UNITED STATESTable of Contents

~~SECURITIES~~UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~June~~ September 30, 2010

~~Commission~~ Commission file number: ~~0896898~~000-09459

U.S. AEROSPACE, INC.

(Exact name of registrant as specified in its charter)

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


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

10291 Trademark Street Rancho Cucamonga, CA 91730 (Address of principal executive offices)

~~Rancho~~(909) 477-6504 ~~Cucamonga~~(Registrant’s telephone number, CAincluding ~~91730~~area code)

Indicate by check mark whether the registrant (~~Address~~1) has filed all reports required to be filed by Section 13 or 15(d) of ~~principal~~the ~~executive~~Securities ~~offices~~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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (~~909~~§232.405 of this chapter) during the preceding 12 months ~~477-6504~~(or for such shorter period that the registrant was required to submit and post such files). Yes o No þ

~~(Registrant’s telephone~~Indicate ~~number~~by check mark whether the registrant is a large accelerated filer, ~~including~~an ~~area~~accelerated ~~code~~filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

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

Indicate by check mark whether the registrant ~~has~~is ~~submitted~~a ~~electronically~~shell ~~and~~company ~~posted~~(as ~~on its~~defined ~~corporate~~in ~~Web site, if any, every Interactive Data File required to be submitted and posted pursuant to~~ Rule ~~405 of Regulation S~~ 12b-T2 ~~(§232.405~~ of ~~this chapter) during~~ the ~~preceding 12 months (or for such shorter period that the~~ ~~registrant~~Exchange ~~was required to submit and post such files~~Act). Yes o No o þ

~~Indicate by~~As ~~check~~of ~~mark~~December 15, ~~whether~~2010, the ~~registrant~~Company ishad ~~a large accelerated filer~~36, ~~an accelerated filer~~287,625 orshares aof ~~non-accelerated~~common ~~filer~~stock, ~~(as~~$0.10 ~~defined~~par invalue, ~~Rule 12b-2 of the~~issued ~~Exchange~~and ~~Act)~~outstanding.

~~Large~~U.S. ~~accelerated~~AEROSPACE, ~~filer Accelerated filer Non-accelerated filer Smaller reporting company x~~INC.

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

As of August 23, 2010, the Company had 27,977,640 shares of common stock, $0.10 par value, issued and outstanding.


	Page No.

Forward Looking Statements		1

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements		F-1

Condensed Consolidated Balance Sheets — September 30, 2010 (Unaudited) and December 31, 2009		F-1

Condensed Consolidated Statements of Operations (Unaudited)		F-3

Three and Nine Months Ended September 30, 2010 and 2009		F-3

Condensed Consolidated Statements of Cash Flows (Unaudited)		F-5

Nine Months Ended September 30, 2010 and 2009		F-5

Notes to Condensed Consolidated Financial Statements		F-7

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk		5

Item 4T. Controls and Procedures		6

PART II — OTHER INFORMATION

Item 1. Legal Proceedings		7

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		8

Item 5. Other Information		8

Item 6. Exhibits		8

SIGNATURES		8

Exhibit 10.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

U.S. AEROSPACE,Table INC.of Contents

~~INDEX~~Forward-Looking Statements

		Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements		4
Condensed Consolidated Balance Sheets - June 30, 2010 (Unaudited) and December 31, 2009		4
Condensed Consolidated Statements of Operations (Unaudited) -
Six Months Ended June 30, 2010 and 2009		5
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended June 30, 2010 and 2009		6
Notes to Condensed Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
Item 3. Quantitative and Qualitative Disclosures About Market Risk		27
Item 4T. Controls and Procedures		27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings		29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		30
Item 3. Defaults Upon Senior Securities		30
Item 5. Other Information		30
Item 6. Exhibits		31
SIGNATURES		31

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

Forward-Looking StatementsTable of Contents

~~This Quarterly~~Part ~~Report~~I on— ~~Form~~Financial ~~10-Q contains forward-looking statements~~Information 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.

3ITEM 1. FINANCIAL STATEMENTS

~~Part I~~U.S. -AEROSPACE, ~~Financial~~INC. ~~Information~~AND SUBSIDIARIES

~~ITEM 1. FINANCIAL~~CONDENSED ~~STATEMENTS~~CONSOLIDATED BALANCE SHEETS

~~U.S. AEROSPACE~~September 30, ~~INC. AND~~2010 ~~SUBSIDIARIES~~and December 31, 2009

~~CONDENSED CONSOLIDATED BALANCE SHEETS~~Unaudited

June 30, 2010 and December 31, 2009


	September 30,		December 31,
	2010		2009
ASSETS
Current Assets
Cash	$	76,012	$	57,422
Accounts receivable, net of allowances of $30,000 and $30,000		268,278		63,120
Prepaid expenses and other current assets		11,991		200
Deferred financing costs, current portion, net		4,888		150,251
Current assets of discontinued operations		—		405,813


Total current assets		361,169		676,806

Property and equipment, net		832,579		605,943
Goodwill		2,401,342		2,359,121
Other intangible assets, net		1,285,713		1,446,429
Deferred financing costs, long-term portion		—		92,338
Noncurrent assets of discontinued operations		—		262,711


Total Assets	$	4,880,803	$	5,443,348


LIABILITIES AND STOCKHOLDERS’ DEFICIT

Current Liabilities
Accounts payable and accrued liabilities		2,072,501		1,985,106
Derivative liability		—		48,378
Dividends payable		240,712		204,600
Capital lease obligations		822,294		743,381
Loan payable and accrued interest, net of discount of $0 at September 30, 2010 and $10,003 at December 31, 2009		—		145,563
Notes payable and accrued interest		605,684		115,544
Notes payable to related parties and accrued interest				545,356
Convertible notes payable and accrued interest , net of discounts of $0 at September 30, 2010 and $1,350,164 at December 31, 2009		7,262,869		4,341,613
Current Liabilities of discontinued operations		—		2,038,150


Total Liabilities		11,004,060		10,167,691

	(Unaudited)
	June 30,				December 31,
	2010				2009
ASSETS
Current Assets
Cash		$	28,141		$	157,633
Accounts receivable, net of allowance for doubtful accounts of $30,000 at June 30, 2010			104,861			71,120
Loan receivable from employees			33,278			-
Inventories			262,462			284,339
Costs and estimated earnings in excess of billings on uncompleted contracts			24,066			5,725
Deferred financing costs, current portion			36,532			150,251
Prepaid expenses and other current assets			239,196			7,738
Total current assets			728,536			676,806
Property and equipment, net			964,587			716,864
Goodwill			2,401,342			2,359,121
Other intangible assets, net			1,339,285			1,446,429
Deferred financing costs, long-term portion			83,550			92,338
Other assets			151,790			151,790
Total Assets		$	5,669,090		$	5,443,348
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Bank overdraft		$	20,831		$	7,515
Accounts payable and accrued liabilities			5,244,373			3,856,316
Derivative liability			-			48,378
Dividends payable			217,900			204,600
Billings in excess of costs and estimated earnings on uncompleted contracts			-			149,849
Capital lease obligations			918,881			752,957
Loan payable and accrued interest, net of discount of $0 at June 30, 2010
and $10,003 at December 31, 2009			-			145,563
Notes payable and accrued interest			27,095			115,544
Notes payable to related parties and accrued interest			580,644			545,356
Convertible notes payable and accrued interest , net of discounts of $391,593 at
June 30, 2010 and $1,350,164 at December 31, 2009			5,367,867			4,341,613
Total Liabilities			12,377,591			10,167,691
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 at June 30, 2010 and December 31, 2009)			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 $495,600 at June 30, 2010 and December 31, 2009)			291,000			291,000
Common stock, $0.10 par value, 250,000,000 shares authorized;
24,977,640 shares issued and outstanding
at June 30, 2010 and 22,430,211 at December 31, 2009			2,500,465			2,243,022
Deferred equity compensation				)		(29,169	)
Notes receivable from stockholders			(584,691	)		(584,691	)
Additional paid-in capital			21,399,194			20,167,283
Accumulated deficit			(30,341,349	)		(26,838,668	)
Total Stockholders' Deficit			(6,708,501	)		(4,724,343	)
Total Liabilities and Stockholders' Deficit		$	5,669,090		$	5,443,348

F-1

See accompanyingTable notesof to the condensed consolidated financial statements.Contents


	September 30,			December 31,
	2010			2009
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 at September 30, 2010 and December 31, 2009)		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 $508,900 at September 30, 2010 and $495,600 at December 31, 2009)		291,000			291,000

Cumulative, convertible, Series E preferred stock, $1.00 par value, 5,000,000 shares authorized, 383,793 shares issued and outstanding (liquidation preference of $3,838 at September 30, 2010)		383,793			—

Common stock, $0.10 par value, 250,000,000 shares authorized; 35,887,625 shares issued and outstanding at September 30, 2010 and 22,430,211 at December 31, 2009		3,588,764			2,243,022

Deferred equity compensation					(29,169	)
Notes receivable from stockholders		—			(584,691	)
Additional paid-in capital		33,113,068			20,167,283
Accumulated deficit		(43,526,762	)		(26,838,668	)


Total Stockholders’ Deficit		(6,123,257	)		(4,724,343	)


Total Liabilities and Stockholders’ Deficit	$	4,880,803		$	5,443,348

~~U.S.~~See ~~AEROSPACE,~~accompanying ~~INC. AND~~notes ~~SUBSIDIARIES~~to the condensed consolidated financial statements.

~~CONDENSED~~F-2 ~~CONSOLIDATED STATEMENTS OF OPERATIONS~~

For theTable Threeof and Six Months Ended June 30, 2010 and 2009Contents

~~(Unaudited)~~U.S. AEROSPACE, INC. AND SUBSIDIARIES

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2010			2009			2010			2009
Net revenues	$	694,315		$	1,359,630		$	1,252,005		$	2,414,332
Cost of sales		592,864			1,193,730			1,285,512			2,012,623
Gross profit (loss)		101,451			165,900			(33,507	)		401,709
Operating expenses:
Consulting and other compensation		258,217			77,158			456,565			139,773
Salaries and related		233,386			83,409			507,402			236,496
Selling, general and administrative		265,039			135,967			663,777			367,988
Total operating expenses		756,642			296,534			1,627,744			744,257
Operating loss		(655,191	)		(130,634	)		(1,661,251	)		(342,548	)
Other income (expenses), net:
Other income		164,267						164,267
Gain on write-off of accounts payable					5,681			5,332			5,681
Gain on disposal of assets					-			190,754			-
Gain (loss) on valuation of derivative liabilities					225,075			(11,253	)		(1,575,903	)
Interest expense		(1,204,023	)		(952,461	)		(2,177,229	)		(1,620,856	)
Total other expenses, net		(1,039,756	)		(727,386	)		(1,828,129	)		(3,191,078	)
Net loss	$	(1,694,947	)	$	(858,020	)		(3,489,380	)	$	(3,533,626	)
Preferred Stock Dividends		(13,300	)		(41,275	)		(13,300	)		(41,275	)
Net loss applicable to common stockholders		(1,708,247	)		(899,295	)		(3,502,680	)		(3,574,901	)
Basic and diluted net loss available to common stockholders per common share	$	(0.07	)	$	(0.06	)		(0.15	)	$	(0.23	)
Basic and diluted weighted average common shares outstanding		24,237,214			15,344,654			24,117,622			15,344,654

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

~~See accompanying~~For ~~notes~~the toThree ~~the~~and ~~condensed~~Nine ~~consolidated~~Months ~~financial statements.~~Ended September 30, 2010 and 2009

5Unaudited

U.S. AEROSPACE, INC. AND SUBSIDIARIES


	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009

Net revenues	$	660,144			—		$	1,434,344			—

Cost of sales		325,367			—			869,522			—


Gross profit (loss)		334,777			—			564,822			—


Operating expenses:
Consulting and other compensation		348,124			64,240			2,333,860			85,411
Sale, general and administrative		380,637			1,926			422,729			23,114
Salaries and related		249,173			—			529,740			—
Impairment of an intangible asset		11,513,790			—			11,513,790			—

Total operating expenses		12,491,724			66,166			14,800,199			108,525


Operating loss from continuing operations		(12,156,947	)		(66,166	)		(14,235,297	)		(108,525	)


Other income (expenses), net:
Other income		—			—			109,153			—
Gain on write-off of accounts payable		—			—			15,507			5,680
Gain on disposal of assets		—			—			196,779			—
Gain (loss) on valuation of derivative liabilities		—			(19,649,947	)		(11,253	)		(21,225,850	)
Interest expense		(503,050	)		(1,064,798	)		(2,994,094	)		(2,685,653	)


Total other expenses, net		(503,050	)		(20,714,745	)		(2,683,908	)		(23,905,823	)


Loss from continuing operations	$	(12,659,997	)		(20,780,911	)		(16,919,205	)		(24,014,348	)


Discontinued operations:
Loss from operations of discontinued operations		—			(535,532	)		(905,569	)		(835,721	)

Gain on disposal of discontinued operations		1,172,793			—			1,172,793			—

Net income (loss) from discontinued operations, net of tax		1,172,793			(535,532	)		267,224			(835,721	)

~~CONDENSED~~F-3 ~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~

For the SixTable Months Ended Juneof 30, 2010 and 2009Contents

(Unaudited)


	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009

Net income (loss)		(11,487,204	)		(21,316,443	)		(16,651,981	)		(24,850,069	)


Preferred Stock Dividends		(22,812	)		—			(36,112	)		(41,275	)


Net income (loss) applicable to common stockholders		(11,510,016	)		(21,316,443	)		(16,683,093	)		(24,891,344	)

Basic and diluted loss from continuing operations per common share		(0.45	)		(1.35	)		(0.66	)		(1.57	)
Basic income (loss) from discontinued operations per common share		0.04			(0.04	)		0.01			(0.05	)

Diluted income (loss) from discontinued operations per common share		0.00			(0.04	)		0.00			(0.05	)

Basic and diluted net income (loss) available to common shareholders per common share		(0.41	)		(1.39	)		(0.65	)		(1.62	)

Basic weighted average common shares outstanding		28,367,095			15,358,665			25,549,679			15,358,665

Diluted weighted average common shares outstanding		367,181,783			15,358,665			364,364,367			15,358,665

	For the Six Months Ended June 30,
	2010			2009
Cash flows from operating activities:
Net loss	$	(3,489,380	)	$	(3,533,626	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		300,056			34,681
Gain on write-off of accounts payable		(5,332	)		(5,681	)
Gain on disposal of assets		(196,781	)		-
Amortization of deferred financing costs		122,506			233,712
Amortization of stock-based consulting fees		193,301			37,500
Amortization of debt discount		1,672,548			1,136,035
Estmated fair value of common stock issued for services		306,326			35,014
Loss (gain) on valuation of derivative liabilities		11,253			1,575,903
Changes in operating assets and liabilities:
Accounts receivable		(63,741	)		225,881
Loan receivable from employees		(3,278	)		-
Inventories		21,877			141,166
Costs and estimated earnings in excess of billings on uncompleted contracts		(18,341	)		355,874
Prepaid expenses and other current assets		101,,043			8,486
Accounts payable, accrued liabilities and accrued interest		773,574			281,520
Billings in excess of costs and estimated earnings on uncompleted contracts		(149,849	)		(1,303,946	)
Net cash used in operating activities		(424,218	)		(777,481	)
Cash flows from financing activities:
Bank overdraft		13,317			29,224
Proceeds from issuance of convertible notes payable, net		570,000			730,000
Principal payments on notes payable to related parties		(6,105	)		-
Proceeds from issuance of notes payable to related parties		44,138			-
Principal payments on notes payable and capital leases		(326,624	)		(13,632	)
Net cash provided by financing activities		294,726			745,592
Net (decrease) increase in cash		(129,492	)		(31,889	)
Cash at beginning of period		157,633			31,889
Cash at end of period	$	28,141		$	-
Supplemental schedule of cash flow information:
Interest paid	$	20,862		$	-
Supplemental disclosure of non-cash financing and investing activities:
Debt discount recorded on convertible notes payable	$	625,000		$	479,752
Conversion of convertible notes payable	$	25,600		$	-
Purchase of property and equipment through capital lease	$	479,488		$	-
Payment of accounts payable with proceeds from convertible notes payable	$	55,000		$	-
Estimated fair value of warrants issued in connection with consulting service agreement	$	420,000		$	-
Reclassification of the estimated fair value of warrants from derivative liabilities to additional paid-in capital	$	59,631		$	-
Addition to goodwill for adjustment in net liabilities assumed in acquisition	$	42,221		$	-
Accrued cumulative dividends on preferred stock	$	13,300		$	41,275

See accompanying notes to the condensed consolidated financial statements.

~~See~~F-4 ~~accompanying notes to the condensed consolidated financial statements.~~

6Table of Contents

U.S. AEROSPACE, INC. AND SUBSIDIARIES

~~NOTES TO~~ CONDENSED CONSOLIDATED ~~FINANCIAL~~ STATEMENTS OF CASH FLOWS

~~FOR THE~~For ~~SIX~~the ~~MONTHS~~Nine ~~ENDED~~Months ~~JUNE~~Ended September 30, 2010 ~~AND~~and 2009

~~1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES~~Unaudited

Organization And Nature Of Operations


	For the Nine Months Ended
	September 30,
	2010			2009
Cash flows from operating activities:
Net loss		(16,651,981	)		(24,850,068	)
Adjustments to reconcile net loss to net cash used in operating activities:
Results of discontinued operations		905,569			835,721
Gain on disposal of assets of discontinued operations		(1,172,793	)		—
Depreciation and amortization		363,044			62,032
Impairment of Intangible asset		11,513,790			—
Gain on write-off of accounts payable		(15,507	)		(5,680	)
Gain on disposal of assets		(196,779	)		—
Loss on settlement of loan payable		21,434			—
Amortization of deferred financing costs		237,701			337,384
Amortization of stock-based consulting fees		338,649			54,999
Amortization of debt discount		1,980,121			1,901,039
Estimated fair value of common stock issued in satisfaction of liability		1,500,000			—
Estimated fair value of common stock and options issued for services		319,319			365,520
Warrants issued in connection with debt exchange		—			80,000
Loss on valuation of derivative liabilities		11,253			21,225,850
Changes in operating assets and liabilities		413,669			980

Net cash provided by (used in) operating activities of continuing operations		(432,511	)		7,777

Net cash used in operating activities of discontinued operations		(196,202	)		(867,019	)


Net cash used in operating activities		(628,713	)		(859,242	)


Cash flows from investing activities:
Fixed assets					(6,698	)
Contribution from partner		50,000			—

Net cash provided by (used in) investing activities:		50,000			(6,698	)


Cash flows from financing activities:
Bank overdraft		—			4,873
Proceeds from issuance of convertible notes payable, net		850,000			853,000
Principal payments on notes payable to related parties		(2,600	)		—
Proceeds from issuance of notes payable to related parties		44,138			—
Principal payments on notes payable and capital leases		(294,235	)		(20,668	)


Net cash provided by financing activities		597,303			837,205


Net (decrease) increase in cash		18,590			(28,7359	)


Cash at beginning of period		57,422			31,889

Cash at end of period	$	76,012		$	3,154

On April 26, 2010 New Century Companies, Inc., a Delaware corporation changed its name to U.S. Aerospace, Inc. (“U.S. Aerospace” or the “Company”). The Company was incorporated in Delaware on August 1, 1980. Its wholly owned subsidiary, New Century Remanufacturing Inc., a California corporation (“NCR”), was incorporated in March 1996 and is located in Southern California. On October 9, 2009, the Company entered into a share exchange agreement with Precision Aerostructures, Inc. (“PAI”) pursuant to which the sole shareholder of PAI agreed to transfer all capital stock of PAI to the Company (see Note 3). Collectively, U. S. Aerospace and its wholly owned subsidiaries are referred to as the “Company”. The Company is engaged in the production of aircraft assemblies, structural components, and highly engineered, precision machined details on projects for the U.S. Department of Defense, United States Air Force, Lockheed Martin Corporation, The Boeing Company, LF-~~3 Communications Holdings,~~5 Inc., the Middle River Aircraft Systems subsidiary of General Electric Company, and other aircraft manufacturers, aerospace companies, and defense contractors. NCR also provides after-market services, including rebuilding, retrofitting and remanufacturing of metal cutting machinery

The CompanyTable tradesof on the OTC Bulletin Board under the symbol "USAE".Contents

Principles Of Consolidation


	For the Nine Months Ended
	September 30,
	2010		2009
Supplemental schedule of cash flow information:
Interest paid	$	36,700	$	—


Supplemental disclosure of non-cash financing and investing activities:
Debt discount recorded on convertible notes payable	$	625,000	$	588,695


Conversion of convertible notes payable	$	25,600	$	—


Purchase of property and equipment through capital lease	$	479,488	$	—


Payment of accounts payable with proceeds from convertible notes payable	$	125,000	$	—


Repayment of loan payable with proceeds from convertible notes payable	$	150,000	$	—


