10-Q

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 September 30, 2010

Commission file number: 000-09459

U.S. AEROSPACE, INC.

(Exact name of registrant as specified in its charter)

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)

(909) 477-6504
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company þ

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

As of December 15, 2010, the Company had 36,287,625 shares of common stock, $0.10 par value, issued and outstanding.

U.S. AEROSPACE, INC.

INDEX

	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

Forward-Looking Statements

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.

1

Part I — Financial Information

ITEM 1. FINANCIAL STATEMENTS

U.S. AEROSPACE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30, 2010 and December 31, 2009

Unaudited

	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

F-1

	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

See accompanying notes to the condensed consolidated financial statements.

F-2

U.S. AEROSPACE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

Unaudited

	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	)

F-3

	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

See accompanying notes to the condensed consolidated financial statements.

F-4

U.S. AEROSPACE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2010 and 2009

Unaudited

	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

F-5

	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

See accompanying notes to the condensed consolidated financial statements.

F-6

U.S. AEROSPACE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of Operations

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

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

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

Principles of Consolidation

The condensed consolidated financial statements include the accounts of U.S. Aerospace and its wholly-owned subsidiary PAI and the accounts of NCR as of August 27, 2010, the date the Company sold NCR to its former directors. All significant intercompany accounts and transactions have been eliminated in consolidation.

Segments of an Enterprise and Related Information

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

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

F-7

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:

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

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

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

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

• Decreased cost of operations with the divesture non-performing subsidiary NCR, and received full indemnity on all liabilities and other issues (See Note 2)

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

• Expanded the Company’s international relationships with established companies in China and Ukraine.

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

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

Reclassifications

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

Revenue Recognition

The Company recognizes product revenue provided that (1) persuasive evidence exist of an arrangement exists, (2) delivery to the customer has occurred, (3) the selling price is fixed or determinable and, (4) collection is reasonably assured. Delivery is considered to have occurred hen title and risk of loss have transferred to the customer.

F-8

Use of Estimates

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

Concentration of Credit Risks

Cash is maintained at one financial institution. The Federal Deposit Insurance Corporation (“FDIC”) insures accounts at each financial institution for up to $250,000. At times, cash may be in excess of the FDIC insured limit. The Company did not have any uninsured bank balances at 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.

Accounts Receivable

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

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

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

During the three and nine months ended September 30, 2010, sales to one customer approximated 97% and 91% of net revenues. Further, there was one customer that accounted for approximately 98% of accounts receivable at September 30, 2010.

During the three and nine months ended September 30, 2009, sales to five customers accounted for approximately 95% of net revenues. At September 30, 2009, three customers accounted for approximately 95% of the accounts receivable balance.

Basic and Diluted Loss per Common Share

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

Common stock equivalents, representing convertible Preferred Stock, convertible debt, options and warrants totaling approximately 348,673,806 and 132,360,000 for September 30, 2010 and 2009, respectively, are not included in the computation of diluted loss from operations per share and in diluted income (loss) available to common shareholders per share as they would be anti-dilutive. However, the dilutive shares are included in the diluted income from discontinued operations per share.

F-9

Stock Based Compensation

The Company uses the fair value method of accounting for employee stock compensation cost. Share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period. For the three and nine months ended September 30, 2010, $219,319 and $319,319 respectively of share-based compensation expense was recognized in the accompanying condensed consolidated statements of operations. For the three and nine months ended September 30, 2009, $330,506 and $365,520 respectively, employee share-based compensation expense was recognized in the accompanying condensed consolidated statements of operations.

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

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

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

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

There were no plan options granted, and 1,600,000 options were exercised or expired during the three and nine months ended September 30, 2010. There were 3,000,000 shares available for grant at September 30, 2010.

F-10

All plan options outstanding have vested as of September 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	$	—

⁽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).

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

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

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

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

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

Non-Plan Options

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

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

Deferred Financing Costs

Direct costs of securing debt financing are capitalized and amortized over the term of the related debt. When a loan is paid in full, any unamortized financing costs are removed from the related accounts and charged to operations. During the three and nine months ended September 30, 2010 the Company amortized approximately $18,955 and $140,955, respectively, of deferred financing costs to interest expense in the accompanying condensed consolidated statements of operations. During the three and nine months ended September 30, 2009 the Company amortized approximately $103,000 and $337,000, respectively, of deferred financing costs to interest expense in the accompanying condensed consolidated statements of operations.

F-11

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.

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

The Company has no assets that are measured at fair value on a recurring basis. There were no assets or liabilities measured at fair value on a non-recurring basis during the nine months ended September 30, 20010.

Accounting for Derivative Instruments

In connection with the issuance of certain convertible notes payable (see Note 5), the notes had conversion features that the Company determined were embedded derivative instruments. The Company issued warrants in connection with a loan payable (see Note 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.

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

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

Also as discussed in Note 5, effective January 31, 2010, the variability feature of the exercise price of the outstanding warrants issued to Micro Pipe were removed. As a result, the fair value of the warrants of $59,631 was reclassified to additional paid-in capital on January 31, 2010.

During the nine months ended September 30, 2010 and 2009, the Company recognized other expense of $11,253 and $21,225,850, respectively, related to recording derivative liabilities at fair value. At September 30, 2010 and December 31, 2009, the derivative liability balance was $0 and $48,378, respectively.

