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 ~~September~~June 30, ~~2008~~2009

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

Commission file number: 000-09459

NEW CENTURY COMPANIES, INC.

(Exact name of registrant as specified in its charter)

Delaware		061034587
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

~~9835~~9831 Romandel Ave.

Santa Fe Springs, CA 90670

(Address of principal executive offices)

(562) 906-8455

(Registrant’s telephone number, including area code)

Not applicable

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes oNo 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 ~~November 17, 2008,~~July 28, 2009, the Company had ~~15,344,656~~15,344,654 shares of common stock, $0.10 par value, issued and outstanding.

~~Documents incorporated by reference: None~~

~~INDEX~~NEW CENTURY COMPANIES, INC.

INDEX

		Page No.
PART I - FINANCIAL INFORMATION		~~Page No.~~

Item 1. Financial Statements		F-1

Condensed Consolidated Balance Sheets -
~~September~~ June 30, ~~2008~~2009 (Unaudited) and December 31, ~~2007~~2008		F-1

Condensed Consolidated Statements of Operations (Unaudited) -
Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2008~~2009 and ~~2007~~2008		F-2

Condensed Consolidated Statements of Cash Flows (Unaudited) -
~~Nine~~Six Months Ended ~~September~~June 30, ~~2008~~2009 and ~~2007~~2008		F-3

Notes to Condensed Consolidated Financial Statements		F-4

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		24

Item 3. Quantitative and Qualitative Disclosures About Market Risk		78

Item 4T. Controls and Procedures		79

PART II - OTHER INFORMATION

Item 1. Legal Proceedings		811

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		811

Item 3. Defaults Upon Senior Securities		811

Item 4. Submission of Matters to a Vote of Security Holders		811

Item 5. Other Information		11

Item 6. Exhibits		11

SIGNATURES		9

~~EXHIBITS~~		12

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~~Part I - Financial Information

ITEM 1. FINANCIAL STATEMENTS

NEW CENTURY COMPANIES, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

~~September~~June 30, ~~2008~~2009 and December 31, ~~2007~~2008

	(Unaudited)
	June 30,			December 31,
	2009			2008
ASSETS

Current Assets
Cash	$	-		$	31,889
Contract receivables, net of allowance of $0 and $24,000 for June 30, 2009 and December 31, 2008, respectively		11,906			237,787
Inventories		422,856			564,022
Costs and estimated earnings in excess of billings on uncompleted contracts		60,790			416,664
Deferred financing costs		283,433			252,305
Prepaid expenses and other current assets		160,182			168,668

Total current assets		939,167			1,671,335

Property and Equipment, net		152,225			186,906
Deferred Financing Costs, net		113,862			233,702

Total Assets	$	1,205,254		$	2,091,943

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current Liabilities
Bank overdraft	$	44,553		$	15,329
Accounts payable and accrued liabilities		1,643,751			1,417,464
Dividends payable		500,550			459,275
Billings in excess of costs and estimated earnings on uncompleted contracts		84,402			1,388,348
Capital lease obligation, current portion		24,044			27,874
Derivative liability		4,080,953			1,975,298
CAMOFI Convertible note payable, net of discount of $1,423,780 at June 30, 2009 and $2,089,443 at December 31, 2008, respectively		1,403,501			737,838
CAMHZN Convertible note payable, net of discount of $239,535 at June 30, 2009 and $350,090 at December 31, 2008, respectively		510,465			399,910
CAMOFI Convertible Note, net of discount of $96,039		605,161			-
CAMHZN Convertible Note, net of discount of $23,896		149,904			-

Total current liabilities		9,047,284			6,421,336

Long Term Liabilities
Capital lease obligation, long term portion		-			9,804

Total liabilities		9,047,284			6,431,140

Commitments and Contingencies

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 $672,000)		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 $291,000)		291,000			291,000
Common stock, $0.10 par value, 50,000,000 shares authorized; 15,344,654 shares issued and outstanding at June 30, 2009 and December 31, 2008		1,534,466			1,534,466
Notes receivable from stockholders		(564,928	)		(564,928	)
Deferred equity compensation		(64,167	)		(101,667	)
Additional paid-in capital		7,390,021			7,355,007
Accumulated deficit		(16,455,302	)		(12,879,955	)

Total stockholders' deficit		(7,842,030	)		(4,339,197	)

Total Liabilities and Stockholders' deficit	$	1,205,254		$	2,091,943

ASSETS

September 30, 2008

December 31,

2008

2007

(unaudited)

Current Assets

Cash $ 4,348 $ 281,729
Contract receivables, net 50,679 438,876
Inventories, net 669,116 886,107
Costs and estimated earnings in excess of billings on uncompleted contracts 522,755 570,797
Deferred financing costs, current portion 164,178 358,292
Prepaid expenses and other current assets 415,430 229,104

Total current assets 1,826,506 2,764,905

Property and Equipment, net
207,384 269,092
Deferred Financing Costs, long-term portion
192,369 59,715

Total Assets $ 2,226,259 $ 3,093,712

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current Liabilities

Bank overdraft $ 6,607 $ 18,962
Accounts payable and accrued liabilities 983,992 2,074,666
Dividends payable 418,000 376,725
Billings in excess of costs and estimated earnings on uncompleted contracts 449,165 88,025
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 3,006,284 3,975,138

Long Term Liabilities

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 2,824,664 37,679

Commitments and Contingencies

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 )
Notes receivable from stockholders (545,165 ) (545,165 )
Additional paid-in capital 9,410,905 9,628,781
Accumulated deficit (13,860,275 ) (11,232,567 )

Total stockholders' deficit (3,604,689 ) (919,105 )

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~~Six Months Ended ~~September~~June 30, ~~2008~~2009 and ~~2007~~2008

(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

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
				As Restated						As Restated
	2009			2008			2009			2008

CONTRACT REVENUES	$	1,359,630		$	1,434,676		$	2,414,332		$	2,961,278

COST OF SALES		1,193,730			1,363,614			2,012,623			2,672,093

GROSS PROFIT		165,900			71,062			401,709			289,185

OPERATING EXPENSES
Consulting and other compensation		77,158			73,998			139,773			345,382
Salaries and related		83,409			74,123			236,496			127,619
Selling, general and administrative		135,967			278,441			367,988			716,470
TOTAL OPERATING EXPENSES		296,534			426,562			744,257			1,189,471