Estimated fair value of warrants issued in connection with consulting service agreement	$	420,000	$	—


Reclassification of the estimated fair value of warrants from derivative liabilities to additional paid-in capital	$	59,631	$	—


Reclassification of the estimated fair value of non-employee options and warrants to derivative liability	$	—	$	129,524


Cumulative effect to retained earnings due to reclassification of non-employee options and warrants to derivative liability	$	—	$	707,474


Addition to goodwill for adjustment in net liabilities assumed in acquisition	$	42,221	$	—


Accrued cumulative dividends on preferred stock	$	36,112	$	41,275


Issuance of preferred stock for intangible asset	$	11,513,790	$	—


Cashless exercise of warrants	$	159,999	$	—


Cashless exercise of stock options	$	73,600	$	6,591

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

~~Segments~~F-6 ~~of an Enterprise and Related Information~~

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

~~(a) Multiaxis~~U.S. ~~structural~~AEROSPACE, ~~aircraft~~INC. ~~components~~AND ~~and~~SUBSIDIARIES

~~(b)~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ~~CNC~~FOR ~~machine~~THE ~~tool~~THREE ~~remanufacturing.~~AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

~~The Company evaluates performance and allocates resources based upon operating income~~1. ~~The~~ORGANIZATION ~~accounting~~AND ~~policies~~SUMMARY ofOF ~~the~~SIGNIFICANT ~~reportable~~ACCOUNTING ~~segments are the same as those~~POLICIES ~~described in this summary of significant accounting policies.~~

7Organization and Nature of Operations

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

~~The accompanying~~Effective ~~unaudited~~August 27, ~~condensed~~2010, ~~consolidated financial statements have been prepared by~~ the Company ~~pursuant~~discontinued to the ~~rules~~operations and ~~regulations~~sold ofits ~~the United~~unprofitable ~~States~~remanufacturing ~~Securities~~subsidiary, ~~and~~New ~~Exchange~~Century ~~Commission~~Remanufacturing, ~~(the "SEC")~~Inc. ~~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~~NCR”), ~~have been omitted pursuant~~ to ~~such SEC rules and regulations; nevertheless,~~ the Company’s ~~believes that the disclosures are adequate to make the~~former ~~information~~directors, ~~presented~~David ~~not~~Duquette ~~misleading. These financial statements~~ and ~~the~~Josef ~~notes hereto should be read in conjunction with the financial statements~~Czikmantori, ~~accounting policies~~for $1 and ~~notes~~an ~~thereto~~indemnity ~~included~~from inall ~~the~~of ~~Company'~~NCR’s ~~Annual Report on Form 10-K~~ ~~for the year ended December 31, 2009, filed with the SEC~~liabilities. InAs ~~the opinion of management~~such, ~~all adjustments necessary to present fairly, in accordance with GAAP,~~ the Company's ~~consolidated~~is ~~financial~~no ~~position~~longer asin ~~of June 30, 2010, and~~ the ~~consolidated~~machine ~~results~~tool ~~of operations and cash flows for the interim periods presented~~business, ~~have been made. Such adjustments consist only of normal recurring adjustments. The results of operations for the three~~ and ~~six~~is ~~months~~focused ~~ended June 30, 2010 are not necessarily indicative of the results~~solely ~~for~~on ~~the~~aerospace full year ending December 31, 2010. Amounts related to disclosure of December 31, 2009 balances within these interim condensed consolidated financial statements were derived from the audited 2009 consolidated financial statements and ~~notes thereto~~defense.

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

~~The accompanying~~Principles ~~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~~Consolidation normal course of business. As of and the for the three and six months ended June 30, 2010, the Company has a net loss of approximately $3,489,000, an accumulated deficit of approximately $30,341,000, and working capital deficit of approximately $11,649,000 and was in default on several notes payable (see Note 6) and had events of default on its CAMOFI and CAMHZN debt (see Note 5). These factors raise substantial doubt about the Company's ability to continue as a going concern. The Company intends to fund operations through anticipated increased sales which management believes may be insufficient to fund its capital expenditures, working capital and other cash requirements for the year ending December 31, 2010. Therefore, the Company will be required to seek additional funds to finance its long-term operations in the form of debt and equity financing which the Company believes is available to it. The successful outcome of future activities cannot be determined at this time and there is no assurance that if achieved, the Company will have sufficient funds to execute its intended business plan or generate positive operating results.

InThe condensed consolidated financial statements include the accounts of U.S. Aerospace and its ~~response~~wholly-owned tosubsidiary ~~these~~PAI ~~problems~~and the accounts of NCR as of August 27, ~~management~~2010, ~~has~~the ~~taken~~date the ~~following~~Company ~~actions:~~sold NCR to its former directors. All significant intercompany accounts and transactions have been eliminated in consolidation.

·Segments ~~continued~~of ~~its~~an ~~aggressive~~Enterprise ~~program~~and ~~for~~Related ~~selling its products;~~Information

·The ~~continued~~Company has adopted the authoritative guidance for disclosures about segments of an enterprise and related information. The guidance requires the Company to ~~implement~~report ~~plans~~information about segments of its business in annual financial statements and requires it to ~~further~~report ~~reduce~~selected ~~operating~~segment ~~costs;~~information in its quarterly reports issued to stockholders. The guidance also requires entity-wide disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenues and its major customers. The Company’s two reportable segments are managed separately based on fundamental differences in their operations. The Company sold NCR as of August 27, 2010 and thus at September 30, 2010, the Company operated in one reportable segment, multiaxis structural aircraft components (see Note 9):

·Basis isof ~~seeking investment capital through the public and private markets.~~Presentation

The accompanying unaudited condensed consolidated financial statements dohave ~~not~~been ~~include~~prepared ~~any~~by ~~adjustments~~the Company pursuant to the ~~carrying~~rules ~~amounts~~and ~~related~~regulations toof ~~recoverability~~the U.S. Securities and ~~classification~~Exchange ofCommission ~~assets~~(the “SEC”). orCertain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the ~~amount~~United States of America (“GAAP”) have been omitted pursuant to such SEC rules and ~~classification~~regulations; ofnevertheless, ~~liabilities~~the Company believes that ~~might~~the ~~result~~disclosures are adequate to make the information presented not misleading. These financial statements and the notes hereto should be read in conjunction with the financial statements, accounting policies and notes thereto included in the Company’s beAnnual ~~unable~~Report on Form 10-K for the year ended December 31, 2009, filed with the SEC. In the opinion of management, all adjustments necessary to ~~continue~~present fairly, in accordance with GAAP, the Company’s consolidated financial position as aof ~~going~~September 30, ~~concern~~2010, and the consolidated results of operations and cash flows for the interim periods presented, have been made. Such adjustments consist only of normal recurring adjustments. The results of operations for the three and nine months ended September 30, 2010 are not necessarily indicative of the results for the full year ending December 31, 2010. Amounts related to disclosure of December 31, 2009 balances within these interim condensed consolidated financial statements were derived from the audited 2009 consolidated financial statements and notes thereto.

~~Reclassifications~~F-7

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

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

~~Inventories are~~• ~~stated~~Reorganized at the ~~lower~~Company ofunder ~~cost~~a ornew ~~net~~board ~~realizable~~of ~~value.~~directors ~~Cost~~comprised isof ~~determined under~~experts in the ~~first-in~~field of government contracting, ~~first-out~~financial, ~~method.~~accounting, ~~Inventories~~and ~~represent~~legal ~~cost~~• ofAdopted ~~work~~improved ~~in process~~corporate ongovernance ~~units~~procedures ~~not~~to ~~yet~~further ~~under~~ensure ~~contract.~~timely ~~Cost~~and ~~includes~~accurate ~~all~~disclosure ~~direct~~to ~~material~~stockholders and ~~labor~~ formed various committees such as, ~~machinery~~Nominating & Governance Committee, ~~subcontractors~~Audit Committee, and ~~allocations~~Compensation ofCommittee ~~indirect~~• ~~overhead.~~Adopted Ata ~~each balance~~Code ~~sheet~~of ~~date~~Ethics, ~~the~~applicable to all Company ~~evaluates~~officers, ~~its~~directors ~~ending~~and ~~inventories~~employees, ~~for~~including ~~excess quantities~~senior financial officers • Restructured and ~~obsolescence.~~renegotiated ~~Among~~the ~~other~~Company’s ~~factors~~existing debts, including a one-year extension of the ~~Company~~senior ~~considers historical~~secured ~~demand~~debt ~~and~~• ~~forecasted~~Decreased ~~demand~~cost inof ~~relation~~operations towith the ~~inventory~~divesture onnon-performing ~~hand~~subsidiary NCR, and ~~market~~ ~~conditions~~received ~~when~~full ~~determining~~indemnity ~~obsolescence~~on all liabilities and ~~net~~other ~~realizable~~issues ~~value. Provisions~~(See ~~are~~Note ~~made~~2) to• ~~reduce~~Retained ~~excess~~the orassistance ~~obsolete~~of ~~inventories~~outside independent financial advisors to ~~their~~identify ~~estimated net~~and ~~realizable~~secure ~~values.~~financial ~~Once~~support ~~established,~~for ~~write-downs~~the ~~are~~Company’s ~~considered~~business ~~permanent adjustments~~plan tothat ~~the~~focuses ~~cost~~and ~~basis~~defines what directions of growth should be targeted within the ~~excess~~aerospace or& ~~obsolete~~defense ~~inventories~~industry, both domestically and internationally • Expanded the Company’s international relationships with established companies in China and Ukraine. As • Changed the name of ~~June~~ 30the Company to U.S. Aerospace, ~~2010~~Inc., ~~inventories~~to ~~consist~~reflect ofthe ~~$24,066~~new ofbranding ~~work-in-process~~ and ~~$262,462~~business focus of ~~finished~~the ~~goods.~~ Company

8The condensed consolidated financial statements do not include any adjustments to the carrying amounts related to recoverability and classification of assets or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

~~Revenue~~Reclassifications ~~Recognition~~

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

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

~~Because contracts~~The ~~may~~Company ~~extend~~recognizes ~~over~~product arevenue ~~period~~provided ofthat ~~time,~~(1) persuasive ~~changes~~evidence inexist ~~job~~of ~~performance, changes~~an inarrangement ~~job~~exists, ~~conditions~~(2) delivery ~~and~~to ~~revisions of estimates of cost and earnings during~~ the ~~course~~ ofcustomer ~~the~~has ~~work~~occurred, ~~are reflected in~~ (3) the ~~accounting~~selling ~~period~~price inis ~~which~~fixed ~~the facts~~or ~~that~~determinable ~~require~~and, ~~the~~(4) collection ~~revision~~is ~~become~~reasonably ~~known~~assured. AtDelivery ~~the~~is ~~time~~considered ato ~~loss~~have ~~on a contract becomes~~occurred ~~known,~~hen ~~the~~title ~~entire~~and ~~amount~~risk of ~~the estimated ultimate~~ loss ishave ~~recognized~~transferred into the ~~consolidated~~ ~~financial statements~~customer.

~~Contracts~~F-8 that are substantially complete are considered closed for financial statement purposes. Costs incurred and revenue earned on contracts in progress in excess of billings (under billings) are classified as a current asset. Amounts billed in excess of costs and revenue earned (over billings) are classified as a current liability.

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

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

~~In accordance~~The preparation of financial statements in conformity with ~~U.S.~~GAAP ~~accounting~~requires ~~standards,~~management ~~revenue~~to ismake estimates ~~recorded~~and ~~net~~assumptions that affect the reported amounts of anassets and liabilities and the ~~estimate~~disclosure ~~for~~of ~~markdowns~~contingent assets and ~~price~~liabilities ~~concessions.~~at ~~Such~~the ~~reserve~~date isof ~~based~~the oncondensed consolidated financial ~~management's~~statements, ~~evaluation~~and the reported amounts of ~~historical~~revenues ~~experience~~and expenses during the reporting periods. Significant estimates made by management are, ~~current~~among ~~industry~~others, ~~trends~~deferred ~~and~~tax asset valuation ~~estimated~~allowances, ~~costs.~~realization Asof inventories, collectability of ~~June~~receivables, 30recoverability of long-lived assets, ~~2010~~accrued warranty costs, ~~the~~payroll ~~Company~~and ~~estimated~~income tax penalties, the ~~markdowns~~valuation ~~and~~of conversion ~~price~~options, ~~concessions~~stock options and ~~concluded~~warrants ~~amounts~~and ~~are~~the ~~immaterial~~estimation ~~and~~of ~~did~~costs ~~not~~for ~~record~~long-term ~~any~~construction ~~adjustment~~contracts. toActual ~~revenues~~results could differ from those estimates.

~~Use~~ Concentration of ~~Estimates~~Credit Risks

~~The preparation~~Cash ofis ~~financial~~maintained ~~statements~~at inone ~~conformity~~financial ~~with~~institution. ~~GAAP~~The ~~requires~~Federal ~~management to~~Deposit ~~make~~Insurance ~~estimates~~Corporation ~~and assumptions that affect the reported amounts of assets and~~(“FDIC”) ~~liabilities~~insures ~~and~~accounts ~~the~~at ~~disclosure~~each offinancial ~~contingent~~institution ~~assets~~for ~~and~~up ~~liabilities~~to at$250,000. ~~the~~At ~~date of the condensed consolidated financial statements~~times, ~~and~~cash ~~the~~may ~~reported~~be ~~amounts~~in ofexcess ~~revenues~~of ~~and expenses during~~ the ~~reporting~~FDIC ~~periods~~insured limit. ~~Significant~~The ~~estimates~~Company ~~made by~~did ~~management~~not ~~are,~~have ~~among~~any ~~others,~~uninsured ~~deferred~~bank ~~tax~~balances ~~asset~~at ~~valuation allowances~~September 30, ~~realization~~2010 ofand ~~inventories~~December 31, ~~collectibility~~2009. ofThe ~~receivables,~~Company ~~recoverability~~has ~~of long-lived~~not ~~assets,~~experienced ~~accrued~~any ~~warranty~~losses ~~costs,~~in ~~payroll~~such ~~and~~accounts ~~income tax penalties, the valuation of conversion options, stock options~~ and ~~warrants and the estimation~~ ofbelieves ~~costs~~it ~~for~~is ~~long-term~~not ~~construction~~exposed ~~contracts.~~to ~~Actual~~any ~~results~~significant ~~could~~credit ~~differ~~risks ~~from those~~on ~~estimates~~cash.

9Accounts Receivable

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

The Company ~~provides~~maintains aan ~~warranty~~allowance onfor ~~certain~~doubtful ~~products~~accounts ~~sold.~~for ~~Estimated~~balances ~~future~~that ~~warranty obligations~~appear ~~related~~ to ~~certain~~have ~~products~~specific collection ~~and~~issues. ~~services~~The ~~are~~collection ~~provided~~process byis ~~charges~~based ~~to operations~~on inthe age of the ~~period~~invoice inand ~~which~~requires attempted contacts with the ~~related~~customer ~~revenue~~at isspecified ~~recognized~~intervals. AtIf, ~~June~~after ~~30, 2010~~a ~~and~~specified ~~December~~number ~~31,~~of ~~2009~~days, the Company ~~warranty~~has ~~obligation~~been ~~balance~~unsuccessful ~~was~~in ~~approximately $136,000~~its ~~and~~collection ~~$137~~efforts,~~000,~~ ~~respectively~~a bad debt allowance is recorded for the balance in question. ~~Amounts~~Delinquent accounts receivable are charged toagainst ~~warranty~~the ~~expense~~allowance for doubtful accounts once uncollectability has been determined. The factors considered in ~~the~~reaching this ~~accompanying~~determination ~~condensed~~are ~~consolidated~~the ~~statements~~apparent financial condition of ~~operations~~the ~~was~~customer ~~approximately~~and the Company’s success in $0contacting and ~~$3,000~~negotiating ~~for~~with the ~~three~~customer. ~~and~~If ~~six~~the ~~months~~financial ~~ended~~condition ~~June~~of ~~30,~~the ~~2010~~Company’s ~~and $0~~customers ~~for~~were ~~the~~to ~~three~~deteriorate, ~~and~~resulting ~~six~~in ~~months~~an ~~ended~~impairment ~~June~~of ~~30,~~ability ~~2009~~to make payments, ~~respectively~~additional allowances may be required.

~~Concentration~~Management reviews the collectability of receivables periodically and believes that the allowance for doubtful accounts as of ~~Credit~~September 30, ~~Risks~~2010 and December 31, 2009 is adequate.

~~Cash~~During ~~is maintained~~the atthree ~~various~~and ~~financial~~nine ~~institutions.~~months ~~The~~ended ~~Federal~~September 30, ~~Deposit~~2010, ~~Insurance Corporation~~sales ~~(“FDIC”)~~to ~~insures~~one ~~accounts~~customer atapproximated ~~each~~97% and ~~financial~~91% ~~institution~~of ~~for~~net ~~up to $250,000~~revenues. ~~At times~~Further, ~~cash~~there ~~may~~was beone incustomer ~~excess~~that ofaccounted ~~the~~for ~~FDIC~~approximately ~~insured~~98% ~~limit. The Company~~of ~~did~~accounts ~~not~~receivable ~~have any uninsured bank balances~~ at ~~June~~ September 30, 2010 ~~and December 31, 2009~~. ~~The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risks on cash.~~

~~The Company~~During ~~sells~~the ~~products~~three toand ~~customers~~nine ~~throughout~~months ~~the~~ended ~~United~~September 30, ~~States.~~2009, ~~The~~sales ~~Company’s ability~~ to ~~collect~~five ~~receivables~~customers isaccounted ~~affected by economic fluctuations in the~~for ~~geographic~~approximately ~~areas~~95% ~~served~~of bynet ~~the Company~~revenues. ~~Although~~At ~~the~~September 30, ~~Company does not obtain collateral with which to secure its accounts receivable~~2009, ~~management~~three ~~periodically reviews accounts receivable and assesses the financial strength of its~~ customers ~~and,~~ asaccounted ~~a consequence, believes that the receivable credit risk exposure could,~~for atapproximately ~~times,~~95% beof ~~material to~~ the ~~condensed~~accounts ~~consolidated~~receivable ~~financial statements~~balance.

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

~~Management reviews~~Basic ~~the~~net ~~collectibility~~loss ofper ~~receivables~~share ~~periodically~~is ~~and~~computed ~~believes~~by ~~that~~dividing ~~the allowance~~net ~~for~~loss ~~doubtful~~by ~~accounts for~~ the ~~three~~weighted ~~and~~average ~~six~~number ~~months ended~~of common ~~June~~shares ~~30,~~outstanding ~~2010~~for ~~and~~ the ~~year~~period. ~~ended~~Diluted ~~December~~net ~~31,~~loss ~~2009~~per share is ~~adequate.~~computed ~~There~~by ~~was~~dividing ~~no allowance~~net ~~for~~loss ~~doubtful~~by the ~~accounts~~weighted ataverage ~~June~~number ~~30,~~of ~~2010~~common shares and ~~December~~dilutive ~~31,~~common stock equivalents outstanding for ~~2009~~each respective year.

~~During the~~Common ~~three~~stock equivalents, representing convertible Preferred Stock, convertible debt, options and ~~six~~warrants ~~months~~totaling ~~ended~~approximately ~~June~~348,673,806 and 132,360,000 for September 30, 2010 and 2009, respectively, ~~sales~~are tonot ~~one~~included ~~customer~~in ~~approximated 95% and~~the ~~90%~~computation of ~~net~~diluted ~~revenues.~~loss ~~Further,~~from ~~there~~operations ~~was~~per ~~one~~share ~~customer~~and ~~that~~in ~~accounted~~diluted ~~for~~income ~~approximately~~(loss) available ~~86%~~to ofcommon ~~accounts~~shareholders per ~~receivable~~share atas ~~June~~they 30would be anti-dilutive. However, the dilutive shares are included in the diluted ~~2010~~income from discontinued operations per share.

~~During~~F-9 ~~the three and six months ended June 30, 2009, sales to two customers accounted for approximately 46% of net revenues.~~

Basic AndTable Dilutedof Loss Per Common ShareContents

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

~~Common stock~~The ~~equivalents,~~Company ~~representing~~uses ~~convertible~~the ~~Preferred~~fair ~~Stock,~~value ~~convertible~~method ~~debt,~~of accounting for employee stock compensation cost. ~~options~~Share-based ~~and~~compensation ~~warrants~~cost ~~totaling~~is ~~approximately~~measured ~~153,611,000~~at the grant date based on the fair value of the award and 74is recognized as expense on a straight-line basis over the requisite service period,~~320,847~~ ~~for~~which ~~June~~is the vesting period. For the three and nine months ended September 30, 2010, $219,319 and ~~2009~~$319, 319 respectively, ~~are~~of ~~not~~share-based ~~included~~compensation expense was recognized in the ~~computation~~accompanying condensed consolidated statements of ~~diluted~~operations. For the three and nine months ended September 30, 2009, ~~loss~~$330,506 ~~per~~and $365,520 respectively, employee share-based ascompensation ~~they~~expense ~~would~~was berecognized ~~anti-dilutive~~in the accompanying condensed consolidated statements of operations.