Beneficial conversion feature and warrant-related derivatives were valued using the Black-Scholes Option Pricing Model with the following assumptions during the period ended September 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.

F-12

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:

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

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

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

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

Significant Recent Accounting Pronouncements

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

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

2. ANTONOV STRATEGIC COOPERATION AGREEMENT

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

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.

F-13

On July 9, 2010, the Company submitted a response to the Request for Proposal from the U.S. Air Force for the KC-X Tanker Modernization Program. If the Company’s bid 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.

Management performed its assessment of the fair value of the relationship with Antonov Company at September 30, 2010. In this undertaking, management analyzed the projected cash flow from the assets discounted at appropriate rates, 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.

3. DISCONTINUED OPERATIONS AND SALE OF NCR

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

NCR had no operations during the three months ended September 30, 2010 as the facility was effectively idled. During the nine months ended September 30, 2010, NCR had revenues of $407,805, cost of good sold of $741,356, SG&A expenses of $642,018 producing a loss from operations of $905,569.

During the three and nine months ended September 30, 2009, NCR had revenues of $644,609 and $3,058,941 respectively, cost of goods sold of $653,060 and $2,665,683 respectively, SG&A expenses of $593,247 and $1,337,504 respectively producing a loss from operations of $601,698 and $944,246 respectively.

As of the sale date, August 27, 2010, NCR had current assets of $311,503, total assets of $615,573, and current and total liabilities of $2,373,000 (see table in this Note 2). As of September 30, 2009, NCR had $905,782 in current assets, $1,129,198 in total assets, and $5,772,207 in current and total liabilities.

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:

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	)

F-14

4. ACQUISITION OF PRECISION AEROSTRUCTURES, INC.

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

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

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

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

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

	Three Months			Nine Months
	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	)

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.

5. GOODWILL AND OTHER INTANGIBLE ASSETS

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

F-15

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

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

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

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

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

	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.

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

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

Impairment of Intangible Assets

Management performed its assessment of the fair value of the intangible assets for the nine months ended September 30, 2010. In this undertaking, management analyzed the projected cash flow from the assets discounted at appropriate rates, 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 of $11,513,790 consisting of the net book value of the Strategic Cooperation Agreement with Antonov. This impairment charge reduces the net book value of the asset to zero.

6. NOTES PAYABLE

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

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

F-16

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

2009

During 2009, the Company borrowed $1,199,600 from CAMOFI and $298,400 from CAMHZN under the Notes, which mature in July 2011, as amended. The debt discounts, which includes amounts for the conversion options, as of December 31, 2009 related to the 2009 borrowings from CAMOFI and CAMHZN were $375,535 and $93,882, respectively. The debt discounts as of September 30, 2010 related to the 2009 borrowings from CAMOFI and CAMHZN were $0. 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.

2010

During the first nine months of 2010, the Company borrowed $700,000 from CAMOFI and $175,000 from CAMHZN under the Notes and recorded debt discounts related to the conversion options and warrants issued for $500,000 and $125,000 respectively. The Company received proceeds of $600,000, net of amounts paid directly to a lender and to vendors by the note holder. The Notes are due in July 2011, as amended, and bear interest at 15% per annum. The debt discounts as of September 30, 2010 related to these borrowings from CAMOFI and CAMHZN were $0.

On July 28, 2010, the Company issued a $250,000 convertible note to Hutton International, SPE, LLC, due on July 31, 2011 and bearing an interest rate of 15%. This was half of the $500,000 15% convertible 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).

F-17

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

			(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

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

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 $388,000 and $1,901,039, respectively, to interest expense related to the Notes.

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

Micro Pipe Note Payable

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

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

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

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

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

F-18

7. EQUITY TRANSACTIONS

Common Stock, Preferred Stock, Warrants and Options

ISSUANCE OF COMMON STOCK

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

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

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

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

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

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

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

In February 2008, the Company entered into a one year contract with a third party for corporate consulting and marketing services valued at $30,000. The fee was paid in the form of 150,000 shares of the Company’s common stock and valued based on the stock market price of the shares at the contract date. The value of the common stock on the date of the transaction was recorded as a deferred charge and was amortized to operating expense over the life of the agreement. During the three months and nine months ended September 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 September 30, 2009 the balance of deferred consulting fees was fully amortized.

F-19

In June 2007, the Company entered into a three-year contract with a third party for Internet public investor relations services valued at $210,000. The fee was paid in the form of 300,000 shares of the Company’s common stock and valued based on the stock market price of the shares at the contract date. The value of the common stock on the date of the transaction was recorded as a deferred charge and during the three months and nine months ended September 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 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.

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.

In June 2010 the Company issued 8,310,000 shares of restricted common stock, valued at $1,500,000 to settle a claim relating to the Antonov joint venture agreement.

On September 15, 2010 CAMOFI exercised 1,199,989 and CAMHZN exercised 399,996 cashless warrants, totaling 1,599,985 of the Company common stock equaling a value of $159,999.

ISSUANCE OF PREFERRED STOCK

On July 1, 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 Series E Preferred Stock is convertible into 500 shares of the Company’s commons stock per share of Series E Preferred Stock. The Series E Preferred Stock includes a liquidation Preference of $3,838.