OPERATING LOSS		(130,634	)		(355,500	)		(342,548	)		(900,286	)

OTHER INCOME (EXPENSES)
Gain on writeoff of accounts payable		-			3,577			5,681			60,205
(Loss) / gain on valuation of derivative liabilities		225,075			1,287,654			(1,575,903	)		2,588,416
Interest expense		(952,461	)		(497,382	)		(1,620,856	)		(984,151	)

TOTAL OTHER INCOME (EXPENSES)		(727,386	)		793,849			(3,191,078	)		1,664,470

INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES		(858,020	)		438,349			(3,533,626	)		764,184

PROVISION FOR INCOME TAXES		-			-			-			-

NET INCOME ( LOSS)	$	(858,020	)	$	438,349		$	(3,533,626	)	$	764,184

Preferred Stock Dividends	$	(41,275	)	$	(41,275	)	$	(41,275	)	$	(41,275	)

NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS	$	(899,295	)	$	397,074		$	(3,574,901	)	$	722,909

Basic net income (loss) available to common stockholders per common share	$	(0.06	)	$	0.03		$	(0.23	)	$	0.05

Diluted net income (loss) available to common stockholders per common share	$	(0.06	)		0.01			(0.23	)	$	0.02

Basic weighted average common shares outstanding		15,344,654			15,344,656			15,344,654			15,344,656

Diluted weighted average common shares outstanding		15,344,654			45,450,838			15,344,654			45,450,838

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 ~~Nine~~Six Months Ended ~~September~~June 30, ~~2008~~2009 and ~~2007~~2008

(Unaudited)

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 $ -

				As Restated
	2009			2008

Cash flows from operating activities:
Net (loss) income	$	(3,533,626	)	$	764,184
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation and amortization of property and equipment		34,681			41,232
Bad debt expense		-			27,259
Gain on write off of accounts payable		(5,681	)		(60,205	)
Amortization of deferred financing costs		233,712			180,960
Estimated fair value of options issued to employees		35,014			-
Amortization of stock-based consulting fees and employee compensation		37,500			251,165
Amortization of BCF and debt discount		1,136,035			503,788
(Gain) / loss on valuation of derivatives liabilities		1,575,903			(2,588,416	)

Changes in operating assets and liabilities:
Contracts receivable		225,881			20,717
Inventories		141,166			232,377
Costs and estimated earnings in excess of billings on uncompleted contracts		355,874			135,363
Prepaid expenses and other current assets		8,486			(264,416	)
Accounts payable and accrued liabilities		281,520			202,406
Billings in excess of costs and estimated earnings on uncompleted contracts		(1,303,946	)		241,013

Net cash used in operating activities		(777,481	)		(312,573	)

Cash flows from financing activities:
Bank overdraft		29,224			47,665
Proceeds from issuance of convertible notes payable, net of financing costs		730,000			-
Principal payments on notes payable and capital lease		(13,632	)		-
Deferred financing cost		-			(16,821	)

Net cash provided by financing activities		745,592			30,844

Net change in cash		(31,889	)		(281,729	)

Cash at beginning of period		31,889			281,729

Cash at end of period	$	-		$	-

Supplemental disclosure of non-cash financing and investing activities:

Accrued cumulative dividends on preferred stock	$	41,275		$	41,275

Debt discount recorded on convertible notes payable	$	479,752		$	2,755,107

Stock and warrants Issued for Financing Costs	$	-		$	102,500

See accompanying notes to the condensed consolidated financial statements.

F-3

NEW CENTURY COMPANIES, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, 2009 AND 2008 ~~AND 2007~~(As Restated)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization ~~and~~And Nature ofOf Operations

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

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

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

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..~~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~~10-K for the year ended December 31, ~~2007,~~2008, filed with the SEC. In the opinion of management, all adjustments necessary to present fairly, in accordance with GAAP, the Company's financial position as of ~~September~~June 30, ~~2008,~~2009, and the results of operations and cash flows for the interim periods presented, have been made. Such adjustments consist only of normal recurring adjustments. The results of operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2008~~2009 are not necessarily indicative of the results for the full year ending December 31, ~~2008.~~2009. Amounts related to disclosure of December 31, ~~2007~~2008 balances within these interim condensed consolidated financial statements were derived from the audited ~~2007~~2008 consolidated financial statements and notes thereto.

F-4

Reclassifications

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

Going Concern

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. ~~The~~As of June 30, 2009, the Company has ~~losses from operations year to date of approximately $1,567,000,~~ an accumulated deficit of approximately ~~$13,860,000 and~~$16,455,000, had recurring losses, a ~~negative~~ working capital ~~balance~~deficit of approximately ~~$1,180,000.~~$8,108,000, and was also in default on its convertible notes. These factors ~~among others,~~ raise substantial doubt about the Company's ability to continue as a going concern. The Company intends to fund operations through anticipated increased sales along with renegotiated or new debt and equity financing ~~arrangements. Currently, the Company's~~arrangements which management ~~attracted additional funding in the form of secured debt. However, there is no guarantee that the capital raised is sufficient~~believes may be insufficient to fund its capital expenditures, working capital and other cash requirements for the year ending December 31, ~~2008.~~2009. 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 machines.

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

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

·	The Company is seeking strategic acquisition candidates.

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

Inventory

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

~~Inventory costs as~~basis of ~~September 30, 2008 and December 31, 2007:~~the excess or obsolete inventories.

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

F-5

For contracts, the amount of revenue recognized at the financial statement date is the portion of the total contract price that the cost expended to date bears to the anticipated final cost, based on current estimates of cost to complete. ~~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")~~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~~June 30, ~~2008,~~2009, the Company estimated the markdowns, price concessions and warranty costs and concluded amounts are immaterial and did not record any adjustment to revenues.

Basic ~~and~~And Diluted Loss ~~per~~Per Common Share

Basic net earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing net ~~income (loss)~~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 ~~10,101,000~~74,320,847 shares at ~~September~~June 30, ~~2008 and 6,192,972 at December 31, 2007~~2009 are not included in the diluted loss per share as they would be anti-dilutive. ~~Accordingly,~~Common stock equivalents, representing convertible Preferred Stock, convertible debt, options and warrants totaling approximately 30,106,000 are included in the diluted ~~and basic loss~~income per ~~common~~ share ~~are the same~~ at ~~September~~June 30, ~~2008 and December 31, 2007.~~2008.