10From 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 ~~Based~~5,000,000 ~~Compensation~~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.

~~The Company~~In ~~uses~~accordance ~~the~~with ~~fair~~U.S. ~~value method of~~ accounting ~~for~~standards, ~~employee~~the ~~stock~~Company’s ~~compensation cost.~~policy ~~Share-based compensation cost~~ is ~~measured~~to atadjust ~~the grant date~~ share-based ~~on the~~ ~~fair~~compensation ~~value of the award and is recognized as expense~~ on a ~~straight-line~~quarterly basis ~~over~~ ~~the~~for ~~requisite~~changes ~~service~~to ~~period, which is~~ the ~~vesting~~estimate ~~period. For the three and six months ended June 30, 2010, $79,352~~ of ~~employee and~~ ~~director~~expected ~~share-based~~award ~~compensation~~forfeitures ~~expense~~based ~~was~~on ~~recognized~~actual inforfeiture ~~the accompanying condensed consolidated statements of operations~~experience. ~~For the three and six months ended June 30, 2009, $35,014 and~~ ~~$0 of employee share-based compensation expense was recognized in the accompanying condensed consolidated statements of operation,~~

~~From~~The ~~time~~fair value of stock-based awards to employees and directors is calculated using the Black-Scholes option pricing model, even though the model was developed to ~~time~~estimate the fair value of freely tradable, fully transferable options without vesting restriction, which differ significantly from the Company'’s ~~Board~~stock ofoptions. ~~Directors~~The ~~grants~~Black-Scholes ~~common~~model ~~share~~also ~~purchase~~requires ~~options~~subjective orassumptions ~~warrants~~regarding tofuture ~~selected~~stock ~~directors,~~price ~~officers,~~volatility ~~employees,~~and ~~consultants~~expected ~~and~~time ~~advisors~~to exercise, which greatly inaffect ~~payment~~the ofcalculated ~~goods~~values. orThe ~~services~~expected ~~provided~~term byof ~~such~~options ~~persons~~granted is derived from historical data on aemployee ~~stand~~exercises and post-~~alone~~vesting ~~basis~~employment termination behavior. The risk-free rate selected ~~outside~~to ofvalue any particular grant is based on the U.S. Treasury rate that corresponds to the pricing term of the ~~Company's~~grant ~~formal~~effective ~~stock~~as ~~plans~~of the date of the grant. The ~~terms~~expected ofvolatility ~~these~~is ~~grants~~based on the ~~are~~historical ~~individually~~volatility ~~negotiated~~of ~~and~~the ~~generally~~Company’s ~~expire~~common ~~within~~stock. ~~five~~These ~~years~~factors ~~from~~could change in the future, ~~grant~~affecting ~~date~~the determination of stock-based compensation expense in future periods.

~~Under~~There ~~the terms~~were ofno ~~the~~plan ~~Company's~~options ~~2000 Stock Option Plan~~granted, ~~options~~and ~~to purchase an aggregate of 5~~1,~~000~~600,000 ~~shares~~options ofwere ~~common~~exercised ~~stock~~or ~~may~~expired beduring ~~issued to officers, key employees and consultants of~~ the ~~Company. The exercise price of any option generally may not~~ bethree ~~less~~and ~~than~~nine ~~the~~months ~~fair~~ended ~~market~~September 30, ~~value~~2010. ofThere ~~the~~were 3,000,000 shares onavailable ~~the~~for ~~date of~~ grant~~. The term~~ ofat ~~each~~September 30, ~~option generally may not be more than five years~~2010.

~~In accordance with U.S. accounting standards, the Company’s policy is to adjust share~~F-~~based compensation on a quarterly basis for changes to the estimate of~~10 ~~expected award forfeitures based on actual forfeiture experience.~~

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

~~There were~~All no plan options ~~granted,~~outstanding ~~and~~have ~~1,200,000~~vested ~~options~~as ~~were~~of ~~exercised or expired during the three and six months ended June~~ September 30, 2010~~. There~~ ~~were 2,900,000~~and ~~shares~~are ~~available~~as ~~for grant at June 30, 2010.~~follows:

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

Weighted

Average

Weighted

Remaining

Average

Contractual

Aggregate

Number

Exercise

Term in

Intrinsic

of Shares

Price

Years

Value ⁽¹⁾

Vested

2,000,000

0.20

1.37

—

Weighted

Average

Remaining

Aggregate

Number of

Exercise

Contractual

Intrinsic

Price

Term in Years

Value (1)

Vested

6,200,000

0.13

1.92


⁽¹⁾		Represents the approximate difference between the exercise price and the closing market price of the Company’s common stock at the end of the reporting period (as of September 30, 2010 the market price of the Company’s common stock was $0.07).

~~(1)~~The ~~Represents~~Company accounts for transactions involving services provided by third parties where the ~~approximate~~Company ~~difference~~issues ~~between~~equity instruments as part of the ~~exercise~~total ~~price~~consideration ~~and~~using the ~~closing~~fair ~~market~~value of ~~price~~the consideration received (i.e. the value of the ~~Company's~~goods ~~common~~or ~~stock~~services) ator the ~~end~~fair value of the equity ~~reporting~~instruments ~~period~~issued, ~~(as~~whichever is more reliably measurable. In transactions when the value of the ~~June~~goods 30and/or services are not readily determinable, ~~2010~~the fair value of the ~~market~~equity ~~price~~instruments is more reliably measurable and the counter party receives equity instruments in full or partial settlement of the transactions, the Company's ~~common~~uses ~~stock~~the ~~was~~following ~~$0.06).~~methodology:

~~The Company~~a) ~~accounts~~For ~~for~~ transactions ~~involving services provided by third parties~~ where ~~the~~goods ~~Company~~have ~~issues~~already ~~equity~~been ~~instruments~~delivered ~~as part of the total consideration using the fair value of the consideration received (i.e. the value of the goods~~ or services) orrendered, the ~~fair value of the~~ equity instruments are issued, ~~whichever~~on ~~is more reliably measurable. In transactions when the value of the goods and/~~or ~~services~~ ~~are~~about ~~not readily determinable,~~ the ~~fair~~date ~~value of~~ the ~~equity~~performance ~~instruments~~ is ~~more~~complete ~~reliably measurable~~ (and ~~the~~valued ~~counterparty~~on ~~receives equity instruments in full or partial settlement of~~ the ~~transactions,~~date ~~the Company uses the following~~of ~~methodology:~~issuance).

11b) 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.

ac) For ~~transactions~~ ~~where~~any ~~goods~~transactions ~~have~~not ~~already~~meeting ~~been~~the ~~delivered~~criteria in (a) or ~~services rendered~~(b) above, the ~~equity~~ ~~instruments~~Company ~~are~~re-measures ~~issued~~the consideration onat oreach ~~about~~reporting ~~the~~ date ~~the~~based ~~performance is complete (and valued~~ on ~~the~~its ~~date~~then ofcurrent ~~issuance)~~stock value.

b)From ~~For transactions~~time ~~where~~to time, the ~~instruments~~Company ~~are~~issues ~~issued~~warrants onto aemployees ~~fully~~and ~~vested,~~to ~~non-forfeitable basis,~~third ~~the~~parties ~~equity~~pursuant ~~instruments~~to various ~~are~~agreements, ~~valued~~which onare ornot ~~about~~approved ~~the~~by ~~date of~~ the ~~contract~~ shareholders.

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

~~From~~On ~~time to~~April 7, ~~time~~2010, the Company ~~issues~~issued ~~warrants~~10,000,000 stock options that were not under the 2000 Stock Option Plan. These options were issued to ~~employees~~newly hired non-employee directors and to ~~third~~a ~~parties~~marketing consultant. ~~pursuant~~The options have an exercise price of $0.13 per share and a term of five years, with a toweighted ~~various~~average ~~agreements~~remaining life of 4.77 years, One half of the options vest at the end of the first year and one half of the options vest at the end of the second year. The fair value of the options at grant date was approximately $1,273,000 which ~~are~~is ~~not~~being ~~approved~~amortized byinto compensation expense over the ~~shareholders~~vesting period. At September 30, 2010, $265,208 was expensed.

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

OnDeferred ~~April 7,~~Financing ~~2010, the Company issued 10,000,000 stock options that were not under the~~Costs 2000 Stock Option Plan. These options were issued to newly hired non-employee directors and to a marketing consultant. The options have an exercise price of $0.13 per share and a term of five years, with a weighted average remaining life of 4.77 years, One half of the options vest at the end of the first year and one half of the options vest at the end of the second year. The fair value of the options at grant date was $1,273,000 which is being amortized into compensation expense over the vesting period. At June 30, 2010, $159,183 was expensed.

ADirect ~~Black Scholes~~costs ~~model~~of ~~was~~securing ~~used~~debt tofinancing ~~calculate~~are capitalized and amortized over the ~~fair~~term ~~value~~of ~~with~~the related debt. When a loan is paid in full, any unamortized financing costs are removed from the ~~following~~related ~~parameters:~~accounts ~~stock~~and ~~price~~charged ofto $0operations.13 ~~per~~During ~~share~~the three and nine months ended September 30, ~~exercise~~2010 ~~price~~the Company ofamortized approximately $~~0.13~~18,955 ~~per~~and ~~share~~$140,955, respectively, of deferred financing costs to ~~risk~~interest ~~free~~expense ~~rate~~in the accompanying condensed consolidated statements of 3operations.~~52%~~ During the three and nine months ended September 30, ~~stock~~2009 ~~volatility~~the ofCompany ~~204.39%~~amortized approximately $103,000 and $337,000, norespectively, of deferred financing costs to interest expense in the accompanying ~~dividend~~condensed consolidated statements of operations.

~~Deferred~~F-11 ~~Financing Costs~~

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

Fair Value Measurements

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

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

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

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

12Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter. The Company does not have any liabilities that are measured at fair value as of September 30, 2010.

~~Determining which~~The ~~category~~Company anhas ~~asset~~no orassets ~~liability~~that ~~falls~~are ~~within~~measured ~~the~~at ~~hierarchy~~fair ~~requires significant~~value ~~judgment.~~on ~~The~~a ~~Company~~recurring ~~evaluates~~basis. ~~its~~There ~~hierarchy~~were ~~disclosures each~~no ~~quarter. The~~assets ~~Company~~or ~~does~~liabilities ~~not~~measured ~~have~~at ~~any~~fair ~~liabilities~~value ~~that~~on ~~are~~a ~~measured~~non-recurring ~~at fair~~basis ~~value~~during asthe ofnine ~~June~~months ended September 30, ~~2010~~20010.

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

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

~~In connection~~For ~~with~~all ~~the issuance~~ of ~~certain convertible notes payable (see Note 5),~~ the ~~notes had conversion features that the Company determined were embedded~~ derivative instruments., ~~The~~any ~~Company~~change ~~issued~~in ~~warrants~~fair invalue ~~connection~~is ~~with~~recorded aas ~~loan~~non-operating, ~~payable~~non-cash ~~(see~~income ~~Note~~or 6)expense ~~that~~at ~~had~~each anbalance ~~anti-dilution~~sheet ~~provision~~date. ~~which~~If ~~caused~~ the ~~warrants~~ tofair bevalue aof ~~derivative~~the ~~instrument. The~~derivatives ~~accounting~~was higher ~~treatment~~at ~~of derivative~~the ~~financial~~subsequent ~~instruments~~balance ~~requires~~sheet ~~that~~date, the Company ~~record~~recorded ~~the derivatives~~a ~~and~~non-operating, ~~related~~non-cash ~~warrants~~charge. If atthe ~~their~~ fair ~~values~~value as of the ~~inception~~derivatives ~~date of~~was ~~the~~lower ~~note and warrant agreements and~~ at ~~fair~~the ~~value~~subsequent asbalance ofsheet ~~each~~date, ~~subsequent~~the Company ~~balance~~recorded ~~sheet~~non-operating, ~~date~~non-cash income.

~~For~~As ~~all of~~discussed ~~the~~in ~~derivative~~Note ~~instruments~~5, ~~any~~effective ~~change~~December 31, in2009, ~~fair~~CAMOFI ~~value~~and isCAMHZN ~~recorded~~removed asthe variability of ~~non-operating,~~the ~~non-cash~~conversion ~~income~~feature orof ~~expense~~their atnotes, ~~each~~fixing ~~balance~~the ~~sheet~~conversion ~~date.~~price Ifat the ~~fair~~ ~~value~~then conversion price of $0.04 ~~the~~per ~~derivatives~~share. ~~was~~In ~~higher~~addition, atCAMOFI ~~the~~and ~~subsequent~~CAMHZN ~~balance~~also ~~sheet~~removed ~~date,~~ the ~~Company~~variability ~~recorded~~of athe ~~non-operating,~~exercise ~~non-cash~~price of ~~charge~~their outstanding warrants. IfAs a result, the fair ~~value~~values of the ~~derivatives~~ ~~was~~variable ~~lower~~conversion atfeature ($11,190,904) of the ~~subsequent~~notes ~~balance~~and ~~sheet~~the ~~date~~related warrants ($747,381) ~~the~~were ~~Company~~reclassified ~~recorded~~to additional ~~non~~paid-~~operating,~~in ~~non-cash~~capital ~~income~~on December 31, 2009.

As Also as discussed in Note 5, effective ~~December~~ January 31, ~~2009~~2010, ~~CAMOFI and CAMHZN removed~~ the variability ~~of the conversion~~ feature of ~~their notes, fixing~~ the ~~conversion~~exercise price ~~at the then conversion price~~ of ~~$0.04 per share. In addition, CAMOFI and CAMHZN also removed~~ the ~~variability~~outstanding ofwarrants ~~the~~issued ~~exercise~~to ~~price~~Micro ofPipe ~~their outstanding~~were ~~warrants~~removed. As a result, the fair ~~values~~ value of the ~~variable conversion~~warrants ~~feature ($11,190,904)~~ of ~~the notes and the related warrants (~~$~~747~~59,~~381)~~631 ~~were~~was reclassified to additional paid-in capital on ~~December~~ January 31, ~~2009~~ 2010.

~~As discussed~~During inthe ~~Note~~nine 6,months ~~effective~~ended ~~January 31~~September 30, 2010 and 2009, the ~~variability~~Company ~~feature~~recognized ofother ~~the exercise~~expense ~~price~~ of $11,253 ~~the~~and ~~outstanding~~$21,225,850, ~~warrants~~respectively, ~~issued~~related to ~~Micro~~recording ~~Pipe~~derivative ~~were removed. As~~liabilities aat ~~result, the~~ fair value. At ofSeptember 30, ~~the~~2010 ~~warrants~~and ofDecember 31, ~~$59~~2009,~~631~~ ~~was reclassified~~the toderivative ~~additional~~liability ~~paid-in~~balance ~~capital~~was on$0 ~~January~~and 31$48, ~~2010~~378, respectively.

~~During the~~Beneficial ~~periods~~conversion ~~ended~~feature ~~June 30, 2010~~ and ~~2009,~~warrant-related ~~the~~derivatives ~~Company~~were ~~recognized~~valued ~~other~~using ~~expense~~the Black-Scholes ofOption ~~$11,253~~Pricing ~~and $1,575,903,~~Model ~~respectively,~~with ~~related~~the tofollowing ~~recording derivative~~assumptions ~~liabilities~~during atthe ~~fair~~period ~~value. At~~ended ~~June~~ September 30, 2010: dividend ~~and~~yield ~~December~~of ~~31, 2009,~~0%; ~~the~~volatility ~~derivative~~of ~~liability~~204% ~~balance~~and ~~was~~a $risk free interest rate of 0.13% ~~and~~for ~~$48,378,~~the beneficial ~~respectively~~conversion feature and 3.77% for the warrants.

~~Beneficial conversion feature and warrant~~F-~~related derivatives were valued using the~~12 Black-Scholes Option Pricing Model with the following assumptions during the period ended June 30, 2010: dividend yield of 0%; volatility of 204% and a risk free interest rate of 0.13% for the beneficial conversion feature and 3.77% for the warrants.

The followingTable tableof summarizes the activity related to the derivative liability during the period ended June 30, 2010:Contents

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

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

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


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

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

13The Company accounts for debt issued with stock purchase warrants by allocating the proceeds of the debt between the debt and the detachable warrants based on the relative fair values of the debt security without the warrants and the warrants themselves, if the warrants are equity instruments. The relative fair value of the warrants are recorded as a debt discount and amortized to expense over the life of the related debt using the effective interest method which approximates the straight-line amortization method. At each balance sheet date, the Company makes a determination if these warrant instruments should be classified as liabilities or equity, and reclassifies them if the circumstances dictate.

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

Significant Recent Accounting Pronouncements

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

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

2. ~~CONTRACTS~~ INANTONOV ~~PROGRESS~~STRATEGIC COOPERATION AGREEMENT

~~Contracts~~On inJuly 1, ~~progress~~2010, the Company entered into an Agreement and Plan of Merger with Antonov USA, pursuant to which ~~include~~it issued ~~completed~~to ~~contracts~~American ~~not~~Defense ~~completely~~Investments, ~~billed~~LLC ~~approximate~~and TUSA Acquisition Corporation an aggregate of 383,793 shares of Series E Convertible Preferred Stock, each of which is convertible into 500 shares of our common stock, and votes together with the ~~following~~common stock as a single class on an as-converted basis. Additionally, the preferred stock has non-dilution protection for subsequent issuances of ~~March~~common 31stock, ~~2010~~including any conversion of currently outstanding warrants and convertible ~~December~~debt. 31As a result of the merger, ~~2009:~~the Company acquired their company, Antonov USA. The only identifiable asset of Antonov USA was a relationship with Antonov Company, which would have allowed the Company to submit bids for contracts relating to the KC-X Tanker Modernization Program. Management used its judgment in estimating the value of the preferred shares and the value of the relationship acquired in the merger.

	(Unaudited)
	June 30,2010			December 31, 2009
Cumulative costs to date	$	684,000		$	3,166,000
Cumulative gross profit to date		486,000			2,611,000
Cumulative revenue earned		1,170,000			5,777,000
Less progress billings to date		(1,146,000	)		(5,921,000	)
Net over billings	$	24,000		$	(144,000	)

As a result of the above, on July 1, 2010, the Company entered into a Strategic Cooperation Agreement with Antonov Company. Established in 1946, Antonov is a state-owned commercial company in Kiev, Ukraine, where it operates Antonov Airlines, Antonov Airport and is responsible for the design and manufacturing of dozens of different types of aircraft, including the world’s first and second largest aircraft, the AN-225 Mriya and AN-124 Condor strategic airlifters, and the AN-148 and AN-158 commercial airliners.

~~The~~F-13 ~~following approximate amounts are included in the accompanying condensed consolidated balance sheets under these captions:~~

	(Unaudited)
	March 31, 2010		December 31, 2009
Costs and estimated earnings in excess of billings on uncompleted contracts	$	24,000	$	6,000
Billings in excess of costs and estimated earnings on uncompleted contracts		0		(150,000	)
Net over billings	$	24,000	$	(144,000	)

14On July 9, 2010, the Company submitted a response to the Request for Proposal from the U.S. Air Force for the KC-X Tanker Modernization Program. If the Company’s bid was successful, the aircraft components would have been built by Antonov Company in Ukraine, with final assembly by us in the U.S. The U.S. Air Force claimed that the bid was untimely and failed to consider it. On August 2, 2010, the Company submitted a bid protest to the General Accounting Office (“GAO”). On October 6, 2010, the GAO denied Company’s bid protest. After comprehensive discussions of the Government Accountability Office’s decision, including the advice of counsel, the new management of the Company has determined that it will not continue to pursue its bid to supply the U.S. Air Force with its next generation of aerial refueling tankers.

3Management performed its assessment of the fair value of the relationship with Antonov Company at September 30, 2010. In this undertaking, management analyzed the projected ~~ACQUISITION~~cash OFflow ~~PRECISION~~from ~~AEROSTRUCTURES~~the assets discounted at appropriate rates, ~~INC~~the length of time to full development of the cash flow potential and the current recessionary state of the world-wide economy. Management determined after this analysis that it was appropriate to record an impairment charge equal to the net book value of the Strategic Cooperation Agreement with Antonov.

~~On October~~3. 9,DISCONTINUED ~~2009,~~OPERATIONS ~~the~~AND ~~Company~~SALE ~~entered~~OF ~~into a Share Exchange Agreement (the “Share~~NCR Exchange Agreement”) with PAI and Michael Cabral (“Cabral”) pursuant to which Cabral, as the sole shareholder of PAI, agreed to transfer to the Company, and the Company agreed to acquire from Cabral, all of the capital stock of PAI (the “PAI Shares”) in exchange for 5,000,000 shares of the Company’s common stock (the “NCCI shares”) with an acquisition-date fair value of $900,000 and the delivery of a promissory note of the Company (the “Note”) in the principal amount of $500,000 payable from the proceeds of any equity financing with gross proceeds of at least $2,000,000 provided that the investors in such financing permit the proceeds thereof to be used for such purpose (see Note 8).