STOCK OPTIONS

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

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

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

WARRANTS

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

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

F-20

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

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

On September 15, 2010 CAMOFI exercised 1,199,989 and CAMHZN exercised 399,996 cashless warrants, totaling 1,599,985 of the Company common stock , equaling a value of $159,999.

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

	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

(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.

8. RELATED PARTY TRANSACTIONS

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

In connection with the acquisition of PAI (see Note 3), the Company issued a promissory note to Cabral in the amount of $500,000. Interest on the note accrues at 5% per annum and all principal and interest is due only on and paid from the proceeds of any equity financing of the Company with gross proceeds of at $2,000,000 provided that the investors in such financing permit the proceeds thereof to be used for such purpose. During the three and nine months ended September 30, 2010, $6,301 and $18,801 of interest expense was recorded in the accompanying condensed consolidated statements of operations.

9. COMMITMENTS AND CONTINGENCIES

Service Agreements

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

F-21

Capital Lease

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

Legal

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

Delinquent Income Taxes

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

Delinquent Payroll Taxes

At 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.

Tax Lien

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

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

Indemnities and Guarantees

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

F-22

Employment Agreements

On September 30, 2010 the Company and its Chief Executive Officer, Mr. Worsham, entered into an employment agreement for an initial term of one year subject to mutually agreed extensions, at an annual salary of $100,000, plus cash performance bonuses upon achieving increased sales, revenues, or earnings, entering into sales or strategic cooperation agreements, or other improvements in the business or financial performance. He received options to purchase 2,000,000 shares of our common stock, half vesting over two years and half vesting upon achieving milestones and performance targets. All options vest upon death, disability or termination without cause. Mr. Worsham also agreed to our Code of Ethics and standard Indemnification Agreement for directors.

10. SEGMENT REPORTING

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

11. SUBSEQUENT EVENTS

Issuance of Common Stock

On October 6, 2010 the Company issued as consulting fees, 400,000 shares of restricted company common stock.

KC-X Tanker Bid

On July 6, 2010, we entered into a Strategic Cooperation Agreement with Antonov to bid on the request for proposal from the U.S. Air Force for the KC-X Tanker Modernization Program. The U.S. Air Force 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.

F-23

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

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

OVERVIEW

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

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

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

The Company continues to incur operating losses for each of the periods ended September 30, 2010 and 2009. This was 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, to increase orders through current customers and sales methods, and to partner with leading aerospace and defense manufacturers throughout the world to jointly bid and supply aircraft parts and components to major defense contractors and the U.S. military. As part of this strategy, effective August 27, 2010, the Company discontinued the operations and sold its unprofitable remanufacturing subsidiary, New Century Remanufacturing, Inc. (“NCR”), to the Company’s former directors, David Duquette and Josef Czikmantori, for $1 and an indemnity from all of NCR’s liabilities. As such, the Company is no longer in the machine tool business, and is focused solely on aerospace and defense.

However, significant growth will require additional funds in the form of debt or equity, or a combination thereof which the Company believes is available to it. The Company’s growth strategy also includes strategic mergers in addition to growing the current business. A significant acquisition will require additional financing.

HIGHLIGHTS

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

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

• Appointed Jim Worsham, an aerospace veteran, as the Company’s Chief Executive

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

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

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

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

• Modified our international relationships with established companies in China and Ukraine.

• Labor cost has been reduced by 20%.

• Company’s executives are on an aggressive marketing campaign with existing and new component manufacturing clients to expand the core base of the Precision Aerostructures division.

• 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.

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

Net Revenues. We generated net revenues of $660,144 and $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 no comparable gross profit for the three and nine months ended September 30, 2009.

Operating Expenses. The Company incurred total operating expenses of $12,491,724 and $14,800,119 for the three and nine months ended September 30, 2010 versus $66,166 and $108,525 for the three and nine months ended September 30, 2009, which was a $12,425,558 and a $14,691,594 increase, respectively.

The increase in operating expenses is due to the impairment charge of $11,513,790 relating to the strategic cooperation 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 $14,126,772, respectively, is primarily due to the impairment charge for the Strategic Cooperation Agreement, the acquisition of PAI, the reclassification of NCR as a discontinued operation and due to increased consulting services for new aerospace marketing and service contracts.

Interest Expense and Debt Discount Amortization. Interest expense for the three and nine months ended 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).

Other Expense. In the three and nine months ended September 30, 2010, the Company incurred 0 and $11,253 respectively of a loss on the valuation of derivative liabilities versus $19,649,947 and $21,225,850 respectively of a loss on the valuation of derivative liabilities in the three and nine months ended September 30, 2009. The decline in the loss on valuation is due to the renegotiation and elimination of the terms of the convertible securities which gave rise to the derivative treatment (see Note 1).

Net Income (Loss) from Discontinued Operations. The NCR subsidiary was discontinued and sold during the quarter ended September 30, 2010. As such, the 2009 NCR numbers were reclassified as discontinued. In the three and nine months ended September 30, 2010, the Company had net income of $1,172,793 and $267,224 versus a net loss of $535,532 and $835,721 for the comparable periods of 2009. NCR had no operations in the three months ended September 30, 2010 and therefore the increase in both the three and nine months ended September 30, 2010 is due solely to the gain on the sale of the operation. Until the third quarter and the sale of NCR, the subsidiary continued to incur operating losses due to the reduction in revenue and the cost of salaries and other expenses of maintaining the operations.