~~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 Payments”~~~~. Prior to that date, the Company used the intrinsic value method under Accounting Policy Board Opinion No. 25 to recognize compensation cost.~~

123(R), “Share-Based Payments.” Under the ~~modified prospective method~~fair value recognition provisions of ~~adoption for~~ SFAS ~~No. 123-R, the~~123(R), share-based compensation cost ~~recognized by~~is measured at the ~~Company beginning January 1, 2006 includes compensation cost for all equity incentive awards granted subsequent to January 1, 2006,~~grant date based on the ~~grant-date~~ fair value ~~estimated in accordance with~~of 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,~~award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period. For the three and six months ended June 30, 2009 and 2008, $35,014 and $0, ~~and $86,400~~respectively, of share-based compensation expense was recognized in the accompanying condensed consolidated ~~financial~~ statements ~~for the three month periods ended September 30, 2008 and 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.~~operations.

F-6

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

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

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

There is no share-based compensation resulting from the application of SFAS No. ~~123-R~~123R to options granted outside of the Company's Stock Option Plan for the three ~~or nine~~and six months ended ~~September~~June 30, ~~2008~~2009 and ~~2007.~~2008. Share-based compensation recognized as a result of the adoption of SFAS No. ~~123-R~~123R use the ~~Black-Scholes~~Black Scholes option pricing model for estimating fair value of options granted.

In accordance with SFAS No. ~~123-R,~~123R, the Company’s policy is to adjust share-based compensation on a quarterly basis for changes to the estimate of expected award forfeitures based on actual forfeiture experience.

The ~~effect~~fair value of ~~adjusting~~stock-based awards to employees and directors is calculated using the ~~forfeiture~~Black-Scholes option pricing model, even though the model was developed to estimate the fair value of freely tradable, fully transferable options without vesting restriction, which differ significantly from the Company's stock options. The Black-Scholes model also requires subjective assumptions regarding future stock price volatility and expected time to exercise, which greatly affect the calculated values. The expected term of options granted is derived from historical data on employee exercises and post-vesting employment termination behavior. The risk-free rate ~~for all expense amortization after December 31, 2007~~selected to value any particular grant is ~~recognized~~based on the U.S. Treasury rate that corresponds to the pricing term of the grant effective as of the date of the grant. The expected volatility is based on the historical volatility of our common stock. These factors could change in the ~~period~~future, affecting the ~~forfeiture estimate is changed, no changes occurred~~determination of stock-based compensation expense in ~~the period ended September 30, 2008.~~future periods.

~~F-7~~

There were no options granted, exercised or cancelled during the six months ended June 30, 2009. There are 900,000 shares available for grant at June 30, 2009.

~~Options~~All options outstanding ~~that~~ have vested ~~and are expected to vest~~ as of ~~September~~June 30, ~~2008~~2009 and are as follows:

Weighted
Weighted Average
Average Remaining Aggregate
Number of Exercise Contractual Intrinsic
Shares Price Term in Years
Value ⁽¹⁾

Vested ⁽²⁾
2,800,000 $ 0.19 2.57 $ —
Expected to vest — — — $ —
Total 2,800,000 0.19 2.57 $ —

Weighted

Average

Remaining

Aggregate

Number of

Exercise

Contractual

Intrinsic

Price

Term in Years

Value (1)

Vested

4,100,000

0.15

1.49

—

⁽¹⁾ -

These values are calculated as the difference between the exercise price and $0.09, the closing market price of the Company's common stock on 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⁾ -

(1)

~~Includes 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.~~

Options 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, Additional information with respect to stock option activity is as follows:

Outstanding Options
Shares Weighted Aggregate
Available Number of Average Intrinsic
for Grant Shares Exercise Price
Value ⁽¹⁾

December 31, 2007 1,050,000 3,950,000 $ 0.20 $ 79,000

Grants — — —
Exercises — — —
Cancellations 1,150,000 1,150,000 $ 0.25
September 30, 2008 2,200,000 2,800,000 $ 0.19 $ —

Options exercisable at:
September 30, 2008 2,800,000 $ 0.19
December 31, 2007 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 ~~September~~June 30, ~~2008~~2009 and December 31, ~~2007,~~2008, the market price of the Company's common stock was ~~$0.09~~$0.07 and ~~$0.22,~~$0.05, respectively) ~~for all in-the-money options outstanding.~~

~~F-8~~F-7

~~Equity Instruments That Are Issued To Other Than Employees~~

The Company follows SFAS No. ~~123-R~~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.~~

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

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

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

Exercise Price	Number of Options outstanding		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price
$ 0.075-0.083		1,300,000		0.24	$	0.08

$ 0.15-0.20		2,800,000		1.25	$	0.19

		4,100,000			$	0.15

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

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 June 30, 2009 and 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.

	Outstanding Warrants
			Weighted		Aggregate
	Number of		Average		Intrinsic
	Shares		Exercise Price		Value (1)

December 31, 2008		5,586,824	$	0.21	$	—

Grants		—		—
		—		—
Exercises		—		—
Cancellations/ Terminated		—		—

Outstanding and Exercisable at
June 30, 2009		5,586,824	$	0.21		—

(1) Represents the added value as difference between the exercise price and the closing market price of the Company's common stock at the end of the reporting period (as of June 30, 2009 and December 31, 2008, the market price of the Company's common stock was $0.07 and $0.05, respectively).

~~F-9~~

F-8

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

Exercise Price	Number of Warrants outstanding		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price
$ 0.60-0.70		1,372,538		0.72	$	0.64

$ 0.07		4,214,286		3.39	$	0.07

		5,586,824			$	0.21

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 ~~accounts.~~

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 capitalizedaccounts and ~~amortized over the term of the related debt.~~

~~In August 2008, the Company issued a $600,000, 2 year convertible note~~charged to ~~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.~~

interest expense. During the three months ended ~~September~~June 30, ~~2008~~2009 and ~~2007,~~2008, the Company amortized approximately ~~$35,000~~$117,000 and $90,000, ~~of deferred financing costs,~~ respectively, to interest expense. During the ~~nine~~six months ended ~~September~~June 30, ~~2008~~2009 and 2007, the Company amortized approximately $216,000 and $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~~

~~On April 1~~^st, 2008, the company entered into a commercial lease agreement to lease its premises for ten years. Pursuant to the lease, the Company incurred a brokerage fee of approximately $72,500. This cost is capitalized and amortized over the term of the lease.