~~Additionally~~Effective August 27, at ~~such~~2010, ~~time (~~the ~~“Vesting~~Company ~~Date”)~~discontinued asoperations ~~the~~and ~~cumulative~~sold ~~net~~the ~~income of PAI is at~~unprofitable ~~least~~remanufacturing $3subsidiary,~~000,000~~ ~~for~~New ~~the~~Century ~~period commencing on January 1~~Remanufacturing, ~~2010~~Inc. ~~and ending on October 9, 2012 the Company will issue to Cabral warrants~~ (“~~Warrants~~NCR”), to ~~purchase~~ ~~3,000,000~~our ~~shares~~former ofdirectors, David ~~Company~~Duquette ~~common~~and ~~stock. The~~Josef ~~Warrants~~Czikmantori, ~~will be~~ for ~~a term of the earlier of three years from the Vesting Date or January~~ $1~~, 2014,~~ and ~~shall have~~ an ~~exercise~~indemnity ~~price~~from all of ~~$0.10~~NCR’s ~~per share~~liabilities. ~~The~~ ~~Warrant~~As ~~vests~~such, ~~immediately~~we onare ~~the~~no ~~Vesting~~longer ~~Date~~in ~~and~~ the ~~estimated~~machine ~~acquisition-date~~tool ~~fair value~~business ofand ~~the~~are ~~Warrants~~focused ~~was~~solely ~~$540,000 (based~~ on ~~the~~aerospace ~~Black-Scholes option pricing~~and ~~model)~~defense.

~~The Company~~NCR ~~acquired~~had ~~PAI~~no tooperations ~~position~~during ~~itself~~the ~~for~~three ~~growth~~months inended September 30, 2010 as the ~~aerospace~~facility ~~business,~~was ~~which~~effectively isidled. ~~projected~~During tothe ~~grow~~nine atmonths aended 5%September 30, ~~compounded~~2010, ~~annual~~NCR ~~rate~~had ~~for~~revenues ~~the~~of ~~next 20~~$407,805, ~~years. PAI~~cost ~~complements~~of ~~the~~good ~~Company’s~~sold ~~machining~~of ~~capabilities~~$741,356, inSG&A anexpenses ~~industry that~~of ~~shows~~$642,018 ~~more~~producing ~~growth~~a inloss ~~comparison~~from tooperations ~~machine tooling~~of $905,569.

~~The~~During ~~terms of~~ the ~~purchase~~three ~~were~~and ~~the~~nine ~~result~~months ofended ~~arms-length~~September 30, ~~negotiations. There~~2009, isNCR ~~no material~~had ~~relationship~~revenues ~~between~~of ~~the~~$644,609 ~~Company~~and $3,058,941 onrespectively, ~~the~~cost ~~one~~of ~~hand~~goods sold of $653,060 and ~~PAI~~$2,665,683 ~~or Cabral~~respectively, SG&A expenses onof ~~the~~$593,247 ~~other~~and ~~hand~~$1,337,504 respectively producing a loss from operations of $601,698 and $944,246 respectively.

~~The~~As ~~pro forma~~of ~~combined~~the ~~historical~~sale ~~results~~date, asAugust 27, if2010, ~~PAI~~NCR had ~~been~~current ~~acquired~~assets asof $311,503, total assets of ~~January~~$615,573, and 1current and total liabilities of $2,373,000 (see table in this Note 2). As of September 30, 2009, ~~are~~NCR ~~estimated~~had as$905,782 ~~follows~~in ~~(unaudited):~~current assets, $1,129,198 in total assets, and $5,772,207 in current and total liabilities.

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

The Company recorded a gain of approximately $1.2 million based on the sale of the net liabilities of NCR. The operations associated with NCR and the gain on sale will be classified as income (loss) from discontinued operations subsequent to the date of sale. Prior to reclassification, the operations associated with this transaction were classified into our “CNC machine tool remanufacturing” segment. Summarized balance sheet information for NCR as of August 27, 2010 is set forth below:

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


NCR Disposition
Cash	0
Inventories	262,462
Other current assets	49,041

Total current assets	311,503
Property and equipment, net	69,619
Other non-current assets	234,451
Total Assets of NCR	615,573
Accounts payable and accrued expenses	(2,373,060	)
Total liabilities of NCR	(2,373,060	)
Shareholder Note Receivable	584,691
Net Gain from Disposition	(1,172,796	)

4. F-14 ~~GOODWILL AND OTHER INTANGIBLE ASSETS~~

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

154. ACQUISITION OF PRECISION AEROSTRUCTURES, INC.

~~The~~On October 9, 2009, the Company entered into a Share Exchange Agreement with PAI and Michael Cabral ~~changes~~pursuant to which Cabral, as the sole shareholder of PAI, agreed to transfer to the Company, and the Company agreed to acquire from Cabral, all of the capital stock of PAI (the “PAI Shares”) in exchange for 5,000,000 shares of the ~~carrying~~Company’s common stock (the “NCCI shares”) with an acquisition-date fair value of $900,000 and the delivery of a promissory note of the Company (the “Note”) in the principal amount of ~~goodwill~~$500,000 ~~for~~payable from the ~~period~~proceeds ~~ended~~of ~~March~~any 31equity financing with gross proceeds of at least $2,000,000 ~~2010~~provided that the investors in such financing permit the ~~are~~proceeds asthereof ~~follows:~~to be used for such purpose (see Note 8).

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

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

The Company ~~recorded~~acquired aPAI ~~purchase~~to ~~price~~position ~~adjustment~~itself tofor ~~goodwill~~growth ofin ~~$42~~the aerospace business,~~221~~ ~~related~~which tois ~~the~~projected ~~balance~~to ofgrow ~~capital~~at ~~lease~~a ~~obligations~~5% ~~assumed~~compounded ~~upon~~annual ~~acquisition~~rate infor the ~~three~~next 20 years. PAI complements the ~~months~~Company’s ~~ended~~machining ~~March~~capabilities ~~31,~~in ~~2010~~an industry that shows more growth in comparison to machine tooling.

~~Identifiable intangibles~~The ~~acquired~~terms inof ~~connection~~the ~~with~~purchase ~~business~~were ~~acquisitions~~the ~~are~~result ~~recorded~~of ~~at their~~arms-length ~~respective fair values~~negotiations. ~~Deferred~~ ~~income~~There ~~taxes~~was ~~have~~no ~~been~~material relationship ~~recorded~~between to the ~~extent~~Company, ofon ~~differences between~~ the ~~fair~~one ~~value~~hand, and ~~the~~PAI ~~tax~~or ~~basis~~Cabral, ofon the ~~assets~~other hand. Cabral is ~~acquired~~currently our President and ~~liabilities~~a ~~assumed.~~member of our Board of Directors

~~Other intangible~~The ~~assets~~pro ~~consist~~forma ofcombined ~~the~~historical ~~following~~results, as if PAI had been acquired as of ~~June~~January 1, 302009, ~~2010~~are estimated as follows (unaudited):

	Estimated Useful Life (Years)		Gross Carrying Amount				Accumulated Amortization			Net Carrying Amount
	Three Months				Nine Months
Customer relationships	Seven		$	1,500,000			$	(160,715	)	$	1,339,285
	Ended				Ended
	September 30, 2009				September 30, 2009
Net revenues	$	898,283			$	3,751,581
Net loss	$	(21,372,363	)		$	(25,945,069	)
Weighted average common share outstanding:
Basic and diluted		20,344,654				20,344,654
Loss per share:
Basic and diluted	$	(1.05	)		$	(1.28	)

~~Amortization of~~The ~~other~~pro ~~intangible~~forma ~~assets~~information ~~was~~has ~~$53,572~~been ~~and~~prepared ~~$107,144~~ for ~~the~~comparative ~~three~~purposes only and ~~six~~does ~~months ended~~not ~~June~~purport ~~30,~~to be ~~2010.~~indicative ~~There~~of ~~was~~what nowould ~~amortization~~have ~~for~~occurred had the ~~three~~acquisition ~~and~~actually ~~six~~been ~~months ended~~made ~~June~~at ~~30,~~such ~~2009. During the six months ended June 30~~date,~~2010~~ ~~the Company~~nor ~~did~~is ~~not~~it ~~acquire~~necessarily orindicative ~~dispose~~ of ~~any~~future ~~intangible~~operating ~~assets~~results.

~~Other intangible~~5. ~~assets~~GOODWILL ~~consist~~AND ofOTHER ~~the~~INTANGIBLE ~~following as of December 31, 2009:~~ASSETS

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

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

5.F-15 ~~CONVERTIBLE NOTES PAYABLE~~

CAMOFI ANDTable CAMHZNof 12% AND 15% Senior Secured Convertible DebtContents

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

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


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

16The Company recorded a purchase price adjustment to goodwill of $42,221 related to the balance of capital lease obligations assumed upon acquisition in the nine months ended September 30, 2010.

~~2009~~Identifiable intangibles acquired in connection with business acquisitions are recorded at their respective fair values. Deferred income taxes have been recorded to the extent of differences between the fair value and the tax basis of the assets acquired and liabilities assumed.

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

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


	Estimated Useful	Gross Carrying		Accumulated			Net Carrying
	Life (Years)	Amount		Amortization			Amount
Customer relationships	Seven	$	1,500,000	$	(214,287	)	$	1,285,713
Strategic Cooperation Agreement	One	$	11,513,790	$	(11,513,790	)	$	—

Amortization of other intangible assets was $332,769 and $437,770 for the three and nine months ended September 30, 2010. There was no amortization for the three and nine months ended September 30, 2009. During the nine months ended September 30, 2010 the Company did not acquire or dispose of any intangible assets.

~~During the~~Other ~~first~~intangible ~~quarter~~assets ofconsist 2010, the Company borrowed $324,000 from CAMOFI and $81,000 from CAMHZN under the Notes and recorded debt discounts related to the conversion options and warrants issued for the same amounts as borrowed. The Company received proceeds of ~~$350,000, net of amounts paid directly to a vendor by~~ the ~~note~~following ~~holder. The Notes are due on August 1, 2010 and bear interest at 15% per annum. The debt discounts~~ as of ~~June 30~~December 31, ~~2010~~2009: ~~related to these borrowings from CAMOFI and CAMHZN were $64,733 and $16,183, respectively.~~

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


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

InImpairment April and May 2010 the Company borrowed $176,000 from CAMOFI and $44,000 from CAMHZN under the Notes and recorded debt discounts related to the conversion options and warrants issued for the same amounts as borrowed. The Company received no proceeds as the $220,000 was paid directly to a lender and a vendor by the note holder. The Notes are due on August 1, 2010 and bear interest at 15% per annum. The debt discounts as of ~~June~~Intangible ~~30, 2010~~Assets ~~related to these borrowings from CAMOFI and CAMHZN were $65,000 and $22,000, respectively.~~

~~The Company~~Management ~~has~~performed ~~incurred~~its ~~events~~assessment of ~~default on~~ the ~~Notes. The~~fair ~~last~~value ~~monthly contractual~~of ~~payment on~~ the ~~CAMOFI~~intangible ~~note~~assets ~~was~~for ~~made in October 2008 and no payments have been made on~~ the ~~CAMHZN~~nine ~~Note which were scheduled to begin on~~months ~~September~~ended 1September 30, ~~2008~~2010. As aIn ~~result~~this undertaking, ~~these~~management ~~are~~analyzed ~~events of default under~~ the ~~terms~~ ofprojected ~~the~~cash ~~agreement.~~flow ~~Under~~from the assets ~~terms~~discounted ofat ~~the~~appropriate ~~agreement~~rates, ifthe ~~any~~length ~~event~~ of ~~default~~ ~~occurs,~~time ~~the~~to full ~~principal~~development ~~amount~~ of the ~~note,~~cash ~~together with interest~~flow potential and ~~other~~the ~~amounts~~current ~~owing~~recessionary instate ~~respect thereof, to the date~~ of ~~acceleration shall become, at~~ the ~~note~~world-wide ~~holder’s~~economy. ~~election,~~Management ~~immediately~~determined ~~due~~after this ~~and~~analysis ~~payable~~that init ~~cash.~~was ~~The note~~appropriate ~~holders~~to ~~have~~record ~~yet~~an toimpairment ~~elect~~charge toof ~~exercise~~$11,513,790 consisting of the ~~default~~net ~~provisions.~~book Asvalue of ~~June 30,~~the ~~2010~~Strategic ~~and~~Cooperation ~~December~~Agreement ~~31,~~with ~~2009,~~Antonov. ~~the~~This ~~principal~~impairment ~~balances~~charge reduces ~~and~~ the ~~debt~~net ~~discounts are~~book ~~presented~~value inof the ~~Convertible~~asset ~~Notes~~to ~~Table, below~~zero.

	(Unaudited)
	June 30, 2010						December 31, 2009
CONV NOTES	CAMOFI			CAMHZN			CAMOFI			CAMHZN
Principal	$	4,513,401		$	1,168,280		$	4,033,881		$	1,048,400
Discount – warrants		(30,641	)		(7,690	)		(38,814	)		(16,160	)
Discount – conversion options		(210,435	)		(52,820)			(1,068,542	)		(204,850)
Discount – stock issued with notes		(12,228	)		-			(21,798	)		-
Notes presented net of debt discounts	$	4,260,097		$	1,107,770		$	2,904,727		$	827,390

6. NOTES PAYABLE

17CAMOFI AND CAMHZN 12% AND 15% Senior Secured Convertible Debt

The Company entered into various convertible debt financings with CAMOFI Master LDC (“CAMOFI”) and CAMHZN Master LDC (“CAMZHN”) prior to January 1, 2009 under the Amended 12% CAMOFI Convertible Note (“Amended 12% CAMOFI Note) and 15% CAMHZN Convertible Note (“15% CAMHZN Note”) (collectively, the “Notes”), which mature in July 2011, as amended. As of December 31, 2008, the amounts due under ~~June~~the 30Notes to CAMOFI and CAMHZN were $2,834,281 ~~2010~~and $750,000, respectively. In connection with the Notes, the Company issued warrants and ~~December~~stock to CAMOFI and warrants to CAMHZN. The debt discounts as of December 31, ~~2009~~2008 related to the Notes, which includes amounts for the ~~Company~~conversion ~~has~~options, ~~recorded~~warrants and stock, to CAMOFI and CAMHZN were $~~907~~2,~~356~~089,443 and $~~609~~350,~~496~~090, respectively. The debt discounts as of December 31, in2009 ~~accrued~~related ~~interest~~to onthe amounts borrowed prior to 2009 from CAMOFI and CAMHZN were $753,619 and $127,128, respectively. The debt discounts as of September 30, 2010 related to the amounts ~~Notes~~borrowed prior to 2009 from CAMOFI and CAMHZN were $0 and $0, respectively.

~~During~~F-16 the three and six months ended June 30, 2010, the Company amortized debt discounts of approximately $964,000 and $1,673,000, respectively, to interest expense related to the Notes. During the three and six months ended June 30, 2009, the Company amortized debt discounts of approximately $751,000 and $776,000, respectively, to interest expense related to the Notes.

6. LOANTable ANDof NOTES PAYABLEContents

~~On November~~In 12addition, ~~2009,~~ the ~~Company~~conversion ~~entered~~option ~~into~~of anthe ~~agreement~~Notes ~~with~~and ~~Micro~~the ~~Pipe~~warrants ~~Fund~~issued I,to CAMOFI and CAMHZN ~~LLC~~contained ~~for~~an ~~the~~anti-dilution ~~receipt~~feature, ofwhich acaused ~~Secured~~these ~~Loan~~instruments ofto ~~$150,000~~be ~~(the~~accounted ~~“Micro~~for ~~Pipe~~as derivative ~~Loan”)~~liabilities. The ~~loan~~derivative ~~accrued~~liabilities ~~interest~~were accounted for at atheir ~~rate~~fair ofvalues 2%on ~~per~~a quarterly ~~month~~basis and ~~matured~~the onresulting ~~January~~changes ~~5, 2010. On~~in the ~~maturity~~fair ~~date,~~value ~~all~~were ~~principal~~recorded ~~and~~as ~~interest~~a ~~was~~gain ~~due~~or loss in ~~addition~~the tocondensed aconsolidated ~~payment~~statements ~~equal to 10%~~ of ~~the principal balance~~operations. ~~The~~ ~~loan~~As ~~was~~discussed ~~not repaid~~in atNote ~~maturity~~1, isCAMOFI ~~currently in default~~ and ~~is now due on demand. The~~CAMHZN ~~loan~~cancelled isthe ~~secured~~anti-dilution byprovisions aof ~~secondary~~the ~~interest~~conversion inoption ~~all~~ of the ~~assets~~Notes ofand the warrants ~~Company~~effective December 31, 2009.

In2009 ~~connection with the Micro Pipe Loan, the Company granted 500,000 immediately vested five year warrants with a term of five years and an exercise price of $0.20 (“Micro Pipe Warrants”).~~

~~The~~During ~~Micro Pipe~~2009, ~~Warrants~~the ~~had~~Company anborrowed ~~exercise~~$1,199,600 ~~feature~~from ~~that~~CAMOFI ~~was~~and ~~the~~$298,400 ~~same~~from asCAMHZN under the ~~anti-dilution~~Notes, ~~provision~~which mature in July 2011, as amended. The debt discounts, which includes amounts for the conversion options, as of December 31, 2009 related to the 2009 borrowings from CAMOFI ~~Warrants~~and ~~(See~~CAMHZN were ~~Note~~$375,535 5)and $93,882, respectively. ~~Consequently~~The debt discounts as of September 30, ~~the~~2010 ~~warrants~~related ~~were~~to ~~also~~the ~~treated~~2009 asborrowings afrom ~~derivative~~CAMOFI ~~liability~~and CAMHZN were $0. In ~~May~~connection ~~2010,~~with asextending ~~part~~the maturity date of the ~~settlement agreement~~Notes in August 2009, the Company issued 800,000 and 200,000 warrants ~~were~~to ~~cancelled~~CAMOFI and CAMHZN, respectively. The fair value of the warrants on the date of issuance was $80,000 and was recorded as interest expense.

~~The Company~~In ~~recorded at issuance a $108~~addition,~~101~~ ~~derivative liability for~~ the ~~Micro~~conversion ~~Pipe warrants. As~~option ~~discussed~~of ~~in Note 1,~~ the ~~anti-dilution~~Notes ~~provision~~and of the warrants ~~was~~issued ~~cancelled~~to ~~effective~~CAMOFI ~~January~~and ~~31,~~CAMHZN ~~2010. As a result of the~~during ~~cancellation~~2009 ofcontained ~~the~~an anti-dilution ~~provision~~feature, ~~the~~which ~~fair~~caused ~~value~~these ofinstruments ~~the~~to ~~warrant~~be ~~on such~~accounted ~~date~~for ~~($59,631) was reclassified from~~ as derivative ~~liability to additional paid-in capital~~liabilities. As ofThe ~~March~~derivative ~~31,~~liabilities ~~2010~~were ~~and~~accounted ~~December~~for ~~31,~~at ~~2009,~~their ~~the~~ fair ~~value~~ ofvalues ~~the~~on ~~warrant~~a quarterly ~~derivative~~basis ~~was determined to be $0~~ and ~~$48,378, respectively. For~~ the ~~six~~resulting ~~months~~changes ~~ended~~in ~~June~~the ~~30,~~fair ~~2010,~~value ~~the~~were ~~Company~~ recorded a ~~change~~as ina ~~fair~~gain ~~value~~or ofloss in the condensed ~~warrant~~consolidated ~~derivative~~statements ~~liability~~of ~~that~~operations. ~~resulted~~As discussed in ~~a loss~~Note ~~of $11~~1,~~253,~~ ~~which~~CAMOFI isand ~~included~~CAMHZN cancelled inthe ~~gain~~anti-dilution orprovisions ~~loss~~of onthe ~~valuation~~conversion option of ~~derivative liabilities in~~ the ~~accompanying~~Notes ~~condensed~~and ~~consolidated~~the ~~statements of~~warrants ~~operations~~effective December 31, 2009.

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

InDuring ~~March~~ the first nine months of 2010, the Company ~~issued~~borrowed 71$700,~~429~~000 ~~shares~~from ofCAMOFI ~~restricted~~and ~~common~~$175,000 ~~stock~~from CAMHZN inunder ~~lieu~~the ofNotes and recorded debt discounts related to the conversion options and warrants ~~penalties~~issued onfor ~~its~~$500,000 ~~loan~~and ~~payable~~$125,000 respectively. The ~~common~~Company ~~stock~~received ~~was~~proceeds ~~recorded~~of at$600,000, ~~the~~net ~~estimated~~of ~~fair~~amounts ~~value~~paid ofdirectly ~~the~~to ~~common~~a ~~stock~~lender onand ~~the~~to ~~date~~vendors ofby the ~~transaction~~note holder. ~~Approximately~~The Notes are due in July ~~$12~~2011,~~000~~ ~~was~~as ~~expensed~~amended, toand bear interest at ~~the~~15% ~~time~~per ofannum. ~~issuance~~The ~~and~~debt isdiscounts ~~included~~as inof ~~the~~September 30, 2010 ~~accompanying~~related ~~condensed~~to ~~consolidated~~these ~~statements~~borrowings offrom ~~operations~~CAMOFI and CAMHZN were $0.