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FINANCIAL CONDITION, LIQUIDITY, CAPITAL RESOURCES

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 $16,651,981 offset by non-cash expenses of $2,556,471 related to amortization of debt discounts, financing costs and consulting 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.

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

Cash provided by financing activities was $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.

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

For the nine months ended September 30, 2009, $859,242 cash was used in operating activities due mainly from the net loss of $24,860,068 offset by the non-cash loss 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 discontinued operations, but provided cash through a decrease in accounts receivable of $221,420 and an increase in accounts payable and accrued liabilities of $607,079.

For the nine months ended September 30, 2009, the cash provided by financing activities was $837,205 due mainly from the issuance of $853,000 of convertible notes.

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

INFLATION AND CHANGING PRICES

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

CRITICAL ACCOUNTING POLICIES

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

5

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and 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 and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer concluded as of September 30, 2010 that our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses discussed below. Our Board of Directors has begun taking major steps to correct these deficiencies, as outlined below.

Corrections of Material Weaknesses

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

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

• We have established a Whistle Blower program for the receipt, retention, and treatment of complaints received by the issuer regarding accounting, internal accounting controls, or auditing matters; and the confidential, anonymous submission by employees of the issuer of concerns regarding questionable accounting or auditing matters to the Audit Committee and Board of Directors.

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

• We maintain documentation evidencing quarterly and other meetings between the Board, Audit Committee, senior financial managers and our outside general counsel. Such meetings include reviewing and approving quarterly and annual filings with the Securities and Exchange Commission and reviewing on-going activities to determine if there are any potential audit related issues which may warrant involvement and follow-up action by the Board or Audit Committee.

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

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

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

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

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

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

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

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

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

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

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

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

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

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

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

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

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

Item 5. Other Information

None

Item 6. Exhibits

Exhibit 10.1	Stock Purchase Agreement between U.S. Aerospace, Inc. and David Duquette and Josef Czikmantori for purchase of New Century Remanufacturing, Inc.
Exhibit 31.1	Certification required by Rule 13a-14(a) or Rule 15d-14(d) and under Section 302 of the Sarbanes-Oxley act of 2002
Exhibit 31.2	Certification required by Rule 13a-14(a) or Rule 15d-14(d) and under Section 302 of the Sarbanes-Oxley act of 2002
Exhibit 32.1	Certification required by Rule 13a-14(a) or Rule 15d-14(d) and under Section 906 of the Sarbanes-Oxley act of 2002
Exhibit 32.2	Certification required by Rule 13a-14(a) or Rule 15d-14(d) and under Section 906 of the Sarbanes-Oxley act of 2002

SIGNATURES

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

	U.S. Aerospace, Inc.
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)

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EX-10.1

Exhibit 10.1

STOCK PURCHASE AGREEMENT

This Stock Purchase Agreement (this “Agreement”) is entered into on August 16, 2010 (the “Effective Date”), by and among U.S. Aerospace, Inc., a Delaware corporation formerly known as New Century Companies, Inc. (the “Seller”), and David Duquette and Joseph Czikmantori, individuals residing in Los Angeles, California (each, a “Buyer” and collectively, the “Buyers”).

RECITALS

A. Seller owns all of the outstanding capital stock of New Century Remanufacturing, Inc., a California corporation (the “Company”).

B. Company is operated by Buyers as the sole officers and directors of the Company, and is engaged in the business of manufacturing and remanufacturing specialized machining tools, vertical boring mills, Vertical Turning Centers, lathes and attachments under the trade name Century Turn, including acquiring, re-manufacturing and selling pre-owned CNC machines and providing rebuilt, retrofit and remanufacturing services for machine tools (collectively, the “Business”), at 9831 Romandel Avenue, Santa Fe Springs, California 90670 (the “Premises”).

C. Subject to the terms and conditions set forth herein, Seller desires to sell to Buyers, jointly, and Buyers desire to acquire from Seller, the Company, and jointly and severally to assume all of the liabilities in connection with the ownership of the Company, the operation of the Business, and the occupation of the Premises.

AGREEMENT

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements set forth herein, the parties, intending to be legally bound, hereby agree to the foregoing and as follows:

ARTICLE 1
SALE AND PURCHASE

1.1 Stock Purchase. As of the Effective Date, Buyers hereby purchase and acquire, and Seller hereby quit claims, sells, transfers and assigns to Buyers, jointly, all interests of Seller in all capital stock of the Company, and all associated goodwill.

1.2 Files and Records. Buyers shall retain possession of all files and other records of Company (collectively, the “Records”), and at any time on or after the Effective Date shall make all such Records available to Seller for inspection and copying upon reasonable notice. For the sake of clarity, such Records shall not include any and all corporate books and records of the Seller, its minute book, records of directors’ and stockholders’ actions, stock transfer records, governmental and regulatory filings, tax returns and correspondence with any taxing agencies, corporate seal, accounting records, bank statements, and all other records of Seller.