~~During the three months ended September 30,~~ 2008, the Company amortized approximately ~~$1,800~~$234,000 and $181,000, respectively, to ~~rent~~interest expense. ~~At September 30,~~

Fair Value Measurements

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

Implementation of SFAS 157 did not have a material effect on the Company’s results of operations or financial position and had no effect on the Company’s existing fair-value measurement practices. However, SFAS 157 requires disclosure of a fair-value hierarchy of inputs the Company uses to value an asset or a liability. The three levels of the fair-value hierarchy are described as follows:

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

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

Level 3: Unobservable inputs for the ~~lease is approximately $69,000.~~asset or liability. Beginning January 1, 2009, Level 3 inputs may be required for the determination of fair value associated with certain nonrecurring measurements of nonfinancial assets and liabilities. The Company does not currently present any nonfinancial assets or liabilities at fair value.

Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter. Liabilities measured at fair value on a recurring basis are summarized as follows (unaudited):

F-9

							June 30,
	Level 1		Level 2		Level 3		2009

Fair value of derivative liability		—	$	—	$	4,080,953	$	4,080,953

Total	$	—	$	—	$	4,080,953	$	4,080,953

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

~~We adopted the provisions of Financial Standards Accounting Board Interpretation No. 48~~ Accounting for Uncertainty in Income Taxes ("FIN 48") an interpretation of 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 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.

~~Significant Recent Accounting Pronouncements~~Derivative Instruments

In ~~December 2007,~~connection with the ~~FASB issued~~issuance of certain convertible notes payable (see Note 3), the notes provided for a conversion into shares of the Company's common stock at a rate which was determined to be variable. The Company determined that the variable conversion feature was an embedded derivative instrument pursuant to SFAS No. ~~141(R),~~ ~~Business Combinations~~~~. SFAS No. 141(R) retains the fundamental requirements in SFAS No. 141,~~ ~~Business Combinations~~,133, "Accounting for Derivative Instruments and Hedging Activities," as amended. The accounting treatment of derivative financial instruments requires that the ~~acquisition method of accounting be used for all business combinations~~Company record the derivatives 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 non-controlling interest in the acquiree at the acquisition date, measuredrelated warrants at their fair values as of ~~that~~the inception date ~~with limited exceptions specified in SFAS No. 141(R).~~of the note agreements and at fair value as of each subsequent balance sheet date. In addition, ~~SFAS~~under the provisions of Emerging Issues Task Force ("EITF") Issue No. ~~141(R) requires acquisition costs~~00-19, "Accounting for Derivative Financial Instruments Indexed to, and ~~restructuring costs that~~Potentially Settled in, a Company's Own Stock," as a result of entering into the ~~acquirer expected but~~debenture agreements, the Company was ~~not obligated~~required to ~~incur to be recognized separately from~~classify all other non-employee options and warrants as derivative liabilities and record them at their fair values at each balance sheet date. Any change in fair value was recorded as non-operating, non-cash income or expense at each balance sheet date. If the ~~business combination, therefore, expensed instead of part~~fair value of the ~~purchase price allocation. SFAS No. 141(R) will be applied prospectively to business combinations for which~~derivatives was higher at the ~~acquisition~~subsequent balance sheet date, ~~is on or after~~ the ~~beginning~~Company recorded a non-operating, non-cash charge. If the fair value of the ~~first annual reporting period beginning on or after December 15, 2008. Early adoption is prohibited. The~~derivatives was lower at the subsequent balance sheet date, the Company ~~expects to adopt SFAS No. 141(R) to any business combinations with an acquisition date on or after January 1, 2009.~~recorded non-operating, non-cash income.

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

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

F-10

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

Derivative liability - December 31, 2008	$	2,025,298

Derivative liability added during the year		479,752

Change in fair value of derivative liability		1,575,903

Total derivative liability - June 30, 2009	$	4,080,953

Significant Recent Accounting Pronouncements

In ~~December 2007,~~June 2009, the FASB issued SFAS No. ~~160,~~168, The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles – a Replacement of FASB Statement No. 162 ~~Non-controlling Interests in Consolidated Financial Statements, an amendment to ARB No. 51~~. ("SFAS No. ~~160 changes~~168"). The Codification will become the ~~accounting and reporting for minority interests, which will be recharacterized as non-controlling interests and classified as a component~~source 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.~~authoritative U.S. GAAP. 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~~interim and annual periods ending after ~~December~~September 15, ~~2008 and interim periods within those fiscal years.~~2009. The Company ~~has~~expects to adopt this standard with the filing of its Quarterly Report on Form 10-Q for the period ended September 30, 2009 and does not ~~completed its evaluation~~expect the standard to have a material impact on the Company’s consolidated financial statements.

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

In April 2009, the FASB issued FSP FAS 107-1 and APB ~~14-1 would have.~~28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP FAS 107-1 and APB 28-1”), which requires disclosures about the fair value of the Company’s financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the balance sheets, in the interim reporting periods as well as in the annual reporting periods. In addition, FSP FAS 107-1 and APB 28-1 requires disclosures of the methods and significant assumptions used to estimate the fair value of those financial instruments. FSP FAS 107-1 and APB 28-1 became effective for the Company in its second quarter of fiscal 2009. The adoption of FSP FAS 107-1 and APB 28-1 did not have a material impact on the Company’s consolidated financial position, results of operations or liquidity.