AsOn ~~of June 30~~July 28, 2010, ~~and~~the ~~December~~Company ~~31,~~issued ~~2009~~a $250,000 ~~the~~convertible ~~Company~~note ~~had~~to ~~recorded~~Hutton ~~$23~~International,~~566~~ ~~and $5~~SPE,~~566~~ LLC, due ~~respectively~~on July 31, in2011 ~~accrued~~and bearing an interest onrate of 15%. This was half of the ~~Micro~~$500,000 ~~Pipe~~15% convertible ~~Loan~~note offering, of which CAMOFI bought $200,000 of the convertible notes and CAMZHN bought $50,000 of the convertible notes.

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

~~Certain~~F-17 ~~notes payable are in default and are classified as current on the accompanying condensed consolidated balance sheets.~~

AtTable June 30, 2010, the Company’s notes payable consisted of a note in the amount of $27,095 from GE Money Bank, secured with equipment, entered into in July 2007, bearing interest at 17.9% per annum, payable in monthly principal and interest installments of $1,156, maturing in June 2012, includes accrued interest of $5,807. The Company is in default on the note and the balance is due on demand.Contents

18The last monthly contractual payment on the CAMOFI note was made in October 2008 and no payments have been made on the CAMHZN Note which were scheduled to begin on September 1, 2008. As a result, these are events of default under the terms of the agreement. Under the terms of the agreement, if any event of default occurs, the full principal amount of the note, together with interest and other amounts owing in respect thereof, to the date of acceleration shall become, at the note holder’s election, immediately due and payable in cash. The note holders have yet to elect to exercise the default provisions. As of September 30, 2010 and December 31, 2009, the principal balances and the debt discounts are presented in the Convertible Notes Table, below.

7. EQUITY TRANSACTIONS


			(Unaudited)
			September 30, 2010				December 31, 2009
CONV NOTES	HUTTON		CAMOFI		CAMHZN		CAMOFI			CAMHZN
Principal	$	250,000	$	4,713,401	$	1,218,280	$	4,033,881		$	1,048,400
Discount — warrants								(38,814	)		(16,160	)
Discount — conversion options								(1,068,542	)		(204,850	)
Discount — stock issued with notes								(21,798	)		—

Notes presented net of debt discounts	$	250,000	$	4,713,401	$	1,218,280	$	2,904,727		$	827,390

~~Common Stock~~As of September 30, ~~Warrants~~2010 and ~~Options~~December 31, 2009, the Company has recorded $1,081,188 and $609,496, respectively, in accrued interest on the Notes.

~~Issuance~~During the three and nine months ended September 30, 2010, the Company amortized debt discounts of approximately $313,814 and $1,980,121, respectively, to interest expense related to the Notes. During the three and nine months ended September 30, 2009, the Company amortized debt discounts of approximately ~~Common~~$388,000 ~~Stock~~and $1,901,039, respectively, to interest expense related to the Notes.

~~In January~~On July 27, 2010, the Company ~~issued~~also ~~150,000~~entered ~~shares~~into ofan ~~restricted~~agreement ~~common~~with ~~stock~~CAMOFI toand ~~a consultant~~CAMHZN into ~~consideration for investor relation services rendered valued at~~extend ~~$21,000. The consulting fees were expensed entirely at~~ the ~~time~~term of ~~issuance~~their ~~and are~~existing ~~included~~notes into ~~consulting~~July 31, ~~and other compensation in the accompanying condensed consolidated statements of operations~~2011.

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

~~In January~~On ~~2010~~November 12, 2009, the Company ~~issued~~entered ~~640,000~~into ~~shares~~an ofagreement ~~common~~with ~~stock~~Micro toPipe ~~CAMOFI~~Fund ~~and CAMHZN~~I, LLC for ~~conversion~~the receipt of a Secured Loan of $20150,~~480~~000 (the “Micro Pipe Loan”). The loan accrued interest at a rate of 2% per month and $matured on January 5,~~120~~ 2010. In connection with the Micro Pipe Loan, ~~respectively~~the Company granted 500,000 immediately vested five year warrants with a term of ~~principal~~five onyears and an ~~Convertible~~exercise ~~Notes~~price of $0.20 (~~See~~“Micro ~~Note~~Pipe 5Warrants”), which were cancelled effective January 31, 2010.

~~In January~~Before ~~2010~~being cancelled, the ~~Company~~Micro ~~issued~~Pipe ~~250,000~~Warrants ~~shares~~had ofan ~~restricted~~exercise ~~common~~feature ~~stock~~that towas the same as the ~~Company’s~~anti-dilution ~~landlord~~provision in ~~lieu~~the ofCAMOFI ~~penalties~~Warrants ~~for~~(See ~~late~~Note ~~payments~~5). ~~due~~Consequently, the warrants were also treated as a derivative liability. The ~~common~~Company recorded at issuance a $108,101 derivative ~~stock~~liability for the Micro Pipe warrants. As discussed in Note 1, the anti-dilution provision of the warrants was ~~recorded~~cancelled ateffective January 31, 2010. As a result of the ~~estimated~~cancellation of the anti-dilution provision, the fair value of the ~~common~~warrant ~~stock~~ on ~~the~~such date ($59,631) was reclassified from derivative liability to additional paid-in capital. As of September 30, 2010 and December 31, 2009, the ~~transaction.~~fair ~~Approximately~~value of the warrant derivative was determined to be $450 and $48,~~000~~378, ~~was~~respectively. For ~~expensed~~the ~~entirely~~nine atmonths ended September 30, 2010, the ~~time~~Company recorded a change in fair value of the ~~issuance~~warrant ~~and~~derivative liability that resulted in a loss of $11,253, which is included in ~~selling,~~gain ~~general~~or ~~and~~loss on ~~administrative~~valuation ~~expenses~~of derivative liabilities in the accompanying condensed consolidated statements of operations.

~~In February~~The ~~2010,~~initial ~~the~~Micro ~~Company~~Pipe ~~issued~~Warrants ~~100,000~~derivative ~~shares~~liability of ~~restricted~~$108,101 ~~common~~represented ~~stock~~a ~~to one~~discount of from the ~~Company’s~~face ~~capital~~amount ~~lease lenders in lieu~~ of ~~penalties~~the ~~for~~note ~~late payments due~~payable. ~~The~~ ~~common~~Such ~~stock~~discount was ~~recorded~~amortized atto ~~the~~interest ~~estimated~~expense ~~fair~~over ~~value~~the ofterm of the ~~common~~note. ~~stock~~During on the ~~date~~nine ofmonths ended ~~the~~September 30, ~~transaction. Approximately $19~~2010,~~000~~ ~~was expensed~~the ~~entirely~~Company atamortized the ~~time~~balance of ~~issuance~~$10,003 ~~and~~to ~~is included in~~ interest expense in ~~the~~ the accompanying condensed consolidated statements of operations.

In ~~February~~ March 2010, the Company issued ~~100~~71,~~000~~429 shares of restricted common stock toin ~~a consultant~~lieu inof ~~consideration~~penalties ~~for~~on its ~~investor~~loan ~~relation~~payable. ~~services~~The ~~rendered~~common ~~valued~~stock was recorded at the estimated fair value of the common stock on ~~$15,000.~~the ~~The~~date ~~consulting~~of ~~fees~~the ~~were~~transaction. Approximately $12,000 was expensed ~~entirely~~to interest at the time of issuance ~~and~~ ~~are included in consulting~~ and ~~other~~is ~~compensation~~included in the accompanying condensed consolidated statements of operations.

In ~~March~~ May 2010, the Company repaid the Micro Pipe loan with proceeds from the Convertible Notes issued to 71CAMOFI and to CAMZHN. In addition,~~429~~ the Company issued 250,000 shares of ~~restricted~~its common stock, valued inat ~~lieu~~$45,000 ~~of penalties~~(based on ~~its~~the ~~loan~~closing ~~payable~~market ~~(See~~price ~~Note~~on 6the effective date) in settlement of accrued interest and cancellation of warrants.

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

19Table of Contents

~~In June 2007, the Company entered into a three year contract with a third party for Internet public investor relations services valued at $210,000~~7. ~~The~~EQUITY ~~fee was paid~~TRANSACTIONS in the form of 300,000 shares of the Company’s common stock and valued based on the stock market price of the shares at the contract date. The value of the common stock on the date of the transaction was recorded as a deferred charge and during the three months and six months ended June 30, 2010, $11,669 and $29,169, respectively, was amortized to consulting and other compensation in the accompanying condensed consolidated statements of operations. During the three and six months ended June 30, 2009, $18,000 and $35,000 was amortized to consulting and other compensation in the accompanying condensed consolidated statements of operations. At June 30, 2010 and December 31, 2009, the remaining deferred consulting fees totaled $0 and $29,169, respectively.

~~STOCK~~Common Stock, Preferred Stock, Warrants and Options ~~OPTIONS~~

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

AtIn ~~June 30~~January 2010, ~~2010~~the ~~and~~Company ~~December~~issued 31150,000 ~~2009,~~shares ~~the~~of ~~Company~~restricted ~~had~~common ~~2,900,000~~stock to a consultant in ~~and 1~~consideration for investor relation services rendered valued at $21,~~700,~~000. ~~options~~The ,consulting ~~respectively,~~fees ~~available~~were expensed ~~for~~entirely ~~future~~at the time of issuance ~~under~~ ~~their~~and ~~ISOP~~are ~~equity~~included in consulting and other compensation ~~plan~~in the accompanying condensed consolidated statements of operations.

~~Under~~In ~~the terms~~January 2010, of the Company's ~~non-statutory~~issued ~~stock option plan ("NSSO")~~250, ~~options to purchase an aggregate of 1,350,~~000 shares of restricted common stock ~~may~~to bea ~~issued~~consultant toin ~~non-employees~~consideration for financial consulting services rendered. ~~These~~valued ~~options~~at ~~are~~$35,000. ~~non-assignable~~The ~~and~~consulting fees ~~non-transferable,~~were ~~are~~expensed ~~exercisable~~entirely ~~over~~at athe ~~five-year~~time ~~period~~of ~~from~~issuance ~~the~~and ~~date~~are ~~of grant,~~included in consulting and ~~vest~~other compensation onin the ~~date~~accompanying condensed consolidated statements of ~~grant~~operations.

AsIn ~~of June 30~~January 2010, ~~2010~~the ~~and~~Company ~~December~~issued 31640,000 ~~2009,~~shares ~~the~~of ~~Company~~common ~~had~~stock ~~650,000~~to ~~options~~CAMOFI ~~available~~ and CAMHZN for conversion ~~future~~of ~~issuance~~$20,480 ~~under~~and ~~their~~$5,120, ~~non-statutory~~respectively, ~~stock~~of ~~option~~principal ~~plans~~on Convertible Notes (See Note 5).

~~There were~~In noJanuary 2010, ~~options~~the ~~granted,~~Company ~~and~~issued 1250,~~200,~~000 ~~options~~shares ~~exercised~~of orrestricted ~~forfeited~~common ~~during~~stock to the Company’s ~~six~~landlord ~~months~~in ~~ended~~lieu ~~June~~of ~~30,~~penalties ~~2010~~for late payments due. ~~There~~The ~~were~~common nostock ~~options~~was ~~granted~~recorded at the estimated fair value of the common stock on the date of the transaction. Approximately $45,000 ~~exercised~~was orexpensed ~~cancelled~~entirely ~~during~~at the ~~six~~time ~~months~~of ~~ended~~issuance ~~June~~and 30is included in selling, ~~2009~~general and administrative expenses in the accompanying condensed consolidated statements of operations.

~~WARRANTS~~In February 2010, the Company issued 100,000 shares of restricted common stock to one of the Company’s capital lease lenders in lieu of penalties for late payments due. The common stock was recorded at the estimated fair value of the common stock on the date of the transaction. Approximately $19,000 was expensed entirely at the time of issuance and is included in interest expense in the accompanying condensed consolidated statements of operations. In February 2010, the Company issued 100,000 shares of restricted common stock to a consultant in consideration for investor relation services rendered valued at $15,000. The consulting fees were expensed entirely at the time of issuance and are included in consulting and other compensation in the accompanying condensed consolidated statements of operations.

~~From~~In ~~time to time~~March 2010, the Company ~~issues~~issued ~~warrants~~71,429 toshares ~~employees~~of ~~and~~restricted tocommon ~~third~~stock ~~parties~~in ~~pursuant to~~lieu ~~various~~of ~~agreements,~~penalties ~~which~~on its ~~are~~loan ~~not~~payable ~~approved~~(See byNote ~~the stockholders~~6).

On ~~January~~ 19April 5, 2010, inDavid ~~connection~~Duquette ~~with~~and aJosef ~~12-month~~Czikmantori, ~~strategic~~who ~~advisory~~were ~~consulting services~~then ~~agreement,~~ the ~~Company~~sole ~~issued~~members anof ~~immediately~~the ~~vested~~board of ~~warrant~~directors toof ~~purchase 3~~the Company,~~000,000~~ ~~shares~~submitted ofto the Company’s ~~common~~transfer ~~stock. The~~agent ~~warrant~~notice ~~is for a term~~ of ~~seven years, and has an~~ exercise ~~price~~ of ~~$0.000001 per share. The~~ ~~estimated~~options ~~fair~~to ~~value~~purchase ofshares ~~the warrants~~ of ~~$420,000~~common ~~was~~stock ~~capitalized~~on as a ~~deferred charge~~cashless onbasis. ~~the~~They ~~date~~were ofissued ~~grant~~an ~~and~~aggregate ~~will be amortized to operating expense ratably~~of ~~over~~736,000 ~~the~~shares ~~term~~ of the ~~consulting~~Company’s ~~agreement. During~~common ~~the~~stock ~~six~~at ~~months~~an ~~ended June~~exercise ~~30,~~price ~~2010,~~of ~~the Company amortized~~ $870,~~499~~ ~~which~~based ison ~~included~~the ~~in consulting and~~purported ~~other~~cashless ~~compensation~~exercise inof ~~the~~800,000 ~~accompanying condensed consolidated statements of operations~~options.

In ~~connection~~ ~~with the 2010 Notes~~February 2008, the Company ~~issued~~entered ~~CAMOFI~~into ~~and~~a ~~CAMHZN~~one ~~warrants~~year ~~to purchase~~contract with a ~~total~~third ofparty ~~976,000~~for corporate consulting and ~~244~~marketing services valued at $30,000. ~~shares,~~The ~~respectively~~fee was paid in the form of 150,000 shares of the Company’s common stock and valued based on the stock market price of the shares at the contract date. The ~~warrants~~value ~~were~~of ~~issued~~the common stock on ~~various~~the ~~dates,~~date ~~are~~of ~~immediately~~the ~~vested, have~~transaction awas ~~term~~recorded ofas ~~seven~~a ~~years~~deferred charge and anwas ~~exercise~~amortized ~~price~~to operating expense over the life of $0the agreement.~~000001. The~~ During the three months and nine months ended September 30, ~~relative~~2009, ~~fair~~consulting ~~values~~fees ofunder ~~the~~this ~~warrants~~contract ~~totaling~~of $~~132~~2,~~738~~500 and $5,000, respectively, were ~~recorded~~amortized asto consulting aand ~~debt~~other compensation in the accompanying condensed consolidated statements of ~~discount~~operations. ~~upon~~As ~~issuance~~of ~~(see~~September 30, ~~Note~~2009 5)the balance of deferred consulting fees was fully amortized.

~~In April~~F-19 and May of 2010, the Company issued CAMOFI and CAMHZN warrants to purchase a total of 275,000 and 260,000 shares, respectively, of the Company’s common stock. The warrants were issued on various dates, are immediately vested, have a term of seven years and an exercise price of $0.000001. The relative fair values of the warrants totaling $17,600 were recorded as a debt discount upon issuance (see Note 5).

20Table of Contents

In June 2007, the Company entered into a three-year contract with a third party for Internet public investor relations services valued at $210,000. The fee was paid in the form of 300,000 shares of ~~following~~the ~~represents~~Company’s acommon ~~summary~~stock and valued based on the stock market price of ~~all~~the ~~warrant~~shares ~~activity~~at ~~for~~the contract date. The value of the ~~six~~common stock on the date of the transaction was recorded as a deferred charge and during the three months and nine months ended September 30, 2010, $11,669 and $29,169, ~~June~~respectively, was amortized to consulting and other compensation in the accompanying condensed consolidated statements of operations. During the three and nine months ended September 30, 2009condensed consolidated statements of operations. At September 30, 2010: and December 31, 2009, the remaining deferred consulting fees totaled $0 and $29,169, respectively.

	Outstanding Warrants
	Number of Shares		Weighted Average Exercise Price		Aggregate Intrinsic Value (1)
Outstanding at January 1, 2010		12,497,538	$	0.12	$	-
Grants (2)		4,754,515	$	0.000001	$	285,266
Exercise		-	$	-	$	-
Cancelled		(500,000)	$	0.20	$	-
Outstanding at June 30, 2010 (3)		16,752,053	$	0.09	$	357,765
Exercisable at June 30, 2010 (3)		13,752,053	$	0.09	$	357,765

On July 27, 2010, the Company issued 1,000,000 shares of restricted common stock to a consultant in consideration for management services rendered valued at $100,000. The consulting fees were expensed entirely at the time of issuance and are included in consulting and other compensation in the accompanying condensed consolidated statements of operations.

~~(1)~~In ~~Represents~~June 2010 the ~~approximate~~Company ~~added~~issued ~~value~~8,310,000 asshares ~~difference between the exercise price and the closing market price~~ of ~~the~~restricted ~~Company's~~ common stock, valued at ~~the end of the reporting period (as of June 30~~$1, ~~2010~~500,000 to ~~the~~settle ~~market~~a ~~price~~claim ofrelating to the ~~Company's~~Antonov ~~common~~joint ~~stock~~venture ~~was $0~~agreement.~~06).~~

~~(2)~~On ~~All~~September 15, 2010 CAMOFI exercised 1,199,989 and CAMHZN exercised 399,996 cashless warrants, totaling 1,599,985 of the ~~warrants~~Company ~~issued~~common ~~are~~stock ~~exercisable~~equaling ata ~~June~~value ~~30,~~of ~~2010~~$159,999.

~~(3)~~ISSUANCE ~~The~~OF ~~warrants~~PREFERRED outstanding and exercisable at June 30, 2010 have a weighted-average contractual remaining life of 4.36 years and 5.04 years, respectively. The 3,000,000 warrants not exercisable at June 30, 2010 were issued in connection with the acquisition of PAI in 2009. See Note 3 for a description of the vesting terms of the warrant.STOCK

On July 81, 2010 the Company issued 383,793 shares of Series E Preferred Stock, $1 par value, in exchange for a Strategic Cooperation Agreement with a large, multi-national aircraft manufacturer. The ~~RELATED~~Series E ~~PARTY~~Preferred Stock is convertible into 500 shares of the Company’s commons stock per ~~TRANSACTIONS~~share of Series E Preferred Stock. The Series E Preferred Stock includes a liquidation Preference of $3,838.

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

AtUnder ~~June 30,~~the ~~2010~~terms ~~and~~of ~~December~~the 31Company’s Incentive Stock Option Plan (“ISOP”), ~~2009~~options to purchase an aggregate of 5,000,000 ~~the~~shares ~~Company~~of ~~has~~common ~~loans~~stock ~~from~~may ~~various~~be issued to key employees, as defined. The ~~totaling~~exercise ~~$80,644~~price ~~and~~of ~~$39,106,~~any ~~respectively,~~option ~~which~~may ~~are~~not ~~included~~be inless ~~notes~~than ~~payable to~~the ~~related~~fair ~~parties~~market invalue of the ~~condensed~~shares ~~consolidated~~on ~~balance~~the ~~sheet~~date of grant. ~~The~~No ~~loans~~options ~~are non-interest~~granted ~~bearing~~may ~~and~~be ~~are~~exercisable ~~due~~more onthan ~~demand~~10 years after the date of grant.