1.3 Liabilities. The Company shall be sold and conveyed to Buyers inclusive of all liabilities arising out of or relating to the ownership of the Company, the operation of the Business, and the occupation of the Premises (collectively, the “Liabilities”) and of all related liens, security interests, restrictions, prior assignments, claims and encumbrances of any kind or type (collectively, the “Liens”). It is expressly understood and agreed that the Liabilities shall include, without limitation, and that the Buyers shall be solely and completely responsible, jointly and severally, and the Seller shall not be liable, for any of the obligations or liabilities of Company of any kind or nature, including, without limitation, any of the following debts, duties, liabilities, or obligations, that arose with regard to Seller prior to the Effective Date, or arose or will arise out of or relating to the Company, the Business and/or the Premises at any time before or after the Effective Date: (i) payroll expenses or liabilities; (ii) any tax whatsoever, including, without limitation, any withholding obligation, tax liability, fees or other assessments owed to the U.S. Internal Revenue Service, the California Franchise Tax Board, the State of California, or any other local, state, federal, or other government or governmental agency; (iii) product liability; (iv) loans secured by Company assets or any portion thereof; (v) any liability whatsoever to current or former employees, including, without limitation, sick leave, vacation benefits, health care benefits (including under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended), other accrued employee benefits, or employee liability claims, all of which shall be included within the definition of Liabilities; and/or (vi) rent, damages, attorney fees or any obligation whatsoever to the landlord of the Premises.

1.4 Purchase Price. The purchase price (the “Purchase Price”) paid by Buyers for the Company shall be:

(a) the sum of $1.00;

(b) the assumption by the Buyers of all of Seller’s duties and obligations under or associated with the Company, the Business and/or the Premises; and

(c) the defense and indemnification of the Seller by the Buyers, jointly and severally, from and against any and all of the Liabilities.

ARTICLE 2
RESTRICTIONS ON TRANSFER

Each of the Buyers agrees as follows:

2.1 Restrictions. For a period of one year from the Effective Date, each Buyer will not, and will cause any affiliate not to, without the prior written consent of Seller, which consent may be withheld in its sole discretion, directly or indirectly, sell, transfer, offer to sell or transfer, contract or grant any option to sell (including without limitation any short sale), pledge, transfer, establish an open “put equivalent position” within the meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise dispose of any shares of common stock of Seller, options or warrants to acquire shares of common stock of Seller, or securities exchangeable or exercisable for or convertible from the shares of common stock of Seller, currently or hereafter owned either of record or beneficially (as defined in Rule 13d-3 under the Exchange Act), by Buyers or their affiliates (collectively, “Shares”), or publicly announce an intention to do any of the foregoing. Buyers also agree and consent to the entry of stop transfer instructions with the Seller’s transfer agent and registrar against the transfer of Shares except in compliance with the foregoing restrictions.

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2.2 Sales. Notwithstanding the foregoing paragraph, after December 31, 2010, Buyers may sell up to a total of $10,000.00 in Shares each calendar month on a non-cumulative basis.

ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF SELLER

Seller represents and warrants to Buyers as follows:

3.1 Status. Seller is a corporation validly existing and in good standing under the laws of the State of Delaware. Seller has the requisite power to enter into and complete the transactions contemplated by this Agreement, except as may be limited by principles of equity, applicable bankruptcy, reorganization, insolvency, moratorium, fraudulent conveyance or other similar laws relating to or affecting the rights and remedies of creditors generally.

3.2 Authority. All corporate actions necessary to be taken by or on the part of Seller in connection with the transactions contemplated by this Agreement have been duly and validly taken, and this Agreement has been duly and validly authorized, executed, and delivered by Seller and constitutes the legal, valid and binding obligation of Seller, enforceable against Seller in accordance with its terms.

ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYERS

Each Buyer, jointly and severally, represents and warrants to Seller as follows:

4.1 Status. The Buyers are individuals with all requisite capacity, power and authority to execute and deliver this Agreement, to perform their respective obligations hereunder and to consummate the transactions contemplated hereby.

4.2 Enforceability. This Agreement has been duly and validly executed and delivered by the Buyers. This Agreement and all other agreements and obligations entered into and undertaken in connection with the transactions contemplated hereby to which the Buyers are a party constitute the valid and legally binding obligations of the Buyers, enforceable against the Buyers in accordance with their respective terms, except as may be limited by principles of equity, applicable bankruptcy, reorganization, insolvency, moratorium, fraudulent conveyance or other similar laws relating to or affecting the rights and remedies of creditors generally. The execution, delivery and performance by the Buyers of this Agreement and the agreements provided for herein, and the consummation by the Buyers of the transactions contemplated hereby and thereby, will not, with or without the giving of notice or the passage of time or both, violate the provisions of any law, rule or regulation applicable to the Buyers; (b) violate any judgment, decree, order or award of any court, governmental body or arbitrator; or (c) conflict with or result in the breach or termination of any term or provision of, or constitute a default under, or cause any acceleration under, or cause the creation of any lien, charge or encumbrance upon the properties or assets of the Buyers or Seller pursuant to, any indenture, mortgage, deed of trust or other instrument or agreement to which the Buyers are a party or by which the Buyers may be bound, or any indenture, mortgage, deed of trust or other instrument or agreement to which Seller is a party on or before the Effective Date and by which Seller may be bound after the Effective Date.