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

F-11

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

~~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:~~approximate the following as of June 30, 2009 and December 31, 2008:

September 30, 2008 December 31, 2007

Cumulative costs to date $ 5,911,000 $ 6,940,000
Cumulative gross profit to date 4,167,000 7,893,000

Cumulative revenue earned 10,078,000 14,833,000
Less progress billings to date (10,004,000 ) (14,350,000 )

Net under billings $ 74,000 $ 483,000

	June 30, 2009			December 31, 2008

Cumulative costs to date	$	2,578,000		$	6,756,000
Cumulative gross profit to date		2,050,000			5,768,000

Cumulative revenue earned		4,628,000			12,524,000
Less progress billings to date		(4,651,000	)		(13,495,000	)

Net over billings	$	(23,000	)	$	(971,000	)

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

September 30, 2008 December 31, 2007

Costs and estimated earnings in excess of billings on uncompleted contracts $ 523,000 $ 571,000
Billings in excess of costs and estimated earnings on uncompleted contracts (449,000 ) ( 88,000 )

Net under billings $ 74,000 $ 483,000

	June 30, 2009			December 31, 2008

Costs and estimated earnings in excess of billings on uncompleted contracts	$	61,000		$	417,000

Billings in excess of costs and estimated earnings on uncompleted contracts		(84,000	)		(1,388,000	)

Net over billings	$	(23,000	)	$	(971,000	)

F-12

3. CONVERTIBLE DEBT

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

3. ~~DEBT FINANCING TRANSACTIONS~~

~~3.1.~~The Company’s convertible debt financing, Amended 12% CAMOFI ~~Master LDC~~Convertible Note (“~~CAMOFI”~~Amended 12% CAMOFI Note”) ~~Debt~~

~~On February 28, 2006,~~and 15% CAMHZN Convertible Note (“15% CAMHZN Note”), are in default. The last monthly contractual payment on the ~~Company issued a 12% senior convertible promissory~~CAMOFI note was made in October 2008 and no payments have made on the CAMHZN Note which were scheduled to ~~CAMOFI Master LDC.~~begin on September 1, 2008. The Convertible Notes aggregate to $3,897,213 principal and interest. As of June ~~26,~~30, 2009 and December 31, 2008, ~~an aggregate of $3,800,890~~the principal balances, accrued interest and ~~penalties were due under~~ the ~~note.~~debt discounts are presented in the table below.

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

Accrued Interest	$	226,182		$	93,750		$	56,546		$	37,500

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

The Convertible Debt and Warrant Agreements include an anti-dilution feature and a ~~letter agreement dated June 26, 2008 (the “Letter Agreement”) between New Century Companies, Inc. (the “Company”)~~buy-in clause which cause the embedded conversion option and ~~CAMOFI Master LDC (“CAMOFI”), CAMOFI agreed~~the warrants to ~~waive certain penalties~~be treated as derivative liabilities which are valued on a quarterly basis and ~~default interest which have been accrued under~~ the ~~transaction documents previously entered into with CAMOFI, including~~resulting change in fair value of the derivative liabilities are recorded as a ~~12% Senior Secured Convertible Promissory Note due February 20, 2009~~gain or loss upon valuation in the ~~original principal amount~~statement 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 inoperations.

In connection with the ~~Letter Agreement. Pursuant to the Letter Agreement, the Company issued an amended and restated~~Amended 12% CAMOFI 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~~five year warrants with an exercise price of ~~common stock~~$0.10 per share and 725,000 five year warrants with an exercise price of ~~$0.10 and 725,000 five year~~$0.20 per share. Due to the anti-dilution feature in the warrant agreements, the warrants ~~with an~~have a reduced exercise price of ~~$0.20. Commencing on August 1,~~$0.07 and adjusted total warrants of 3,214,286 at June 30, 2009 and December 31, 2008. As of June 30, 2009 and December 31, 2008, 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~~warrant derivative liability was determined to ~~CAMOFI was approximately $73,000, aggregating to $233,000 which~~be $208,873 and $151,400 respectively. Upon valuation, a gain of $1,305 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 ~~September~~June 30, ~~2008 and 2007,~~2009. For the six months ended June 30, 2009, a total loss of $57,473 was recorded.

In connection with the 15% CAMHZN Note, the Company 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 CAMOFI note. As of 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 $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~~per share. As of June 30, 2009 and ~~Debt Issued with Stock Purchase Warrants~~,"December 31, 2008, the ~~relative estimated~~ fair value of the ~~warrants granted in connection~~warrant derivative liability was determined to be $68,474 and $50,000 respectively. Upon valuation, a loss of $97 was recorded for the three months ended June 30, 2009. For the six months ended June 30, 2009, a total loss of $18,474 was recorded.

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

F-13

CAMOFI AND CAMHZN Senior Secured Convertible Debt

On February 18, 2009, the Company entered into an agreement with CAMOFI Master LDC for the issuance of ~~the 15%~~a Senior Secured Convertible ~~Promissory~~ Note ~~represents~~for $701,200, maturing on August 18, 2009. The Note can be converted at $0.07 per share at any time during the term of the convertible note, subject to certain anti-dilution adjustments. The note is secured by all of the assets of the Company.

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

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

The Company recorded deferred financing costs at issuance of $116,200 on the CAMOFI Note and $28,800 on the CAMHZN Note for the difference between the face amount of the notes ~~payable. Such~~and the net proceeds received. In addition, the discounts resulting from the conversion options of $384,460 on the CAMOFI Note and $95,292 on the CAMHZN Note are amortized tointo interest expense ratably over the ~~term~~life 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~~Notes. For the three months ended ~~September~~June 30, ~~2008, the Company amortized approximately $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 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, 2008,2009, the Company recorded ~~a loss~~amortization expense on the ~~valuation~~conversion option and issuance costs 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~~"$215,476 and ~~EITF No. 00-27, "~~~~Application of EITF Issue No. 98-5 To Certain Convertible Instruments~~,"$74,985, respectively, on 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 PromissoryCAMOFI 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~~$53,649 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~~18,585, respectively, on the CAMHZN ~~note. As~~Note. For the six months ended June 30, 2009, the Company recorded amortization expense on the conversion option and issuance costs of ~~September 30, 2008,~~$288,421 and $108,750, respectively, on the ~~principal balance is 600,000, which is presented net of debt discounts~~CAMOFI Note and ~~amortization of those discounts, approximately $56,610.~~

4. ~~WAIVER OF REGISTRATION REQUIREMENT~~

~~On November 18, 2008 in a letter agreement,~~$71,396 and $57,844, respectively, on the 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~~Note.

4. EQUITY TRANSACTIONS

Equity Compensation

In ~~June~~February 2008, the Company entered into a ~~19 day~~year contract with a third party for public relations services valued at ~~$18,000.~~$30,000. The fee was paid in the form of ~~200,000~~150,000 shares of the Company’s common stock based on the stock market price of the shares at the contract date. The value of the common stock on the date of the transaction was recorded as a deferred charge and ~~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 September 30, 2008, the remaining deferred consulting~~Consulting fees under this contract ~~totaled $10,000.~~of $2,500 were amortized to expense during the three months ended June 30, 2008. Consulting fees under this contract of $2,500 and $5,000 were amortized to expense during the six months ended June 30, 2009 and June 30, 2008, respectively. As of June 30, 2009 the balance of deferred consulting fees was fully amortized.