~~In connection~~Under ~~with~~ the ~~acquisition~~terms of ~~PAI (see Note 3),~~ the Company’s ~~issued~~non-statutory ~~a promissory~~stock ~~note~~option toplan ~~Cabral in the amount of $500~~(“NSSO”),~~000.~~ ~~Interest~~options onto ~~the~~purchase ~~note~~an ~~accrues~~aggregate ~~at 5% per annum and all principal and interest is due only on and paid from the proceeds~~ of ~~any equity financing of the Company with gross proceeds of at $2~~1,~~000~~350,000 ~~provided~~shares ~~that~~of ~~the~~common ~~investors~~stock inmay ~~such~~be ~~financing~~issued ~~permit the proceeds thereof~~ to benon-employees ~~used~~ for ~~such~~services ~~purpose~~rendered. ~~During the three and six months~~ ~~ended~~These ~~June~~options ~~30,~~are ~~2010,~~non-assignable ~~$12,501~~ and ~~$18~~non-transferable,~~750~~ ofare ~~interest~~exercisable ~~expense~~over ~~was~~a ~~recorded~~five-year inperiod ~~the~~from ~~accompanying~~the ~~condensed~~date ~~consolidated statements~~ of ~~operations. At June 30~~grant, ~~2010~~ and ~~December~~vest ~~31,~~on ~~2009,~~ the ~~Company~~date ~~has~~of ~~accrued $18,750 and $6,250 in interest, respectively~~grant.

~~During the~~There ~~six~~were 10,000,000 options granted, 800,000 options exercised and 400,000 forfeited during the nine months ended ~~June~~ September 30, 2010,. ~~the~~There ~~Company~~were ~~advanced~~no ~~funds~~options togranted, ~~various~~exercised or cancelled during ~~employees. At~~the ~~June~~nine months ended September 30, ~~2010~~2009. The 10,000,000 options granted during the ~~Company~~nine ~~has~~months ended aSeptember 30, ~~loan~~2010 ~~receivable~~were ~~from employees~~outside ~~totaling~~the ~~$33,277~~Plan.

21WARRANTS

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

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

~~Periodically,~~F-20 the Company enters into various agreements for services including, but not limited to, public relations, financial consulting and manufacturing consulting. Generally, the agreements are ongoing until such time they are terminated, as defined. Compensation for services is paid either at a fixed monthly rate or based on a percentage, as specified, and may be payable in shares of the Company’s common stock. The Company's policy is that expenses related to these types of agreements are valued at the fair market value of the services or the shares granted, whichever is more realistically determinable. Such expenses are amortized over the period of service.

Capital LeaseTable of Contents

During the ~~three~~quarter ~~months~~ ended March 31, 2010, the Company ~~purchased~~issued ~~property~~CAMOFI and ~~equipment~~ ~~under~~CAMHZN awarrants ~~capital~~to ~~lease totaling $479,488. The terms of the~~purchase ~~lease~~a ~~are~~total ~~monthly principal payments~~ of ~~$25~~976,000 and ~~interest~~244,000 ~~payments~~shares, respectively, of 6%the ~~per annum~~Company’s oncommon ~~the~~stock. ~~remaining~~The ~~principal~~warrants were ~~balance~~issued ~~beginning~~ on ~~February~~various 5dates, ~~2010. The~~ ~~payments~~ are ~~due~~immediately ~~every~~vested, 30have ~~days~~a ~~for~~term ~~up to 120 days. At the end~~ of ~~the~~seven ~~120~~years ~~days,~~and ~~the~~an ~~Company is required to pay the~~exercise ~~total~~price ~~remaining~~of ~~balance~~$0.000001. ~~plus~~The ~~accrued~~relative ~~interest. The~~fair ~~Company~~values ~~was~~of ~~also required~~the towarrants ~~pay~~totaling $35132,~~000~~738 ~~upon~~were ~~signing~~recorded ~~the~~as ~~capital lease agreement. In~~a ~~addition,~~debt ~~the~~discount ~~Company~~upon ~~issued~~issuance ~~100,000 shares to the lender~~ (see Note 75) ~~to settle past penalties and interest~~.

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

~~From~~On ~~time to time~~September 15, ~~the~~2010 ~~Company~~CAMOFI ~~may~~exercised ~~be involved in various claims~~1, ~~lawsuits~~199,989 and ~~disputes with~~CAMHZN ~~third~~exercised ~~parties~~399,996 ~~actions~~cashless ~~involving~~warrants, totaling ~~allegations~~1,599,985 orof ~~discrimination~~the orCompany ~~breach~~common ~~of contract~~stock ~~actions~~, ~~incidental~~equaling toa ~~the~~value ~~normal operations~~ of ~~the business~~$159,999.

~~Delinquent Income~~The ~~Taxes~~following represents a summary of all warrant activity for the nine months ended September 30, 2010:

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


	Outstanding Warrants
				Weighted
				Average		Aggregate
	Number of			Exercise		Intrinsic
	Shares			Price		Value ⁽¹⁾
Outstanding at January 1, 2010		12,497,538		$	0.12	$	—
Grants ⁽²⁾		4,754,545		$	0.000001	$	—
Exercise		(1,600,000	)	$	—	$	—
Cancelled		(500,000	)	$	0.20	$	—

Outstanding at September 30, 2010 ⁽³⁾		15,152,083		$	0.09	$	539,663

Exercisable at September 30, 2010 ⁽³⁾		12,152,053		$	0.08	$	539,663

Delinquent Payroll Taxes


⁽¹⁾		Represents the approximate added value as difference between the exercise price and the closing market price of the Company’s common stock at the end of the reporting period (as of September 30, 2010, the market price of the Company’s common stock was $0.07).

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

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

At June 30, 2010 and December 31, 2009, the Company has accrued approximately $1,324,000 and $1,187,000, respectively, for payroll taxes not yet remitted for employee compensation and estimated penalties and interest in connection with payroll taxes incurred but not remitted related to executive compensation8. ~~The~~RELATED ~~Company has~~PARTY ~~included the accrued amounts in accounts payable and accrued liabilities in~~TRANSACTIONS ~~the accompanying condensed consolidated balance sheets and the related expense in salaries and related expenses in the accompanying condensed consolidated statements of operations.~~

~~Delinquent~~At September 30, 2010 and December 31, 2009, the Company has loans from various employees totaling ~~Sales~~$33,050 ~~Taxes~~and $39,106, respectively, which are included in notes payable to related parties in the condensed consolidated balance sheet. The loans are non-interest bearing and are due on demand.

AtIn ~~June 30,~~connection ~~2010~~with ~~and~~the ~~December~~acquisition ~~31,~~of ~~2009~~PAI (see Note 3), the Company ~~has~~issued ~~accrued~~a ~~approximately~~promissory ~~$132,000~~note to ~~and~~Cabral in the amount of $~~127~~500,000,. ~~respectively,~~Interest ~~for~~on ~~sales~~the ~~taxes~~note ~~not~~accrues ~~yet~~at ~~remitted~~5% per annum and ~~estimated penalties~~all principal and interest inis ~~connection~~due ~~with~~only ~~the~~on ~~sales~~and ~~tax~~paid ~~incurred~~from ~~but not yet remitted for~~ the ~~period~~proceeds ~~October~~of 1,any ~~2007~~equity tofinancing ~~December~~of ~~31,~~the ~~2008~~Company ~~and~~with gross ~~January~~proceeds 1,of ~~2008 to~~at ~~March 31~~$2,000,000 ~~2008. The~~provided ~~Company~~that ~~has included~~ the ~~accrued~~investors ~~amounts~~ in ~~accounts~~ ~~payable~~such ~~and~~financing ~~accrued~~permit ~~liabilities in~~ the ~~accompanying condensed~~proceeds ~~consolidated~~thereof ~~balance~~to ~~sheets~~be ~~and~~used ~~the~~for ~~related~~such ~~expense~~purpose. inDuring ~~selling,~~the ~~general~~three and ~~administrative~~ ~~expenses~~nine inmonths ~~the~~ended ~~accompanying~~September 30, ~~condensed~~2010, $6,301 ~~consolidated~~and ~~statements~~$18,801 of ~~operations. The~~ ~~Company~~interest ~~has~~expense ~~yet~~was torecorded ~~file~~in athe ~~return~~accompanying ~~for~~condensed ~~the following~~consolidated ~~quarterly~~statements ~~sales~~of ~~tax periods~~operations.

~~Tax~~9. COMMITMENTS AND CONTINGENCIES ~~Lien~~

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

22Periodically, the Company enters into various agreements for services including, but not limited to, public relations, financial consulting and manufacturing consulting. Generally, the agreements are ongoing until such time they are terminated, as defined. Compensation for services is paid either at a fixed monthly rate or based on a percentage, as specified, and may be payable in shares of the Company’s common stock. The Company’s policy is that expenses related to these types of agreements are valued at the fair market value of the services or the shares granted, whichever is more realistically determinable. Such expenses are amortized over the period of service.

~~Indemnities~~F-21 ~~and Guarantees~~

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

~~10. SEGMENT~~Capital ~~REPORTING~~Lease

~~The~~During the nine months ended September 30, 2010, the PAI purchased property and equipment under a ~~Company’s~~capital ~~operations~~lease totaling $479,488. The terms of the lease are ~~classified~~monthly ~~into~~principal ~~two~~payments of $25,000 and interest payments of 6% per annum on the remaining principal ~~reportable~~balance ~~segments~~beginning ~~that~~on February 5, ~~provide~~2010. ~~different~~The ~~products~~payments orare ~~services~~due every 30 days for up to 120 days. ~~Separate~~At ~~management~~the end of ~~each~~the ~~segment~~120 days, PAI is required ~~because~~to ~~each~~pay ~~business~~the ~~unit~~total isremaining ~~subject~~balance plus accrued interest. PAI was also required to ~~different~~pay $35,000 ~~marketing~~upon signing the capital lease agreement. In addition, ~~production~~ the Company issued 100,000 ~~and~~shares to ~~technology~~the ~~strategies~~lender (see Note 6) to settle past penalties and interest. ~~The~~During the three months ended September 30, 2010, the Company ~~operates~~renegotiated inthis obligation reducing the ~~following~~monthly ~~two~~obligation to ~~reportable~~$15,000 ~~segments:~~and extending the maturity beyond one year.

~~(a) CNC machine tool remanufacturing and~~Legal

~~(b)~~From ~~Multiaxis~~time ~~structural~~to ~~aircraft~~time, ~~components~~the Company may be involved in various claims, lawsuits, and disputes with third parties, actions involving allegations or discrimination or breach of contract actions incidental to the normal operations of the business.

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

~~The following~~At ~~table~~September 30, ~~summarizes~~2010 ~~segment~~and ~~asset~~December 31, 2009, PAI has accrued approximately $352,000 related to penalties and ~~operating~~interest ~~balances~~in byconnection ~~reportable~~with delinquent income taxes related to PAI’s Federal and ~~segment~~State income tax returns for the years ended December 31, 2007 and 2006. PAI has ~~been~~included ~~prepared~~the accrued amounts in ~~accordance~~accounts ~~with~~payable and accrued liabilities and the ~~internal~~related ~~accounting~~expense ~~policies~~in selling, general and ~~may~~administrative ~~not~~expense bein ~~presented~~the inaccompanying ~~accordance~~condensed ~~with~~consolidated ~~GAAP:~~statements of operations. The related returns were filed in April 2009.

	Three Months Ended/ As of June 30, 2010			Three Months Ended/ As of June 30, 2009			Six Months Ended/ As of June 30, 2010			Six Months Ended June 30, 2009
Net revenue from external customers:
CNC machine tool remanufacturing		317,758			1,359,630		$	477,805		$	2,414,332
Multiaxis structural aircraft components		376,557						774,200			-
Total net revenue from external customers:		694,315			1,359,630			1,252,005			2,414,332
Operating loss:
CNC machine tool remanufacturing		(517,012	)		(130,634	)		(1,318,270	)		(342,548	)
Multiaxis structural aircraft components		(138,179	)					(342,981	)		-
Total operating loss:		(655,191	)		(130,634	)		(1,661,251	)		(342,548	)
Depreciation and amortization from operations:
CNC machine tool remanufacturing		26,899			20,651			152,025			34,681
Multiaxis structural aircraft components		61,768						82,790			-
Total depreciation and amortization expense:		88,667			20,651			234,815			34,681
Interest expense:
CNC machine tool remanufacturing		1,190,518			(952,461	)		2,128,476			1,620,856
Multiaxis structural aircraft components		13,505						48,753			-
Total interest expense:		1,204,023			(952,461	)		2,177,229			1,620,856
Net loss:
CNC machine tool remanufacturing		(1,638,174	)		(858,020	)		(3,395,180	)		(3,533,626	)
Multiaxis structural aircraft components		(56,773	)					(94,200	)		-
Total loss from continuing operations:		(1,694,947	)		(858,020	)		(3,489,380	)		(3,533,626	)
Identifiable assets:
CNC machine tool remanufacturing		808,585			1,205,254			808,585			1,205,254
Multiaxis structural aircraft components		4,860,505						4,860,505
Total identifiable assets:		5,669,090			1,205,254			5,669,090			1,205,254

Delinquent Payroll Taxes

23At September 30, 2010 and December 31, 2009, PAI has accrued approximately $1,257,000 and $1,187,000, respectively, for payroll taxes incurred but not yet remitted for employee compensation and estimated penalties and interest. PAI has included the accrued amounts in accounts payable and accrued liabilities in the accompanying condensed consolidated balance sheets and the related expense in salaries and related expenses in the accompanying condensed consolidated statements of operations.

~~11. SUBSEQUENT~~Tax ~~EVENTS~~Lien

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

On ~~July 1~~May 19, 2010, PAI received notice from the ~~Company~~California ~~entered~~Employment ~~into~~Development Department of a state ~~Strategic~~tax ~~Cooperation~~lien ~~Agreement~~filing ~~with~~for ~~Antonov Company~~amounts totaling $43,177. aThe ~~state-~~lien attaches to all property owned ~~Ukraine~~by ~~company,~~PAI and ~~providing~~any ~~for:~~property acquired in the future by PAI.

·Indemnities ~~Participation~~and ~~in the KC-X Tanker Modernization Program for the U.S. Air Force~~Guarantees

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

~~· Sale of Antonov aircraft, products and services in the United States~~F-22

UnderTable the terms of the agreement, Antonov will be responsible for design, construction and manufacture of aircraft. The Company will be responsible for coordinating the bidding process, negotiating and contracting with customers, and coordinating with defense sub-contractors for specialized systems.Contents

~~Plan of~~Employment ~~Merger~~Agreements

On ~~July 1~~September 30, 2010, the Company and its Chief Executive Officer, Mr. Worsham, entered into an employment ~~Agreement~~agreement ~~and~~for ~~Plan~~an initial term of ~~Merger,~~one ~~pursuant~~year subject to ~~which~~ itmutually ~~has~~ agreed toextensions, ~~issue~~at toan annual ~~American~~salary ~~Defense~~of ~~Invesments~~$100,000, ~~LLC~~plus ~~and~~cash ~~TUSA~~performance bonuses upon achieving increased sales, revenues, ~~Acquisition~~or ~~Corporation~~earnings, anentering ~~aggregate~~into ofsales ~~383~~or strategic cooperation agreements,~~793~~ ~~shares~~or ofother ~~Series~~improvements Ein ~~Convertible~~the ~~Preferred~~business ~~Stock,~~or ~~each~~financial ofperformance. ~~which~~He isreceived ~~convertible~~options ~~into~~to ~~500~~purchase 2,000,000 shares of our common stock, ~~and~~half ~~votes~~vesting ~~together~~over ~~with~~two ~~the~~years ~~common~~and ~~stock~~half asvesting aupon ~~single~~achieving ~~class~~milestones onand anperformance ~~as-converted~~targets. ~~basis,~~All tooptions ~~acquire~~vest ~~their~~upon ~~company~~death, ~~and~~disability ~~its~~or ~~relationships~~termination ~~with~~without ~~Antonov and~~cause. ~~associated goodwill~~Mr. ~~Additionally,~~ Worsham ~~the preferred stock has~~also ~~non-dilution protection~~agreed ~~for~~to ~~subsequent~~our ~~issuances~~Code of ~~common~~Ethics ~~stock,~~and ~~including any conversation~~standard ofIndemnification ~~currently outstanding~~Agreement ~~warrants~~for ~~and convertible debt~~directors.

~~On July 9, 2010, we submitted a response to the Request for Proposal from the U~~10.S. ~~Air Force~~SEGMENT ~~for the KC-X Tanker Modernization Program. If our bid is successful, the~~REPORTING ~~aircraft components will be built by Antonov Company in Ukraine, with final assembly by us in the United States.~~

~~Convertible~~ At September 30, 2010, as a result of the discontinued operations of NCR (see Note ~~Issuance~~2) the Company only operated in one business segment, multiaxis structural aircraft components.

~~Effective July 27, 2010, the Company obtained an aggregate of $500,000~~11.00 inSUBSEQUENT ~~financing~~EVENTS from Hutton International SPE, LLC and our current lenders, CAMOFI Master LDC and CAMHZN Master LDC, pursuant to 15% Senior Secured Convertible Notes due July 31, 2011. The notes are convertible into shares of common stock at $0.13 per share, the closing sale price on July 27, 2010.

24Issuance of Common Stock

~~Extension of~~On October 6, 2010 the ~~Maturity~~Company issued as consulting fees, 400,000 shares of ~~Existing~~restricted ~~Convertible~~company common ~~Notes~~stock.

OnKC-X ~~July 27,~~Tanker ~~2010, the Company also entered into an agreement with CAMOFI and CAMHZN to~~Bid ~~extend the term of their existing notes to July 31, 2011.~~

~~ITEM~~On July 6, 2010, we entered into a Strategic Cooperation Agreement with Antonov to bid on the 2request for proposal from the U. ~~MANAGEMENT'~~S. ~~DISCUSSION~~Air ~~AND~~Force ~~ANALYSIS~~for OFthe ~~FINANCIAL~~KC-X ~~CONDITION~~Tanker ~~AND~~Modernization Program. The U.S. ~~RESULTS~~Air OFForce ~~OPERATIONS~~denied our request for an extension of the bidding deadline on July 8, 2010, and as a result, we bid only one model of aircraft, the AN-112KC. We then submitted a response to the Request for Proposal from the U.S. Air Force for the KC-X Tanker Modernization Program which was deemed untimely by the U.S. Air Force and we therefore appealed the decision to the Government Accountability Office (GAO). On October 6 2010 the GAO has denied Company’s bid protest in connection with the KC-X Tanker Modernization Project. After comprehensive discussions of the Government Accountability Office’s decision, including the advice of counsel, the new management of the Company has determined that it will not continue to pursue its bid to supply the U.S. Air Force with its next generation of aerial refueling tankers.

~~The following discussion should be read in conjunction with the Company's consolidated financial statements and the notes thereto appearing elsewhere in this Form 10~~F-~~Q. Certain statements contained herein that are not related to~~23 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.

OVERVIEWTable of Contents

~~U.S. Aerospace~~ITEM ~~is engaged in the production of aircraft assemblies, structural components, and highly engineered, precision machined details on projects for the U~~2. MANAGEMENT’S. ~~Department~~DISCUSSION ofAND ~~Defense,~~ANALYSIS ~~United~~OF ~~States~~FINANCIAL ~~Air~~CONDITION ~~Force,~~AND ~~Lockheed~~RESULTS ~~Martin Corporation,~~OF The Boeing Company, L-3 Communications Holdings, Inc., the Middle River Aircraft Systems subsidiary of General Electric Company, and other aircraft manufacturers, aerospace companies, and defense contractors. The Company supplies structural aircraft parts for military aircraft such as the P-3 Orion, and wide-body commercial airliners such as the Boeing747.OPERATIONS

The following discussion should be read in conjunction with the Company’s isconsolidated anfinancial statements ~~emerging~~and ~~world~~the ~~class~~notes ~~supplier~~thereto ofappearing ~~complex~~elsewhere ~~structural~~in ~~airframe~~this Report. Certain statements contained ~~machined~~herein ~~components~~that ~~and~~are ~~assemblies~~not ~~for~~related ~~commercial~~to ~~and~~historical ~~military~~results, ~~aircraft~~including, ~~builders~~without limitation, statements inregarding the ~~United~~Company’s ~~States~~business strategy and ~~around~~objectives, ~~the~~future ~~world. PAI~~financial ~~specializes~~position, inexpectations ~~engineering~~about pending litigation and estimated cost savings, are forward-looking statements within the meaning of Section 27A of the Securities Act and ~~manufacturing~~Section 21E of ~~precision~~the ~~computerized~~Securities ~~numerical~~Exchange ~~control~~Act of 1934, as amended (the “~~CNC~~Securities Exchange Act”) ~~machined~~and ~~multiaxis~~involve ~~structural~~risks ~~aircraft~~and ~~components,~~uncertainties. ~~with~~Although ~~tolerances~~the Company ofbelieves upthat 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.~~0001”~~ onFactors that ~~ferrous~~could cause or contribute to such differences include, but are not limited to, regulatory policies, and ~~non~~market and general policies, competition from other similar businesses, and market and general economic factors. All forward-~~ferrous~~looking ~~metals~~statements contained in this Report are qualified in their entirety by this statement.