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4.3 Private Placement. Buyers are purchasing the stock of Company for their own account, and not with a view toward resale or distribution thereof. At the time Buyers were offered the stock of Company they were, and at the Effective Date the Buyers are “accredited investors” as defined in Rule 501(a) under the Securities Act of 1933, as amended (the “Securities Act”). Buyers have such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Company, and has so evaluated the merits and risks of such investment. Buyers are able to bear the economic risk of an investment in the Company and, at the present time, are able to afford a complete loss of such investment. No registration under the Securities Act is required for the offer and sale of the capital stock of the Company by Seller to Buyers as contemplated hereby. Buyers are not purchasing the stock of Company as a result of any advertisement, article, notice or other communication regarding the Company published in any newspaper, magazine or similar media or broadcast over television or radio or presented at any seminar or any other general solicitation or general advertisement.

4.4 SEC Reports. The Seller has filed all reports required or permitted to be filed with the U.S. Securities and Exchange Commission (“SEC”) under the Securities Act or the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the five years preceding the Effective Date, (collectively, the “SEC Reports”). As of their respective dates, the SEC Reports complied in all material respects with the requirements of the Securities Act and the Exchange Act and the rules and regulations of the SEC promulgated thereunder, as applicable, and none of the SEC Reports, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included or consolidated in the SEC Reports comply in all material respects with applicable accounting requirements and the rules and regulations of the SEC with respect thereto as in effect at the time of filing. The financial statements of the Company were prepared in accordance with GAAP, except as may be otherwise specified in such financial statements or the notes thereto and except that unaudited financial statements may not contain all footnotes required by GAAP, and fairly present in all material respects the financial position of the Company as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, immaterial, year-end audit adjustments.

4.5 Material Changes. Since the date of the latest audited financial statements included within the SEC Reports, except as disclosed in writing to Seller, (i) there has been no event, occurrence or development that has had, or that could reasonably be expected to result in, a material adverse effect, (ii) the Company has not incurred any liabilities (contingent or otherwise) other than (A) trade payables and accrued expenses incurred in the ordinary course of business consistent with past practice, and (B) liabilities not required to be reflected in the Company’s financial statements pursuant to GAAP or required to be disclosed in filings made with the SEC, (iii) the Company has not altered its method of accounting, (iv) the Company has not declared or made any dividend or distribution of cash or other property to its stockholders or purchased, redeemed or made any agreements to purchase or redeem any shares of its capital stock and (v) the Company has not issued any equity securities to any officer, director or affiliate, except as disclosed in the SEC Reports.

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4.6 Litigation. Except as disclosed in writing to Seller, there is no action, suit, inquiry, notice of violation, proceeding or investigation pending or, to the knowledge of the Company, threatened against or affecting the Seller, the Company, or any of their respective properties before or by any court, arbitrator, governmental or administrative agency or regulatory authority (federal, state, county, local or foreign), which could, if there were an unfavorable decision, have or reasonably be expected to result in a material adverse effect. Neither the Company nor the Seller, nor to the knowledge of the Company any director or officer thereof, is or has been the subject of any action involving a claim of violation of or liability under federal or state securities laws or a claim of breach of fiduciary duty. There has not been, and to the knowledge of the Company, there is not pending or contemplated, any investigation by the SEC involving the Company, the Seller or the Buyers.

4.7 Regulatory Approvals. All consents, approvals, authorizations or other requirements prescribed by any law, rule or regulation that must be obtained or satisfied by the Buyers and that are necessary for the execution and delivery by the Buyers of this Agreement or any documents to be executed and delivered by the Buyers in connection therewith have been, or prior to the Effective Date will be, obtained and satisfied.

4.8 No Brokers. No broker or finder has acted for the Buyers in connection with this agreement or the transactions contemplated hereby, and no broker or finder is entitled to any brokerage or finder’s fee or other commissions in respect of such transactions based upon agreements, arrangements, or understandings made by or on behalf of the Buyers.

4.9 Compliance with the Law. To the best of each Buyer’s knowledge, the operations of the Company have been conducted in accordance with all applicable laws, regulations, and other requirements of the United States of America and of all states, municipalities, and other political subdivisions and agencies thereof, having jurisdiction over the Company. No Buyer has any knowledge of any notice of any asserted present or past violation of any applicable federal, state or local statute, law, or regulation (including, without limitation, OSHA and environmental laws, any applicable building, zoning or other law, ordinance or regulation) with respect to the Business, the Company of the Premises prior to the Effective Date.

4.10 No Representation. Buyers have served as the sole officers and directors of Company since August 2001, are intimately familiar with the Company, its asset, liabilities, finances, business and operations, and are relying solely on their own personal experience with the Company in making their decision to enter into this Agreement. Buyers acknowledge and agree that Seller does not make and has not made any representations or warranties whatsoever with respect to the Company or the Business.

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ARTICLE 5
CONDITIONS TO SELLER’S OBLIGATIONS AT CLOSING

The obligations of the Seller to consummate the transaction contemplated hereby on the Effective Date is subject to the satisfaction on or before the Effective Date of the following conditions by Buyers:

5.1 Representations and Warranties. All representations and warranties of Buyers made herein are true and correct as of the Effective Date.

5.2 Release of Claims. Each Buyer, and substantially all employees of Company since April 1, 2010, shall execute and deliver a General Release, the form of which is attached hereto as Exhibit A, that releases Seller from any and all claims relating to the Company. Notwithstanding the foregoing, the Buyers shall not waive any statutory rights to which they are entitled as former officers or directors of the Seller.