~~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 ~~fee~~value of the common stock on the date of the transaction was recorded as a deferred charge and ~~was~~is amortized to operating expense over the life of the agreement. Consulting fees under this contract of $20,000 were amortized to expense during the six months ended June 30, 2008 and at June 30, 2008 the balance of deferred consulting fees was fully amortized.

F-14

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

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~~entered into a three year contract with a third party for internet public investor relations services ~~under a three year contract.~~valued at $210,000. The fee was paid in the form of 300,000 shares of the Company’s common stock ~~was recorded~~and valued based on the stock market price of the shares at the ~~estimated fair~~contract date. The value of the common stock on the date of the transaction was recorded as a deferred charge. $18,000 was amortized to operating expense during the three months ended June 30, 2009 and is2008. $35,000 was amortized ~~over~~to operating expense during the ~~life of the agreement.~~six months ended June 30, 2009 and 2008. At ~~September~~June 30, 2009 and December 31, 2008, the remaining deferred consulting fees ~~under this contract~~ totaled ~~$116,667.~~$64,167 and $101,667, respectively.

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 was 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 was 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 was 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 September 30, 2008 and 2007, the Company amortized approximately $40,000 and $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 September 30, 2008 and December 31, 2007, the unamortized portion of consulting fees on such equity based compensation arrangements approximate $127,000 and $234,000, respectively.~~

~~F-15~~

Dividends on ~~Preferred Stock~~preferred stock

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

At ~~September~~June 30, ~~2008~~2009 and December 31, ~~2007,~~2008, the Company had a total of 26,680 ~~Preferred~~preferred shares Series C ~~shares~~ and 11,640 ~~Preferred~~preferred shares Series D ~~shares~~ issued and outstanding. As of ~~September~~June 30, ~~2008~~2009 and December 31, ~~2007,~~2008, the ~~Company has~~Company’s accumulated dividends ~~in arrears~~payable of ~~$418,000~~$500,550 and ~~$376,725,~~$459,275, respectively. The Company ~~did not declare~~declared dividends of $41,275 during the three and six months ended June 30, 2009.

F-15

5. EARNINGS (LOSS) PER SHARE

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

	Three months ended June 30, 2008
	Income					Per Share
	(Loss)			Shares		Amount

Net income	$	438,349
Less: Preferred stock dividends		(41,275	)
Basic income available to common shareholders	$	397,074			15,344,656	$	0.03

Add: Preferred dividends		41,275
Add: Interest on convertible debt		148,382			-
Add: Dilutive impact of convertible preferred stock		-			582,000
Add: Dilutive impact of convertible debt		-			29,500,000
Add: Dilutive impact of options and warrants		-			24,182

Diluted income available to common shareholders	$	586,731			45,450,838	$	0.01

	Six months ended June 30, 2008
	Income					Per Share
	(Loss)			Shares		Amount

Net income	$	764,184
Less: Preferred stock dividends		(41,275	)
Basic income available to common shareholders	$	722,909			15,344,656	$	0.05

Add: Preferred dividends		41,275
Add: Interest on convertible debt		299,403			-
Add: Dilutive impact of convertible preferred stock		-			582,000
Add: Dilutive impact of convertible debt		-			29,500,000
Add: Dilutive impact of options and warrants		-			2,343,000

Diluted income available to common shareholders	$	1,063,587			47,769,656	$	0.02

F-16

The computation of diluted earnings per share does not ~~intend to declare any dividends as~~assume conversion or exercise of ~~September 30, 2008.~~

~~6. SUBSEQUENT EVENT~~

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 optionssecurities that may have an ~~exercise price of $0.075, vest 50%~~anti-dilutive effect on ~~December 31, 2008, and 50% on April 8, 2009, and expire on April 6, 2010.~~

~~SFAS No. 123-R requires employee~~earnings per share. Convertible preferred stock, convertible debt, stock options and ~~rights~~warrants that have not been included in the diluted income per share computation totaled 76,073,976 for the period ended June 30, 2009.

6. RESTATEMENTS

June 30,2008

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

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

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

March 31, 2009

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

F-17

The effect of these changes impacted the balance sheet and the statement of operations from January 1, 2009 through March 31, 2009. The balance sheet effect is due to adjusting the conversion option ~~pricing model for estimating fair value. Accordingly, share-based compensation is measured at the grant date, based~~discount that was originally recorded on the CAMOFI and CAMZHN notes issued in February 2009, the valuation of the related derivative liabilities certain adjustments related to the Company’s contract accounting, a misclassification error and for the valuation of the related derivative liabilities at March 31, 2009 and the valuation of the derivative liabilities associated with the 12% CAMOFI and 15% CAMZHN notes. The effect on the statement of operations is due to the gains and losses from the revised quarterly fair value adjustments and an increase in interest expense from the increased amortization expense related to the adjustment of the ~~award. The exercise price of options is generally equal to~~conversion option discounts that were recorded on the ~~market price~~CAMOFI and CAMZHN notes issued in February 2009. Accordingly, the effect of the ~~Company's common stock (defined as the closing price as quoted~~restatements on the ~~Over-the-Counter Bulletin Board administered by Nasdaq) on the date~~balance sheet at March 31, 2009 and statement of ~~grant. Accordingly, $97,500 of share-based compensation will be recognized in the financial statements based on vesting periods, as follows: $48,750~~operations for the ~~year~~three months ended ~~December~~March 31, ~~2008, and $48,750 for the year ended December 31, 2009.~~2009 has been summarized below:

Effect of Correction As Previously Reported Adjustment As Restated
Balance Sheet as of March 31, 2009

(1) Costs in Excess of Billings 15,551 86,477 102,028

(2) Deferred financing costs 435,986 108,750 544,736

(3) Billings in Excess of Costs 823,478 (216,417) 607,061

(4) February 2009 Convertible Notes 464,984 49,798 514,782

(5) Derivative Liability 4,885,000 (578,972) 4,306,028

(6)Accumulated Deficit 16,701,824 (1,040,414) 15,661,410

Statement of Operations for the three months ended March 31, 2009

(7) Sales 1,298,458 (243,756) 1,054,702

(8) Cost of sales 1,365,543 (546,650) 818,893

(9) Marked-to-Market Gain (Loss) (2,738,436) 937,458 (1,800,978)