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

~~The Company~~U.S. ~~continues to incur operating losses for each of the periods ended June 30~~Aerospace, ~~2010 and 2009~~Inc. ~~This~~is ~~was~~engaged ~~a result of a dramatic decrease~~ in ~~sales.~~the ~~The Company's~~production ~~current~~of ~~strategy~~aircraft isassemblies, tostructural ~~focus solely on aerospace and defense~~components, to ~~increase orders through current customers~~ and ~~sales~~highly ~~methods~~engineered, ~~and~~precision tomachined ~~partner~~details ~~with leading~~on ~~aerospace~~projects ~~and~~for ~~defense~~major ~~manufacturers~~aircraft ~~throughout the world to jointly bid~~manufacturers, ~~and~~aerospace ~~supply aircraft~~companies, ~~parts~~ and ~~components to major~~ defense contractors ~~and the U~~.S. ~~military.~~The ~~However,~~Company ~~significant~~supplies ~~growth~~structural ~~will~~aircraft ~~require~~parts ~~additional~~for military ~~funds~~aircraft insuch as the ~~form~~ ofP-3 ~~debt or equity~~Orion, orand awide-body ~~combination~~commercial ~~thereof.~~airliners ~~The~~such ~~Company's~~as ~~growth strategy also includes strategic mergers in addition to growing~~ the ~~current~~Boeing ~~business~~747. A ~~significant acquisition will require additional financing.~~

252

RESULTSTable OFof OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 COMPARED TO MARCH 31, 2009.Contents

~~Net Revenues. The~~We ~~Company~~are ~~generated~~an ~~net~~emerging ~~revenues~~world ofclass ~~$694,315 and $1,252,005for~~supplier ~~the~~of ~~three~~complex ~~and~~structural ~~six~~airframe ~~months~~machined ~~ended~~components ~~June~~and assemblies ~~30,~~for ~~2010~~commercial ~~versus $1,359,630~~ and ~~$2,414,332~~military ~~for~~aircraft ~~the~~builders ~~same~~in ~~periods~~the ofUnited ~~2009~~States ,and ~~which~~around ~~was~~the ~~a $665,315 or~~world. ~~49%~~We ~~decrease~~specialize in ~~the~~engineering, ~~three months~~ and amanufacturing ~~$1,162,327~~of orprecision ~~48%~~computerized innumerical ~~the six~~control ~~months. The~~(“CNC”) ~~decrease~~machined ismultiaxis ~~the~~structural ~~result~~aircraft ofcomponents, ~~lower~~with ~~sales~~tolerances ~~due~~of up to ~~the~~+/-.0001” on ~~recession~~ferrous and anon-ferrous ~~tighter credit market~~metals.

~~Gross~~Our ~~(Loss) Profit. Gross~~capabilities ~~(loss)~~include ~~profit~~high ~~for~~speed ~~the~~ three, four and ~~six months ended~~ ~~June~~five ~~30,~~axis ~~2010, was~~precision ~~$101,451~~CNC ~~and~~machining ~~$(33~~of titanium,~~507)versus~~ aaluminum, ~~gross~~stainless ~~profit of $165~~steel,~~900~~ and ~~$401,709~~nickel-chromium-based ~~for~~superalloys. ~~the~~Our ~~three~~aircraft ~~and~~component ~~six~~products include ~~months~~wing ~~ended~~ribs, ~~June 30~~stringers, ~~2009.This~~spars, islongerons, abulkheads, ~~decline~~frames, ofengine ~~$64~~mounts,~~449~~ ~~or 39% and $435~~chords,~~216~~ ~~over the comparable~~and ~~periods~~fittings. ~~The~~In ~~decrease in gross profit is due to certain continuing fixed overhead expenses necessary to maintain the level of operations~~addition, ~~which~~we ~~is not~~design ~~recovered~~and ~~because~~fabricate oftools ~~the lower~~and ~~revenues~~fixtures.

~~Operating Loss. Operating~~The ~~loss~~Company ~~for~~continues ~~the~~to ~~three~~incur ~~and~~operating ~~six~~losses ~~months~~for each of the periods ended ~~June~~ September 30, 2010, and 2009. This was ~~$655~~a result of a dramatic decrease in sales for the remanufacturing business. The Company’s current strategy is to focus solely on aerospace and defense,~~191~~ to increase orders through current customers and $1sales methods,~~661,251~~ ~~compared~~and to ~~$130,634~~partner with leading aerospace and ~~$342,548~~defense manufacturers ~~for~~throughout the ~~three~~ world to jointly bid and ~~six~~supply ~~months~~aircraft ~~ended~~parts ~~June~~and ~~30,~~components ~~2009.~~to ~~The~~major defense ~~increase~~contractors inand ~~loss~~the U.S. military. As part of ~~$524~~this strategy,~~557~~ ~~and $1~~effective August 27,~~318,703,~~ ~~respectively~~2010, isthe Company ~~primarily~~discontinued ~~due~~the tooperations ~~an increase~~and insold its unprofitable remanufacturing subsidiary, New ~~operating~~Century ~~expenses~~Remanufacturing, ~~largely~~Inc. ~~due~~(“NCR”), to the ~~acquisition~~Company’s offormer ~~PAI~~directors, David Duquette and ~~secondarily~~Josef Czikmantori, tofor $1 and an indemnity from all of NCR’s liabilities. As such, the ~~decreased~~ ~~revenues~~Company ~~over~~is no longer in the ~~comparable~~machine ~~periods~~tool business, and is focused solely on aerospace and defense.

~~Interest Expense~~However, ~~and~~significant ~~Debt~~growth ~~Discount~~will ~~Amortization. Interest~~require ~~expense~~additional ~~for the~~funds ~~three~~in ~~and~~the ~~six~~form ~~months~~of ~~ended~~debt ~~June~~or 30equity, ~~2010,~~or ~~was $1,204,023 and $2,177,229 as~~a ~~compared~~combination ~~with~~thereof ~~$952,461~~which ~~and $1,620,856 for~~ the ~~three~~Company ~~months~~believes ~~ended~~is ~~June~~available ~~30,~~to ~~2009~~it. The ~~increase~~Company’s ofgrowth ~~26%~~strategy also ~~and~~includes ~~34%~~strategic ~~respectively,~~ mergers in ~~interest~~addition ~~expenses is due~~ to ~~additional~~growing ~~interest and discount amortization on ten new convertible notes for~~ the ~~six~~current ~~months~~business. ~~ended~~A ~~June 30, 2010 and eighteen convertible notes and one~~significant ~~note~~acquisition ~~payable~~will ~~issued~~require ~~after~~additional ~~the period ended June 30, 2009 (See Note 5and 6)~~financing.

~~Operating~~HIGHLIGHTS Expenses. The Company incurred total operating expenses of $756,642 and $1,627,744 for the three and six months ended June 30, 2010 versus $296,534 and $744,257 for the three and six months ended June 30, 2009, which was a $460,108 and a $883,487 increase, respectively. In the three and six months ended June 30, 2010, compared with the three and six months ended June 30, 2009, all the operating expenses increased as follow:

	Three Months Ended June 30, 2010 Increase %		Six Months Ended June 30, 2010 Increase %
Consulting and other compensation		235		227
Salaries and related		180		115
Selling, general and administrative		95		80

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

~~The increase~~• inReorganized ~~consulting~~the ~~and~~Company ~~other~~under ~~compensation~~a isnew ~~due~~board ~~primarily to amortization~~ of ~~3,000,000~~directors ~~warrants~~comprised ~~issued~~of toexperts ain ~~consultant and 5,000,000 options issued for marketing consulting during~~ the ~~six~~field ~~months~~of ~~ended June~~government 30contracting, ~~2010.~~financial, ~~All operating expenses increased due to additional costs related to the operations of Precision Aerostructures~~accounting, ~~Inc~~and ~~which was acquired in October 2009~~legal.

~~FINANCIAL CONDITION~~• Appointed Jim Worsham, ~~LIQUIDITY~~an aerospace veteran, ~~CAPITAL~~as ~~RESOURCES~~the Company’s Chief Executive

As• ~~of August~~Adopted ~~23,~~improved ~~2010,~~corporate wegovernance ~~had~~procedures ~~$311,458_~~to infurther ~~cash~~ensure ontimely ~~hand.~~and Weaccurate ~~have~~disclosure ~~reached~~to ~~payment arrangements~~stockholders ~~with~~and ~~many~~formed ofvarious ~~our~~committees ~~creditors~~such toas, ~~resolve~~Nominating ~~previously~~& ~~past~~Governance ~~due accounts.~~Committee, Audit Committee, and Compensation Committee

~~The~~• ~~net decrease in cash during the six months ended June 30, 2010 was $129,492.~~ The ~~cash~~ ~~used~~Board inof ~~operating~~Directors ~~activities~~adopted ~~was $424,218. This was due mainly to~~ a ~~net loss~~Code of $3Ethics,~~489,380~~ ~~offset~~applicable ~~by non-cash expenses of $1,672,548 related~~ to ~~amortization~~ ofall ~~debt~~Company ~~discount~~officers, ~~$306,326~~directors ~~in stock issued for services~~ and ~~$300,056~~ ~~of depreciation and amortization. Other operating activities that used cash were mainly an increase in accounts receivable of $63~~employees,~~741~~ ~~and~~including asenior ~~decrease~~financial in billings in excess of costs of $149,849. These were offset by an increase of accounts payable and accrued liabilities and interest of $773,574 and a decrease in prepaid expenses and other current liabilities of $101,043.officers

26• Decreased our cost of operations with the divesture our non-performing division NCR, and received full indemnity on all liabilities and eliminating all other outstanding NCR related issues

No• ~~cash was~~Retained ~~used~~the inassistance ~~investing~~of ~~activities~~outside independent financial advisors to identify and secure financial support for our business plan that focuses and defines what directions of growth should be targeted within the Aerospace & Defense industry, both domestically and internationally.

~~Cash provided~~• byModified ~~financing~~our ~~activities~~international ~~was~~relationships ~~$294,726 mainly from the issuance of convertible notes~~ with ~~net~~established ~~proceeds~~companies ofin ~~$570,000~~China ~~offset by principal payments on notes~~ and ~~capital leases of $326,624~~Ukraine.

~~The~~• ~~net decrease~~Labor incost ~~cash~~has ~~during~~been ~~the~~reduced ~~six~~by ~~months ended June 30, 2009 was $31,889~~20%.

~~For the~~• ~~six~~Company’s ~~months~~executives ~~ended~~are ~~June~~on ~~30,~~an ~~2009,~~aggressive ~~the~~marketing ~~cash~~campaign ~~provided~~with byexisting ~~financing~~and ~~activities was~~new ~~$745,592,~~component ~~compared~~manufacturing ~~with~~clients ~~$30,844~~to inexpand the ~~six~~core ~~months~~base ~~ended~~of ~~June 30, 2008. For~~ the ~~six~~Precision ~~months~~Aerostructures ~~ended June 30, 2009, $777,481 cash was used by operating activities~~division.

~~Going Concern~~• Company has identified and is exploring potential acquisitions of other component manufacturers in the aerospace industry who specialize in manufacturing aerospace components with a different client base that will diversify and expand the U.S. Aerospace customer base.

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. As of and the for the three and six months ended June 30, 2010, the Company has a net loss of approximately $3~~,489,000, an accumulated~~ deficit of approximately $30,341,000, and working capital deficit of approximately $11,649,000 and was in default on several notes payable (see Note 6) and had events of default on its CAMOFI and CAMHZN debt (see Note 5). These factors raise substantial doubt about the Company's ability to continue as a going concern. The Company intends to fund operations through anticipated increased sales which management believes may be insufficient to fund its capital expenditures, working capital and other cash requirements for the year ending December 31, 2010. Therefore, the Company will be required to seek additional funds to finance its long-term operations in the form of debt and equity financing which the Company believes is available to it. The successful outcome of future activities cannot be determined at this time and there is no assurance that if achieved, the Company will have sufficient funds to execute its intended business plan or generate positive operating results.

In responseTable toof these problems, management has taken the following actions:Contents

·RESULTS ~~continued~~OF ~~its~~OPERATIONS ~~aggressive~~FOR ~~program~~THE ~~for~~THREE ~~selling~~AND ~~its~~NINE ~~products;~~MONTHS ENDED SEPTEMBER 30, 2010 COMPARED TO SEPTEMBER 30, 2009.

·Net ~~continued~~Revenues. toWe ~~implement~~generated ~~plans~~net torevenues ~~further~~of ~~reduce~~$660,144 ~~operating~~and ~~costs;~~$1,434,344 for the three and nine months ended September 30, 2010 for PAI. The NCR business has been discontinued and sold as of August 27, 2010 and therefore is presented as a discontinued operation (see Note 2). PAI was acquired as of October 9, 2009 (see Note 3), and therefore there is no comparable revenue for the three and nine months ended September 30, 2009.

·Gross (Loss) Profit. Gross (loss) profit for the three and nine months ended September 30, 2010, was $334,777 and $564,822 for PAI. PAI was acquired as of October 9, 2009 (see Note 3), and therefore there is ~~seeking~~no ~~investment~~comparable ~~capital~~gross ~~through~~profit for the ~~public~~three and ~~private~~nine ~~markets~~months ended September 30, 2009.

Operating Expenses. The ~~condensed~~ ~~consolidated~~Company ~~financial~~incurred ~~statements~~total dooperating ~~not~~expenses ~~include~~of ~~any~~$12,491,724 ~~adjustments~~and to$14,800,119 for the ~~carrying~~three ~~amounts~~and ~~related~~nine tomonths ~~recoverability~~ended ~~and~~September 30, ~~classification~~2010 ofversus ~~assets~~$66,166 ~~or the amount~~ and ~~classification~~$108,525 offor ~~liabilities~~the ~~that~~three and ~~might~~nine ~~result~~months ~~should~~ended ~~the Company~~September 30, be2009, ~~unable~~which towas ~~continue~~a as$12,425,558 and a ~~going~~$14,691,594 ~~concern~~increase, respectively.

~~INFLATION~~The increase in operating expenses is due to the impairment charge of $11,513,790 relating to the ~~AND~~strategic ~~CHANGING~~cooperation ~~PRICES~~agreement with Antonov and an increase in consulting and other compensation from the amortization of 3,000,000 warrants issued to a consultant and 5,000,000 options issued for marketing consulting during the nine months ended September 30, 2010. All operating expenses increased due to additional costs related to the operations of Precision Aerostructures, Inc. which was acquired in October 2009. The operating expenses of NCR for the three and nine months ended September 30, 2009 have been reclassified into discontinued operations.

Operating Loss from Continuing Operations. Operating loss for the three and nine months ended September 30, 2010, was $12,156,947 and $14,235,297 compared to $$66,166 and $$108,525 for the three and nine months ended September 30, 2009. The increase in loss of $12,090,781 and ~~Company~~$14,126,772, ~~does~~respectively, ~~not~~is ~~foresee~~primarily ~~any~~due ~~adverse~~to ~~effects~~the onimpairment ~~its~~charge ~~earnings~~for the Strategic Cooperation Agreement, the acquisition of PAI, the reclassification of NCR as a ~~result~~discontinued ofoperation and due ~~inflation~~to orincreased ~~changing~~consulting ~~prices~~services for new aerospace marketing and service contracts.

~~CRITICAL~~Interest Expense and Debt Discount Amortization. Interest expense for the three and nine months ~~ACCOUNTING~~ended ~~POLICIES~~September 30, 2010, was $503,050 and $2,994,094 as compared with $1,064,798 and $2,685,653for the three and nine months ended September 30, 2009. The decrease of 53% in the three months ended September 30, 2010 is due to the ending of the amortization of the discounts on the convertible notes as of August 1, 2010 and to the repayment of the Micro Pipe note. The increase of 11% in interest expense in the nine month period ended September 30, 2010 versus 2009 is due to additional interest and discount amortization on thirteen new convertible notes during the nine month period ended September 30, 2010 (See Note 5).

~~The preparation~~Other ofExpense. ~~financial~~In ~~statements~~the three and ~~related~~nine ~~disclosures~~months inended ~~conformity~~September 30, ~~with accounting~~2010, ~~principles generally accepted in~~ the ~~United~~Company ~~States~~incurred of0 ~~America~~and ~~requires management to make judgments~~$11,253 ~~assumptions~~respectively ~~and~~of ~~estimates~~a ~~that~~loss ~~affect~~on the ~~amounts~~ ~~reported~~valuation inof ~~our~~derivative ~~condensed~~liabilities ~~consolidated~~versus ~~financial~~$19,649,947 ~~statements~~ and ~~the~~ ~~accompanying~~$21,225,850 ~~notes.~~respectively ~~The amounts~~ of ~~assets~~a ~~and~~loss ~~liabilities reported~~ on ~~our balance sheet and~~ the ~~amounts~~valuation of ~~revenues~~derivative ~~and~~liabilities ~~expenses~~in ~~reported~~the ~~for~~three ~~each~~and ~~of our~~nine ~~fiscal~~months ~~periods~~ended ~~are~~September 30, ~~affected~~2009. byThe ~~estimates~~decline ~~and~~in ~~assumptions,~~the ~~which~~loss ~~are~~on ~~used~~valuation ~~for, but~~is ~~not~~due ~~limited~~ to, the ~~accounting for revenue recognition, accounts receivable,~~renegotiation ~~doubtful accounts~~ and ~~inventories.~~elimination ~~Actual~~of ~~results~~the ~~could~~terms ~~differ~~of ~~from~~the ~~these estimates.~~convertible ~~The~~securities ~~accounting~~which ~~policies~~gave ~~stated~~rise ~~below~~to ~~are significantly affected by judgments, assumptions and estimates used in~~ the ~~preparation of the condensed~~derivative ~~consolidated~~treatment ~~financial~~(see ~~statements. See~~ Note 1 ~~for significant accounting policies~~).

~~Other significant~~Net ~~accounting~~Income ~~policies~~(Loss) ~~not~~from ~~involving~~Discontinued ~~the~~Operations. ~~same~~The ~~level~~NCR ofsubsidiary ~~measurement uncertainties~~was asdiscontinued ~~those~~and ~~discussed~~sold ~~above,~~during the ~~are~~quarter ~~nevertheless~~ended ~~important~~September 30, to2010. ~~an understanding~~As ofsuch, the ~~consolidated~~2009 ~~financial~~NCR ~~statements.~~numbers ~~The~~were ~~policies~~reclassified ~~related to~~as ~~consolidation~~discontinued. In the three and ~~loss~~nine ~~contingencies~~months ~~require~~ended ~~difficult~~September 30, ~~judgments~~2010, onthe ~~complex matters~~Company ~~that~~had ~~are~~net ~~often~~income ~~subject~~of $1,172,793 toand ~~multiple~~$267,224 ~~sources~~versus ofa ~~authoritative~~net ~~guidance. Certain~~loss of ~~these~~$535,532 ~~matters~~and ~~are~~$835,721 ~~among~~for ~~topics~~the ~~currently~~comparable ~~under~~periods ~~reexamination by~~of ~~accounting~~2009. ~~standards~~NCR ~~setters~~had ~~and~~no ~~regulators.~~operations ~~Although~~in nothe ~~specific~~three ~~conclusions reached~~months byended ~~these~~September 30, ~~standards~~2010 ~~setters~~and ~~appear~~therefore ~~likely~~the increase toin ~~cause~~both athe ~~material~~three ~~change~~and ~~in our~~nine ~~accounting~~months ~~policies~~ended September 30, ~~outcomes~~2010 ~~cannot~~is bedue ~~predicted~~solely ~~with~~to ~~confidence.~~the ~~Also~~gain ~~see~~on ~~Note~~the 1sale of ~~Notes~~the tooperation. ~~Condensed~~Until ~~Consolidated~~the ~~Financial~~third ~~Statements,~~quarter ~~Summary~~and the sale of NCR, the subsidiary continued to ~~Significant~~incur ~~Accounting~~operating ~~Policies,~~losses ~~which~~due ~~discusses~~to ~~accounting~~the ~~policies~~reduction ~~that~~in ~~must be~~revenue ~~selected~~and bythe ~~management~~cost ~~when~~of ~~there~~salaries ~~are~~and ~~acceptable~~other ~~alternatives~~expenses of maintaining the operations.

~~ITEM~~4 ~~3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~

Not applicable.Table of Contents

~~ITEM 4.~~FINANCIAL ~~CONTROLS~~CONDITION, ~~AND~~LIQUIDITY, ~~PROCEDURES~~CAPITAL RESOURCES

~~Evaluation~~The net increase in cash during the nine months ended September 30, 2010 was $18,590. The cash used in operating activities was $628,713. This was due mainly to a net loss of ~~Disclosure~~$16,651,981 ~~Controls~~offset by non-cash expenses of $2,556,471 related to amortization of debt discounts, financing costs and consulting ~~Procedures~~fees, $11,513,790 non-cash expense for impairment of an intangible asset, $319,319 in stock issued for services, $1,500,000 in stock issued for the settlement of a liability and $363,044 of depreciation and amortization. The Company also recorded a non-cash gain on the sale of NCR of $1,172,793. Other operating activities that used cash were mainly an increase in accounts receivable of $205,158. This was offset by an increase of accounts payable and accrued liabilities and interest of $919,984 and a decrease in prepaid expenses and other current assets of $408,210.