5.3 Shares. All Shares shall be held in record name and certificated form, and no such Shares shall be held in “street name” or electronic form other than at accounts with BMA Securities, or another brokerage acceptable to Seller in its sole discretion, pursuant to irrevocable instructions to comply with the restrictions on transfer set forth in Article 2 of this Agreement. Buyers understand and agree that Seller would be irreparably harmed by violation of this provision, and entitled to immediate and permanent injunctive relief without the necessity of posting any bond

5.4 Resignations. Each Buyer shall resign from any and all capacities with Seller, including without limitation as an officer or director thereof.

ARTICLE 6
INDEMNIFICATION

6.1 Indemnification. From and after the Effective Date, each Buyer, jointly and severally, shall fully, completely and unconditionally indemnify, defend, and hold harmless Seller, its subsidiaries and affiliates, and each of their shareholders, officers, directors, managers, members, partners, employees, representatives, agents, attorneys and assigns, in their individual and representative capacities, (collectively, “Indemnified Parties”), from and against any and all claims, demands, actions, causes of action, judgments, settlements, losses, damages, liabilities, compromises, injuries, lawsuits, deficiencies, obligations, costs, and expenses, including without limitation reasonable attorneys’ fees, expert witness fees, and related costs and expenses as incurred by any Indemnified Party, including any and all costs associated with defense of any Indemnified Party, or any other claim before a bankruptcy court or other court, trustee, or receiver (collectively, “Claims”), whether such Claims are fixed or contingent, that any Indemnified Party shall incur or suffer, that arise out of, result from, or relate to:

(a) any breach of, or failure by any Buyer to perform, any of its representations, warranties, covenants, or agreements set forth in this Agreement;

(b) any liability or claim which may be asserted against Seller arising out of, relating to, or in connection with Sellers’s ownership of the Company prior to the Effective Date, or the Company’s activities, the operation of the Business, or the occupation of the Premises prior to or after the Effective Date;

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(c) any of the Liabilities and/or Liens;

(d) Any taxes arising out of or relating to the transaction contemplated by this Agreement; and/or

(e) All actions, suits, investigations, proceedings, demands, assessments, judgments, reasonable attorneys’ fees, costs and expenses incident to the foregoing, including, but not limited to, any audit or investigation by any governmental entity.

6.2 Failure to Defend. If Buyers fail to fulfill their indemnity obligations hereunder in connection or to pay for the defense thereof, the Indemnified Party may engage counsel of its choice, defend and/or settle such Claim, and shall be entitled to be indemnified for the full amount of such claim and all costs and expenses, including attorneys’ fees, incurred in connection therewith.

6.3 Unlawful Detainer. Notwithstanding the foregoing, Seller shall be responsible for the costs of its own counsel to defend Seller only for a period of up to 60 days with regard to the unlawful detainer action filed by the landlord of the Premises; provided, however, that Buyers (a) shall use their best efforts to cause Seller to be dismissed from such litigation as soon as possible, and (b) shall be solely responsible for obtaining counsel to defend Company and Buyers, for all defense costs relating to Company and Buyers, and for all damages or any judgment against any party including Seller.

ARTICLE 7
SURVIVAL

7.1 Survival. The representations, warranties, and indemnifications contained in this Agreement, or in any certificate, agreement, or other document or instrument delivered pursuant thereto, shall survive the Effective Date, any investigation conducted by any party hereto, and any information which any party may receive.

ARTICLE 8
MISCELLANEOUS

8.1 Non-Disparagement. Each of the Buyers agrees that they shall not at any time, in any written or communications with the press or other media, any customer, client, stockholder, investor or supplier of Seller or any of its affiliates, or any other person, criticize, ridicule, or make or encourage any other person to make any statement which disparages, is derogatory of, or is negative toward the personal or business reputation, conduct or practices of Seller, any of its affiliates, or any of their then current or former officers, directors, employees, representatives, agents or attorneys. Buyers understand and agree that Seller would be irreparably harmed by violation of this provision, and entitled to immediate and permanent injunctive relief without the necessity of posting any bond.

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8.2 Expenses. Each party hereto shall bear all of his, her, or its expenses incurred in connection with the transactions contemplated by this Agreement, including, without limitation, accounting, and legal fees incurred in connection herewith.

8.3 Further Assurances. From time to time prior to, on and after the date hereof, each party hereto will execute all such instruments and take all such actions as any other party shall reasonably request, without payment of further consideration, in connection with carrying out and effectuating the intent and purpose hereof and all transactions contemplated by this Agreement, including, without limitation, the execution and delivery of any and all confirmatory and other instruments in addition to those to be delivered on the date hereof, and any and all actions which may reasonably be necessary to complete the transactions contemplated hereby. The parties hereto shall cooperate fully with each other and with their respective counsel and accountants in connection with any steps required to be taken as part of their respective obligations under this Agreement.

ARTICLE 9
GENERAL PROVISIONS

9.1 Successors and Assigns. Except as otherwise expressly provided herein, this Agreement shall be binding upon and inure to the benefit of the parties hereto, and their respective representatives, successors and permitted assigns. Neither party may assign any of its rights or delegate any of its obligations hereunder without the prior written consent of the other party hereto. In the event of any such assignment by either party, such assignee shall assume in writing, in form and substance reasonably acceptable to the other party hereto, all of the obligations of such assigning party hereunder. For purposes of this Agreement, “Buyers” or “Seller,” as the case may be, shall be deemed to include such assignee and in furtherance thereof, such assignee shall be deemed to have made all of such assigning party’s representations, warranties, covenants, and agreements in this Agreement. Nothing in this Agreement is intended to confer on any person or entity not a party hereto any rights or remedies by reason of this Agreement.

