable alternatives.
 
6
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.


ITEM 4.4T. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer,, who is also our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer concluded as of March 31,September 30, 2008 that our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses discussed immediately below.weaknesses.

Changes in Controls and Procedures

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:

5
(i)pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

(ii)provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

(iii)provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material affect on our financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness in internal control over financial reporting is defined by the Public Company Accounting Oversight Board’s Audit Standard No. 5 as being a deficiency, or combination of deficiencies, that results in a reasonable possibility that a material misstatement of the financial statements would not be prevented or detected on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, such that there is a reasonable possibility that a significant misstatement of the company’s annual or interim financial statements will not be prevented or detected.

Management assessed and evaluated the effectiveness of our internal control over financial reporting as of December 31, 2007. Management identified five material weaknesses relating to our internal control over financial reporting, as follows:

(1)We had not effectively implemented comprehensive entity-level internal controls.
(2)We did not have a sufficient complement of personnel with appropriate training and experience in generally accepted accounting principals, or GAAP.
(3)We did not adequately segregate the duties of different personnel within our accounting group due to an insufficient complement of staff.
(4)We did not implement financial controls that were properly designed to meet the control objectives or address all risks of the processes or the applicable assertions of the significant accounts.
(5)Due to the material weaknesses identified at our entity level controls 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.

The foregoing material weaknesses are described in detail below under the caption “Material Weaknesses.”As a result of these material weaknesses, our Chief Executive Officer concluded that we did not maintain effective internal control over financial reporting as of December 31, 2007.

6
In making its assessment of our internal control over financial reporting, management used criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in its Internal Control-Integrated Framework. Because of the material weaknesses described above, management believes that, as of December 31, 2007, we did not maintain effective internal control over financial reporting.

An independent firm assisted management with its assessment of the effectiveness of our internal control over financial reporting, including scope determination, planning, staffing, documentation, testing, and overall program management of the assessment project.

Inherent Limitations on the Effectiveness of Controls

Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of internal control over financial reporting can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been or will be detected.

These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

Material Weaknesses

Material Weaknesses

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

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

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

7
·We did not have an individual on our Board, nor on the Audit Committee, who meets the “Financial Expert” criteria.

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

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

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

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

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

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

·We have not consulted with other outside parties to assist us in the SEC filings and disclosures prior to the December 31, 2007 10-KSB filing during 2007.

3. We did not adequately segregate the duties of different personnel within our accounting group due to an insufficient complement of staff and inadequate management oversight.
4.We did not adequately design internal controls that:

·The controls identified in the process documentation were not designed effectively and had no evidence of operating effectiveness for testing purposes.
·The controls identified in the process documentation did not cover all the risks for the specific process
·The controls identified in the process documentation did not cover all applicable assertions for the significant accounts.

5.Due to the material weaknesses identified at our entity level controls 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.

8
We are in the process of remediation of the above noted weaknesses and are evaluating the most efficient method to complete this task.  However, based on our review, management has concluded that the financial statements included in this report fairly present in all material respects our financial position, results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles.

Changes In Controls and Procedures

There have been no changes in our internal controls over financial reporting that occurred during our first quarter ended March 31,September 30, 2008 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
7
 
PART II. OTHER INFORMATION

ItemITEM 1. Legal Proceedings

None.

ItemITEM 1A. Risk Factors

Not applicable.


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

None.On August 8, 2008, the Company issued a 15% Senior Secured Convertible Note to CAMHZN Master LDC in the principal amount of $600,000 with a maturity date of August 1, 2010, and a conversion price of $0.07. The Note was issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended, under Section 4(a) and Regulation D.

ItemITEM 3. Defaults Upon Senior Securities

Starting July 2007, the Company has been in default with all monthly payments on the CAMOFI Convertible Note payable. As of March 31, 2008, the Company is in default with $2,566,667 principal and $1,080,222, totaling an amount of $3,646,889.None.

ItemITEM 4. Submission of Matters to a Vote of Security Holders
ITEM 5. Other Information

None.

Item 5. Other Information

None.

ItemITEM 6. Exhibits

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

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

98
 
SIGNATURES

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

Date: May 20, 2008


NEW CENTURY COMPANIES, INC.
Date: November 19, 2008
 
/s/ DAVID DUQUETTE
 
Name: David Duquette
 
Title: Chairman, President and Director
 
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.

Date: May 20,November 19, 2008
/s/ DAVID DUQUETTE
 
Name: David Duquette
 
Title: Chairman, President and Director
  
Date: May 20,November 19, 2008
/s/ JOSEF CZIKMANTORI
 
Name: Josef Czikmantori
 
Title: Secretary and Director
 
109