(10) Interest expense (490,408) (199,938) (632,145)

(11) Net Loss (3,821,869) 1,040,414 (2,781,455)

Net Loss Available to common shareholders (3,821,869)
1,040,414
(2,781,455)

EPS – Basic (0.25 ) 0.07 (0.18)

EPS - Diluted (0.25 ) 0.07 (0.18)

F-18

(1) Adjustment in order to reconcile the Company’s balance sheet account to the Company’s contract accounting worksheets.
(2) Represents the reclassification of $145,000 of financing costs in connection with the February 2009 notes, less amortization of $36,250.
(3) Adjustment in order to reconcile the Company’s balance sheet account to the Company’s contract accounting worksheets.
(4) Adjustment reflects an increase of $278,486 of debt discount related to the valuation of the conversion options and an increase of $119,938 of amortization of such options, net of reclassification of financing costs of $108,750 noted in (1) above.
(5) Adjustment reflects an increase of $278,486 related to the valuation of the conversion options of the February 2009 notes and a decrease in the loss on fair value of $937,458 and corrections of $80,000 of misclassifications between the change in fair value and interest expense.
(6) and (11) The cumulative effect of adjustments (7) through (11).
(7) and (8) Adjustment in order to reconcile the Company’s P&L accounts to the Company’s contract accounting worksheets.
(9) Adjustment reflects an increase of $278,466 in the valuation of the conversion options in connection with the February 2009 notes, a decrease in the valuation of all derivatives of $578, 972 and a decrease in the loss on fair value of $937,458.
(10) See (2) and (4) above.

F-19

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

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

OVERVIEW

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

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

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

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

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

We provide our manufactured and remanufactured machines as part of the machine tool industry. The machine tool industry worldwide is approximately a $30 billion ~~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 ~~SEPTEMBER~~JUNE 30, ~~2008~~2009 COMPARED TO ~~SEPTEMBER~~JUNE 30, ~~2007.~~2008.

Revenues. The Company generated revenues of ~~$997,890~~$1,359,630 for the three months ended ~~September~~June 30, ~~2008,~~2009, which was a ~~$416,379~~$75,046 or ~~29%~~5% decrease from ~~$1,414,269~~$1,434,676 for the three months ended ~~September~~June 30, ~~2007.~~2008. The decrease ~~in revenues~~ is ~~primarily due to~~the result of lower than usual ~~customer orders. The decrease in machine orders is~~sales and a ~~direct result of the U.S. economic crises and~~ tighter credit ~~markets.~~market.

Gross Profit. Gross profit for the three months ended ~~September~~June 30, ~~2008,~~2009, was ~~negative $330,955~~$165,900 or ~~negative 33%~~12% of revenues, compared to ~~negative $34,561~~$71,062 or ~~negative 2%~~5% of revenues for the three months ended ~~September~~June 30, ~~2007,~~2008, a ~~$296,394 decrease.~~133% increase. The ~~decrease~~increase in gross profit is due to ~~certain fixed~~management strategy to lower cost of sales through reduction of overhead expenses ~~applied to lower revenues~~ and ~~certain manufacturing inefficiencies as a result~~cost of ~~the relocation of facilities in the first quarter of 2008.~~materials.

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

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

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

Operating Loss. Operating loss for the three months ended ~~September~~June 30, ~~2008,~~2009, was ~~$666,917~~$130,634 compared to an operating loss of ~~$457,790~~$355,500 for the three months ended ~~September~~June 30, ~~2007.~~2008. The ~~increase~~decrease in loss of ~~$209,127~~$224,866 is primarily due to decreased ~~revenues~~cost of sales and ~~lower gross profit on jobs in progress~~decreased selling, general and administrative expenses for the quarter ended ~~September~~June 30, 2009.

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

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

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

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

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

Operating Expenses. The Company incurred total operating expenses of ~~$335,962~~$744,257 for the ~~three month~~six months ended ~~September~~June 30, ~~2008,~~2009, which was a ~~$87,267~~$445,214 or ~~21%~~37% decrease from ~~$423,229~~$1,189,471 for the ~~three~~six months ended ~~September~~June 30, ~~2007. The decrease in~~2008. In the six months ended June 30, 2009, compared with the six months ended June 30, 2008, all the operating expenses ~~is primarily due to 25%~~increased (decreased) as follows:

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

The decrease in consulting and other compensation ~~expenses, and secondarily~~is due to ~~27%~~the reduction in the number of consulting contracts and the expiration of the existing contracts. The increase in salaries and related costs is due to the reclassification of certain costs to compensation. Selling, general and administrative expenses decreased due to management strategy to reduce operating expenses.

Operating Loss. Operating loss for the six months ended June 30, 2009, was $342,548 compared to $900,286 for the six months ended June 30, 2008. The decrease in loss of $557,738 or 62% is primarily due to decreased consulting and other compensation expenses and selling, general and administrative expenses. ~~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 and Deferred Gain.~~Amortization. Interest expense for the ~~three~~six months ended ~~September~~June 30, ~~2008,~~2009, was ~~$57,387~~$1,620,856 compared with ~~$475,188~~$984,151 for the ~~three~~six months ended ~~September~~June 30, ~~2007.~~2008. The ~~decrease~~increase of ~~$417,801 or 88%~~$636,705 in interest expenses is due to ~~restructuring of $3.5 million~~additional interest on new 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.~~loans.

Change in Fair Value of Derivative ~~Liability.~~ Liabilities. ~~As of September~~In connection with its convertible notes, the Company recorded conversion options and warrant derivative liabilities. The derivative liabilities are reevaluated each reporting period. During the six months ended June 30, ~~2008,~~2009, we recorded a loss on the ~~decrease~~change in fair value of ~~the~~ derivative ~~liability associated with~~liabilities due to 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~~our stock price during the period, in addition to recording $479,752 of additional derivatives during the ~~Company Statement of Operation (See Note3 to the condensed consolidated financial statements).~~

~~RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO SEPTEMBER 30, 2007.~~period.