9.2 Amendments; Waivers. The terms, covenants, representations, warranties, and conditions of this Agreement may be changed, amended, modified, waived, or terminated only by a written instrument executed by the party waiving compliance. The failure of any party at any time or times to require performance of any provision of this Agreement shall in no manner affect the right of such party at a later date to enforce the same. No waiver by any party of any condition or the breach of any provision, term, covenant, representation or warranty contained in this Agreement, whether by conduct or otherwise, in any one or more instances shall be deemed to be or construed as a further or continuing waiver of any such condition or of the breach of any other provision, term, covenant, representation or warranty of this Agreement.

9.3 Notices. All notices, requests, demands and other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly made and received (i) when personally served, (ii) when received by facsimile transmission, or (iii) when delivered by Federal Express or a similar overnight courier service, expenses prepaid. Any party may alter the address to which communications are to be sent by giving notice of such change of address in conformity with the provisions of this Section providing for the giving of notice.

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9.4 Captions; Number and Gender. The captions of Articles and Sections of this Agreement are for convenience only and shall not control or affect the meaning or construction of any of the provisions of this Agreement. In this Agreement, words importing the singular number only shall include the plural and vice versa and words importing gender shall include all genders.

9.5 Governing Law. This Agreement and all questions relating to its validity, interpretation, performance and enforcement shall be governed by and construed in accordance with the laws of the State of California, without giving effect to principles of conflicts of laws.

9.6 Arbitration. Any disputes, controversies or claims arising out of or relating to this Agreement, or otherwise involving Buyer and Seller, shall be resolved by binding arbitration before a retired judge at JAMS (www.jamsadr.com) or its successor in Los Angeles, California pursuant to its streamlined arbitration rules and procedures. The prevailing party shall be awarded its arbitration, attorney and expert fees, costs and expenses. Judgment on any interim or final award may be entered in any court of competent jurisdiction.

9.7 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all of the parties reflected hereon as the signatories.

9.8 Severability. If any provision of this Agreement is determined by a court of competent jurisdiction to be invalid, illegal or unenforceable in any respect, such determination shall not impair or affect the validity, legality or enforceability of the remaining provisions hereof, and each provision is hereby declared to be separate, severable and distinct.

[Remainder of page intentionally left blank]

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9.9 Entire Agreement. This Agreement constitutes the full and entire understanding and agreement between the parties, and supersedes all prior agreements, understandings, inducements or conditions, express or implied, oral or written, which the parties acknowledge have been merged into this Agreement. The express terms hereof control and supersede any course of performance and/or usage of trade inconsistent with any of the terms hereof. This Agreement has been prepared by all of the parties hereto, and no inference of ambiguity against the drafter of a document therefore applies against any party hereto. No party, representative, attorney or agent has relied upon any collateral contract, agreement, assurance, promise, understanding or representation not expressly set forth herein. The parties hereby expressly waive all rights and remedies, at law and in equity, directly or indirectly arising out of or relating to, or which may arise as a result of, any person’s reliance on any such assurance.

IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written.

Buyers:
David Duquette
Joseph Czikmantori
	Seller:
	U.S. AEROSPACE, INC.
	By:
	Its:

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EX-31.1

Exhibit 31.1

SECTION 302 SARBANES OXLEY CERTIFICATION

I, James Worsham, certify that:

(a) I have reviewed this quarterly report on Form 10-Q of U.S. Aerospace, Inc.;

(b) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(c) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(d) I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

(e) I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

December 15, 2010	/s/ James Worsham
	Name:	James Worsham
	Title:	Chief Executive Officer (Principal Executive Officer)

EX-31.2

Exhibit 31.2

SECTION 302 SARBANES OXLEY CERTIFICATION

I, Rosa Rios, certify that:

(f) I have reviewed this quarterly report on Form 10-Q of U.S. Aerospace, Inc.;

(g) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(h) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(i) I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(j) I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

December 15, 2010	/s/ Rosa Rios
	Name:	Rosa Rios
	Title:	Controller (Principal Financial and Accounting Officer)

EX-32.1

Exhibit 32.1

SECTION 906 SARBANES OXLEY CERTIFICATION

CERTIFICATION PURSUANT TO
18 U.S.C. SS.1350,
AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of U.S. Aerospace, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James Worsham, Chief Executive Officer (Principal Executive Officer) of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

December 15, 2010	/s/ James Worsham
	Name:	James Worsham
	Title:	Chief Executive Officer (Principal Executive Officer)

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906 has been provided to Company and will be retained by Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

SECTION 906 SARBANES OXLEY CERTIFICATION

CERTIFICATION PURSUANT TO
18 U.S.C. SS.1350,
AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of U.S. Aerospace, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Rosa Rios, Controller (Principal Financial and Accounting Officer) of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

December 15, 2010	/s/ Rosa Rios
	Name:	Rosa Rios
	Title:	Controller (Principal Financial and Accounting Officer)

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906 has been provided to Company and will be retained by Company and furnished to the Securities and Exchange Commission or its staff upon request.