~~We conducted~~Cash anwas ~~evaluation~~provided ~~under~~from ~~the~~investing ~~supervision~~activities ~~and with the participation~~ of ~~our management~~$50,000 ~~including~~from ~~our~~a ~~Chief~~contribution ~~Executive Officer, who is also our Chief Financial Officer,~~ of ~~the~~a ~~effectiveness of the design and operation of our~~partner ~~disclosure~~related ~~controls~~to ~~and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under~~ the ~~Securities and~~return ~~Exchange Act~~ of ~~1934, as amended (“Exchange Act”), means controls and other procedures of~~ a ~~company~~deposit 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~~equipment ~~evaluation, our Chief Executive Officer concluded as of June 30, 2010~~ that ~~our~~was ~~disclosure controls and procedures were~~ not ~~effective at the reasonable assurance level due to the material weaknesses discussed immediately below~~purchased.

27Cash provided by financing activities was $597,303 mainly from the issuance of convertible notes with net proceeds of $850,000 offset by principal payments on notes and capital leases of $294,235.

~~Material~~The net decrease in cash during the nine months ended September 30, 2009 was $28,735. ~~Weaknesses~~

~~(1)~~ For the nine months ended September 30, 2009, $859,242 cash was used in operating activities due Wemainly ~~had~~from ~~not~~the ~~effectively~~net ~~implemented~~loss ~~comprehensive~~of ~~entity~~$24,860,068 offset by the non-~~level~~cash ~~internal~~loss ~~controls~~on the valuation of derivative liabilities of $21,225,850 and the amortization of the debt discount of $1,901,039. Other operating activities are now reclassified as ~~evidenced~~discontinued byoperations, ~~the~~but ~~following~~provided ~~deficiencies:~~cash through a decrease in accounts receivable of $221,420 and an increase in accounts payable and accrued liabilities of $607,079.

~~· We did~~For ~~not~~the ~~establish~~nine anmonths ~~independent~~ended ~~Audit~~September 30, ~~Committee~~2009, ~~who are responsible for~~ the ~~oversight~~ ofcash ~~the~~provided ~~financial~~by ~~reporting~~financing ~~process,~~activities ~~nor~~ was $837,205 andue ~~Audit~~mainly ~~Committee~~from ~~Charter defined. At~~ the ~~current~~issuance ~~time~~of we$853,000 ~~do not have any independent members~~ of ~~the~~convertible ~~Board who could comprise this committee~~notes.

~~· We did~~The ~~not~~net ~~establish~~decrease anin ~~adequate~~cash ~~Whistle~~during ~~Blower program for~~ the ~~receipt, retention,~~nine ~~and~~months ~~treatment~~ended ~~of complaints received by the issuer regarding accounting~~September 30, ~~internal~~2009 ~~accounting~~was ~~controls~~$31, 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 Directors889.

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

· We ~~did~~ do not ~~maintain~~foresee ~~documentation~~any ~~evidencing~~adverse ~~quarterly~~effects 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~~its toearnings ~~determine~~as ifa ~~there~~result ~~are~~of ~~any~~inflation ~~potential~~or ~~audit~~changing ~~related issues which may warrant involvement and follow-up action by the Board~~prices.

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

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

~~(2) We did~~Other significant accounting policies not ~~have~~involving athe ~~sufficient~~same ~~complement~~level of ~~personnel~~measurement ~~with~~uncertainties ~~appropriate~~as those ~~training~~discussed above, are nevertheless important to an understanding of the consolidated financial statements. The policies related to consolidation and loss contingencies require difficult ~~experience~~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 ~~GAAP~~our accounting policies, asoutcomes ~~evidenced~~cannot be predicted with confidence. Also see Note 1 of Notes to Condensed Consolidated Financial Statements, Organization and Summary of Significant Accounting Policies, which discusses accounting policies that must be selected by ~~the~~management ~~following~~when ~~deficiencies:~~there are acceptable alternatives.

~~· We do~~ITEM ~~not have a formally trained Chief Financial Officer who is responsible for the oversight of the accounting function~~3. ~~Currently~~ ~~the~~QUANTITATIVE ~~CEO~~AND ~~is responsible~~QUALITATIVE ~~for~~DISCLOSURES ~~this~~ABOUT ~~function,~~MARKET ~~but has not had formal accounting or auditing experience.~~RISK

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

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

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

(ITEM 4~~) We~~. ~~did~~CONTROLS ~~not~~AND ~~adequately design internal controls as follows:~~PROCEDURES

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

·For the period ended September 30, 2010, we conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer, who was also our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls ~~identified~~and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the ~~process~~Securities ~~documentation~~and ~~did~~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 30, 2010 that our disclosure controls and procedures were not ~~cover~~effective ~~all~~at the reasonable ~~risks~~assurance ~~for~~level due to the ~~specific~~material ~~process~~weaknesses discussed below. Our Board of Directors has begun taking major steps to correct these deficiencies, as outlined below.

·Corrections ~~The~~of ~~controls~~Material ~~identified in the process documentation did not cover all applicable assertions for the significant accounts.~~Weaknesses

28We have begun implementing comprehensive entity-level internal controls, which we had not done as of September 30, 2010, as evidenced by the following changes:

~~(5) Due~~• toWe ~~the~~have ~~material~~established ~~weaknesses~~an ~~identified~~independent atAudit ~~our~~Committee ~~entity~~responsible ~~level~~for wethe ~~did~~oversight ~~not~~of ~~test whether~~the ~~our~~ financial ~~activity~~reporting ~~level~~process, ~~controls~~and oran ~~our~~Audit ~~information~~Committee ~~technology general~~Charter ~~controls~~has ~~were~~been ~~operating~~defined. ~~sufficiently~~We topreviously ~~identify~~did anot ~~deficiency,~~have ~~or combination~~any ofindependent ~~deficiencies,~~members ~~that may result in a reasonable possibility that a material misstatement~~ of the ~~financial~~Board ~~statements~~who ~~would~~could ~~not~~comprise bethis ~~prevented or detected on a timely basis~~committee.

On• ~~April 7,~~We ~~2010,~~have ~~our~~established ~~Board~~a ofWhistle ~~Directors~~Blower ~~began~~program ~~taking~~for ~~major~~the ~~steps~~receipt, inretention, ~~correcting~~and ~~these deficiencies~~treatment ~~and~~of ~~created~~complaints anreceived ~~Audit~~by ~~Committee~~the issuer regarding accounting, ainternal ~~Compensation~~accounting ~~Committee~~controls, ~~and Nominating~~or auditing matters; and ~~Governance~~the ~~Committee~~confidential, ~~and~~anonymous ~~adopted~~submission aby ~~Code~~employees of ~~Ethics~~the ~~applicable~~issuer of concerns regarding questionable accounting or auditing matters to ~~all~~ ~~senior~~the ~~executives~~Audit Committee and Board of Directors.

~~CHANGES IN~~• ~~INTERNAL~~We ~~CONTROL~~have ~~OVER~~three ~~FINANCIAL~~individuals ~~REPORTING~~on our Board, who serve on the Audit Committee, who meet the “Financial Expert” criteria.

~~There have~~• ~~been~~We nomaintain ~~significant~~documentation ~~changes~~evidencing inquarterly ~~the~~and ~~Company's~~other ~~internal~~meetings ~~control~~between ~~over financial reporting during~~ the ~~Company's~~Board, ~~most~~Audit ~~recent fiscal quarter that have materially affected~~Committee, orsenior ~~are~~financial ~~reasonably~~managers ~~likely~~and toour ~~materially~~outside ~~affect,~~general ~~the Company's~~counsel. ~~internal~~Such ~~control~~meetings ~~over~~include ~~financial~~reviewing ~~reporting.~~and ~~Inherent~~approving ~~limitations~~quarterly ~~exist in~~and ~~any~~annual ~~system~~filings ofwith ~~internal control including~~ the ~~possibility~~Securities ofand ~~human~~Exchange ~~error~~Commission and ~~the~~ ~~potential~~reviewing ofon-going ~~overriding~~activities ~~controls.~~to ~~Even~~determine ~~effective~~if ~~internal~~there ~~controls~~are ~~can provide~~any ~~only~~potential ~~reasonable~~audit ~~assurance~~related ~~with~~issues ~~respect~~which tomay ~~financial~~warrant ~~statement preparation.~~involvement ~~The~~and ~~effectiveness~~follow-up ofaction anby ~~internal~~the ~~control~~Board ~~system~~or ~~may~~Audit ~~also be affected by changes in conditions~~Committee.

~~PART II. OTHER~~• ~~INFORMATION~~We are establishing a formal fraud assessment process to identify and design adequate internal controls to mitigate those risks not deemed to be acceptable.

~~Item 1. Legal~~• ~~Proceedings~~We are conducting performance reviews and evaluations of our management and staff employees.

OnWe ~~July 12,~~have ~~2010,~~begun ~~NCR’s~~acquiring ~~landlord~~a ~~filed~~sufficient ancomplement ~~unlawful detainer action against it in Los Angeles County Superior Court, Fan v. New Century Remanufacturing, Inc., et al., Case No. VC056735, to recover $391,000 in past due rent and possession~~ of ~~its~~personnel ~~facilities~~with inappropriate ~~Santa~~training Feand ~~Springs,~~experience ~~California. Although the case remains pending, we have sold our interest~~ in ~~NCR on August 23~~GAAP, ~~2010. Litigation~~as ~~can~~evidenced beby ~~expensive and unpredictable, and there can be no assurance regarding~~ the ~~outcome~~following ~~of any~~changes: ~~case. However , we do not believe we should have any liability in a connection with this action.~~

~~Item 1A. Risk~~• ~~Factors~~The Controller is still the only individual with technical accounting experience in our company and has limited in the exposure to SEC filings and disclosures, but now has assistance from the Audit Committee members and outside counsel.

~~In addition~~• toWe ~~the~~are ~~risk~~consulting ~~factors~~with ~~set~~other ~~forth~~outside inparties ~~our~~with ~~most~~accounting ~~recent~~experience ~~annual~~to ~~report,~~assist ~~recent developments~~us ~~have resulted~~ in ~~further risks, including~~ the ~~risk~~SEC ~~factors~~filings ~~listed below. Risks~~ and ~~uncertainties in addition to those we describe below~~disclosures, ~~that~~including ~~may not~~Audit beCommittee ~~presently~~members ~~known to us, or that we currently believe are immaterial, may also harm our business~~ and ~~operations~~outside counsel. IfWe ~~any~~were ofpreviously ~~these~~unable ~~risks~~to ~~occur,~~do ~~our business,~~this ~~results of operations~~ and ~~financial~~as ~~condition~~a ~~could be harmed~~result, ~~the price of~~ our ~~common~~independent ~~stock~~registered ~~could~~public ~~decline,~~accounting ~~and~~firm ~~future~~recorded ~~events~~numerous ~~and~~adjusting ~~circumstances could differ significantly from those anticipated in the forward-looking statements contained in this report~~entries.

~~Our~~6 ~~response to the KC-X Tanker Modernization Program request for proposal may be rejected or disqualified by the U.S. Air Force.~~

TheTable U.S. Air Force rejected our esponse to the request for proposal (RFP) for the KC-X Tanker Modernization Program as untimely. We have filed a protest with the General Accounting Office (GAO). The GAO or the Air Force may find that our proposal was not timely submitted, does not meet all mandatory RFP requirements, that we do not have qualified subcontractors and teaming partners, that we are not a capable and responsible contractor, that we have not obtained or processed the classified information that is needed to prepare a proposal, that we have not demonstrated that the company has the facility and personnel clearances that are prerequisites to receiving, handling and storing classified information, and that our failure to meet the proposal submittal deadline was attributable to our failure to act diligently and promptly. In addition, the Air Force may determine that Antonov Company is not an acceptable subcontractor, that required teaming agreements have not been entered into, and that using a Ukranian commercial aircraft as the basis for a KC-X tanker proposal is unacceptable, that the aircraft we have bid is too new or is not adequately designed, manufactured or certified, or that adequate documentation, data and information have not been provided in support of the bid. For any or all of these reasons, the Air Force may not select our bid, may disqualify our bid, or may refuse to consider it on the merits, or at all. The Air Force has broad discretion in interpreting the requirements of the RFP. Contesting any negative determination would be time consuming, difficult and expensive, with uncertain results, and even attempting such a challenge may exceed our limited resources. If we were successful in the bid, other bidders could challenge the process, our capabilities, or the adequacy of our submissions, which might also result in a denial or disqualification of our bid. If our bid is denied or disqualified for any reason, it would have a material adverse effect on our business, results of operations and financial condition.Contents

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

We ~~are~~ ~~dependent~~have onbegun ~~Antonov~~ to ~~supply~~design ~~the AN-112KC aircraft~~ and ~~components,~~implement ~~and information~~internal ~~necessary~~controls ~~for~~as ~~our RFP response.~~follows:

We• ~~are dependent~~The ~~upon~~controls ~~Antonov~~identified ~~Company~~ in ~~Kiev, Ukraine to supply~~ the ~~AN-112KC aircraft and components for our RFP response, and to supply the information necessary for the bid~~ process~~. Designing~~ ~~and~~documentation ~~manufacturing~~were ~~new aircraft,~~previously ornot ~~modifying~~designed ~~existing~~effectively ~~aircraft to meet new requirements, is time consuming, difficult~~ and ~~expensive,~~had ~~with~~no ~~uncertain~~evidence ~~results. We~~of ~~cannot give~~operating ~~any~~effectiveness assurance that the information supplied by Antonov will be adequate or sufficient to meet the RFP requirements, or that Antonov will timely deliver the planes if our bid is successful. If Antonov fails to perform for ~~any reason,~~testing ~~we would likely be unable to win the bid or supply the planes if selected, which would have a material adverse effect on our business, results of operations and financial condition~~purposes.

~~We face~~• ~~competition~~The ~~from~~controls ~~companies~~identified ~~which~~in ~~may~~the ~~have~~previous ~~greater~~process ~~resources~~documentation ordid ~~better technologies~~not ~~than~~cover weall dothe risks for the specific process.

~~Two large,~~• ~~established, well funded, aerospace corporations,~~ The ~~Boeing~~controls ~~Company~~identified and The European Aeronautic Defense and Space Company N.V. (EADS), are bidding on the RFP utilizing existing wide body commercial airliners as the basis for their KC-X tanker proposals. Both designs are advanced and well developed, and both companies have invested considerable resources into designing their tankers and in ~~preparing their responses to~~ the ~~RFP. Both~~previous ~~companies spent~~process ~~substantially~~documentation ~~more time, money and effort preparing their RFP responses than we~~ did, ~~and~~not itcover isall ~~highly~~applicable ~~likely~~assertions that their responses will be significantly more thorough, detailed and compliant than our response. In addition, both companies have devoted substantial effort to political lobbying with legislators and the Department of Defense, and developing close relationships with industry experts and members of the press. These advantages may prove insurmountable, and it may be impossible for ~~us to compete with their proposals, or even to submit a response deemed minimally acceptable by~~ the ~~U.S. Air~~significant ~~Force~~accounts. ~~If any of these were the case, we could be unsuccessful in our efforts to obtain the bid, which would have a material adverse effect on our business, results of operations and financial condition.~~

~~Item~~Due to the prior material weaknesses identified at our entity level we did not test whether our ~~2. Unregistered~~financial ~~Sales~~activity level controls or our information technology general controls were operating sufficiently to identify a deficiency, or combination of ~~Equity~~deficiencies, ~~Securities~~that ~~and~~may ~~Use~~result in a reasonable possibility that a material misstatement of ~~Proceeds~~the financial statements would not be prevented or detected on a timely basis.

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

OnAs ~~August 20,~~set ~~2010~~forth above, wethere ~~instructed~~have ~~our~~been ~~transfer~~significant ~~agent~~changes toin ~~issue~~the 5Company’s ~~million~~internal ~~shares~~control ~~and agreed~~over tofinancial ~~issue~~reporting anduring ~~additional~~the 10Company’s ~~million~~most ~~shares~~recent tofiscal ~~Omnicom~~quarter ~~Holdings~~that ~~pursuant~~have tomaterially aaffected, ~~stipulated~~or ~~settlement~~are inreasonably anlikely ~~action~~to ~~filed~~materially byaffect, ~~Omnicom~~the ~~for~~Company’s ainternal ~~$1.5~~control ~~million~~over financial ~~commission~~reporting. ~~claimed~~Inherent ~~due~~limitations exist in ~~connection~~any ~~with~~system ~~our~~of ~~agreement~~internal ~~with Anotonov. The~~control ~~issuance~~including ~~was~~the ~~exempt~~possibility of ~~from~~human ~~registration~~error ~~pursuant~~and ~~to Section~~the ~~3(a)(10)~~potential of ~~the~~overriding ~~Securities~~controls. ~~Act~~Even aseffective aninternal ~~issuance approved~~controls can byprovide aonly ~~court~~reasonable ~~after~~assurance awith ~~hearing~~respect ~~upon~~to ~~the~~financial ~~fairness~~statement preparation. The effectiveness of ~~its~~an ~~terms~~internal ~~and~~ control system may also be affected by changes in conditions.

~~Item 3~~PART II. ~~Defaults~~ ~~Upon~~OTHER ~~Senior Securities~~INFORMATION

~~None~~Item 1. Legal Proceedings

~~Item~~On July 12, 2010, NCR’s landlord filed an unlawful detainer action against it in Los Angeles County 5Superior Court, Fan v. ~~Other~~ ~~Information~~New Century Remanufacturing, Inc., et al., Case No. VC056735, to recover $391,000 in past due rent and possession of its facilities in Santa Fe Springs, California. The case remains pending. We have sold our interest in NCR and received an indemnity from its management. Litigation can be expensive and unpredictable, and there can be no assurance regarding the outcome of any case. However, we do not believe we should have any material liability in connection with this action.

~~Entry into~~Item a1A. ~~Material~~Risk ~~Definitive Agreement~~Factors

OnIn ~~August 18~~addition to the risk factors set forth in our most recent annual report, ~~2010~~recent developments have resulted in further risks, including the risk factors listed below. Risks and uncertainties in addition to those we ~~entered~~describe ~~into~~below, athat ~~Strategic~~may ~~Cooperation~~not ~~Agreement~~be ~~with~~presently ~~AVIC~~known to us, or that we currently ~~International~~believe ~~Holding~~are ~~Corporation. We~~immaterial, ~~have~~may also ~~entered~~harm ~~into~~our abusiness and operations. If any of these risks occur, our ~~Confidentiality~~business, results of operations and ~~Non~~financial condition could be harmed, the price of our common stock could decline, and future events and circumstances could differ significantly from those anticipated in the forward-~~Circumvention~~looking ~~Agreement~~statements contained in this report.

30We are dependent on AVIC and Antonov to supply aircraft and components, and information necessary for our RFP responses.

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

~~Effective~~7 ~~August 23, 2010, Michael Cabral was appointed our President and Rosa Rios was appointed our Controller and Principal Financial and Accounting Officer.~~

Item 6. ExhibitsTable of Contents

~~Exhibit 31~~Item 2.1 ~~Certification~~Unregistered ~~required~~Sales byof ~~Rule~~Equity ~~13a-14(a)~~Securities ~~or Rule 15d-14(d)~~ and ~~under Section~~Use ~~302~~ of ~~the Sarbanes-Oxley act of 2002~~Proceeds

~~Exhibit 32.~~On August 20, 2010 we issued 1 million ~~Certification~~shares ~~required~~of bycommon ~~Rule~~stock ~~13a-14(a)~~to ortwo ~~Rule~~consultants ~~15d-14(d)~~who coordinate our efforts with Antonov Company in Kiev, Ukraine, and ~~under~~agreed to issue an additional 1 million shares ~~Section~~if ~~906~~they ofmeet ~~the~~designated ~~Sarbanes-Oxley~~performance ~~act~~criteria. ofThe ~~2002~~issuance was exempt from registration as a transaction by an issuer not involving any public offering.

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

~~Pursuant to~~Item ~~the~~5. ~~requirements~~Other ~~of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.~~Information

	U.S. Aerospace, Inc.
August 23, 2010	By:		/s/ Michael C. Cabral
			Name: Micahel C. Cabral
			Title: President (Principal Executive Officer)
	By:	/s/	Rosa Rios
			Name: Rosa Rios
			Title: Controller (Principal Financial and
			Accounting Officer)

None

31Item 6. Exhibits


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

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

Exhibit 31.2		Certification required by Rule 13a-14(a) or Rule 15d-14(d) and under Section 302 of the Sarbanes-Oxley act of 2002

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

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

SIGNATURES

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


	U.S. Aerospace, Inc.
December 15, 2010	By:	/s/ James Worsham
		Name:	James Worsham
		Title:	Chief Executive Officer (Principal Executive Officer)

	By:	/s/ Rosa Rios
		Name:	Rosa Rios Controller (Principal Financial and Accounting Officer)

Filing Compare · U.S. Aerospace, Inc.