~~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 tighter 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 a 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 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 decrease in cash ~~decrease~~ during the ~~nine~~six months ended ~~September~~June 30, ~~2008~~2009 was ~~$277,381. The decrease is due to $764,613 net cash used in operating activities.~~$31,889.

For the ~~nine~~six months ended ~~September~~June 30, ~~2008,~~2009, the cash provided by financing activities was ~~$487,232,~~$745,592, compared with ~~$478,869 cash used in financing activities~~$30,844 in the ~~nine~~six months ended ~~September~~June 30, ~~2007. In~~2008. For the ~~nine~~six months ended ~~September~~June 30, ~~2008, the~~2009, $777,481 cash ~~provided~~ was used by issuance of a new convertible note in amount of $600,000. For the nine months ended September 30, 2007, cash used to make principal payments on convertible debt notes was 624,500, and for the nine months ended September 30, 2008, cash used to make principal payments on convertible debt notes was $100,413.operating activities.

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 ~~$13,860,000 and~~$16,455,000, a ~~negative~~net loss of approximately $3,534,000, a working capital ~~balance~~deficit of approximately ~~$1,180,000.~~$8,108,000 and was also in default on two of its convertible notes. These factors ~~among others,~~ raise substantial doubt about the Company's ability to continue as a going concern. The Company intends to fund operations through anticipated increased sales along with renegotiated or new debt and equity financing ~~arrangements. Currently, the Company's~~arrangements which management ~~attracted additional funding in the form of secured debt. However, there is no guarantee that the capital raised is sufficient~~believes may be insufficient to fund its capital expenditures, working capital and other cash requirements for the year ending December 31, ~~2008.~~2009. 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).~~

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

·	The Company continues its aggressive program for selling machines.

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

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

·	The Company is seeking strategic acquisition candidates

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

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

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

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

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 ~~revenues consist primarily~~revenue recognition policy for services and product sales conforms to SAB 101 amended by SAB 104. The Company recognizes revenue of long-term contracts ~~with customers.~~ pursuant to SOP 81-1.

Method of Accounting for Long-Term Contracts

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

~~For contracts, the~~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. ~~Costs incurred and revenue~~Revenue earned on contracts in progress in excess of billings (under billings) ~~are~~is 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~~

Other Significant Accounting Policies

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

~~ITEM 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 ~~September~~June 30, ~~2008~~2009 that our disclosure controls and procedures were not effective at the reasonable assurance level due to the material ~~weaknesses.~~weaknesses discussed immediately below.

~~Changes in Controls and Procedures~~Material Weaknesses

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There have been no significant changes in ~~our~~the Company's internal ~~controls~~control over financial reporting ~~that occurred~~ during ~~our~~the Company's most recent fiscal quarter ~~ended September 30, 2008~~ that have materially affected, or are reasonably likely to materially affect, ~~our~~the Company's internal control over financial reporting. Inherent limitations exist in any system of internal control including the possibility of human error and the potential of overriding controls. Even effective internal controls ~~over~~can provide only reasonable assurance with respect to financial ~~reporting.~~statement preparation. The effectiveness of an internal control system may also be affected by changes in conditions.

710

PART II. OTHER INFORMATION

~~ITEM~~Item 1. Legal Proceedings

None.

~~ITEM 1A. Risk Factors~~

~~Not applicable.~~

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

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. None.

~~ITEM~~Item 3. Defaults Upon Senior Securities

~~None.~~Starting October 2008, the Company has been in default with all monthly payments on the 12% CAMOFI and 15% CAMHZN Convertible Note payable. As of June 30, 2009, the Company’s default principal and interest aggregate to $1,100,000.

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

None.

~~ITEM~~Item 5. Other Information

None.

~~ITEM~~Item 6. Exhibits

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

811

SIGNATURES

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

August 14, 2009		NEW CENTURY COMPANIES, INC.

		~~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.

August 14, 2009	/s/ DAVID DUQUETTE
	Name: David Duquette
	Title: Chairman, President and Director

~~Date: November 19, 2008~~ August 14, 2009		/s/ ~~DAVID DUQUETTE~~ JOSEF CZIKMANTORI
	Name: ~~David Duquette~~Josef Czikmantori
	~~Title: Chairman, President and Director~~


~~Date: November 19, 2008~~		~~/s/ JOSEF CZIKMANTORI~~
		~~Name: Josef Czikmantori~~
		Title: Secretary and Director

912

ASSETS
	September 30, 2008			December 31,
	2008			2007
	(unaudited)

Current Assets
Cash	$	4,348		$	281,729
Contract receivables, net		50,679			438,876
Inventories, net		669,116			886,107
Costs and estimated earnings in excess of billings on uncompleted contracts		522,755			570,797
Deferred financing costs, current portion		164,178			358,292
Prepaid expenses and other current assets		415,430			229,104

Total current assets		1,826,506			2,764,905

Property and Equipment, net		207,384			269,092
Deferred Financing Costs, long-term portion		192,369			59,715

Total Assets	$	2,226,259		$	3,093,712


LIABILITIES AND STOCKHOLDERS' DEFICIT

Current Liabilities
Bank overdraft	$	6,607		$	18,962
Accounts payable and accrued liabilities		983,992			2,074,666
Dividends payable		418,000			376,725
Billings in excess of costs and estimated earnings on uncompleted contracts		449,165			88,025
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		3,006,284			3,975,138

Long Term Liabilities
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		2,824,664			37,679

Commitments and Contingencies

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	)
Notes receivable from stockholders		(545,165	)		(545,165	)
Additional paid-in capital		9,410,905			9,628,781
Accumulated deficit		(13,860,275	)		(11,232,567	)

Total stockholders' deficit		(3,604,689	)		(919,105	)

Total liabilities and stockholders' deficit	$	2,226,259		$	3,093,712

	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

	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

			Outstanding Options
	Shares				Weighted		Aggregate
	Available		Number of		Average		Intrinsic
	for Grant		Shares		Exercise Price		Value ⁽¹⁾

December 31, 2007		1,050,000		3,950,000	$	0.20	$	79,000

Grants		—		—		—
Exercises		—		—		—
Cancellations		1,150,000		1,150,000	$	0.25
September 30, 2008		2,200,000		2,800,000	$	0.19	$	—

Options exercisable at:
September 30, 2008				2,800,000	$	0.19
December 31, 2007				3,950,000	$	0.20