**Table
      of Contents**







**U.S.
      SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**






**FORM
      10-QSB**




QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
      EXCHANGE ACT OF 1934




For
      the
      quarterly period ended **March
      31, 2007**




**000-28745**


(Commission
      File No.)





______________





**NATIONAL
      SCIENTIFIC CORPORATION**


(Name
      of
      Small Business Issuer in its Charter)


______________




**Texas**
            
            **86-0837077**(State
                of Incorporation)
            
            (I.R.S.
                Employer Identification No.)**8361
                E. Evans Road, Suite 106****Scottsdale,
                AZ**
            
            **85260-3617**(Address
                of Principal Executive Offices)
            
            (Zip
                Code)




**(480)
      948-8324**


(Issuers
      Telephone Number, Including Area Code)





Securities
      registered under Section 12(b) of the Exchange Act:


**Preferred
      Stock, $0.10 par value**




Securities
      registered under Section 12(g) of the Exchange Act:


**Common
      Stock, $0.01 par value**




Check
      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 if the registrant is a shell company (as defined in Rule 12b-2
      of
      the Act). Yes o No þ





There
      were 111,127,066 shares
      of Common Stock, par value $.01 per share, outstanding at May 9,
      2007.




Transitional
      Small Business Disclosure Format (Check One): Yes o No þ


**Table
          of Contents**




**NATIONAL
      SCIENTIFIC CORPORATION**


**FORM
      10-QSB**


**TABLE
      OF CONTENTS**




**Page**Part
                I
            Financial
                Information
            
            3Item
                1.
            Financial
                Statements (unaudited)
            
            3Condensed
                Balance Sheets - As of March 31, 2007
                (Unaudited) and September 30, 2006
            
            3Condensed
                Statements of Operations (Unaudited) - Three
                and six months ended March 31, 2007 and 2006
            
            4Condensed
                Statements of Cash Flows (Unaudited) - Six
                months ended March 31, 2007 and 2006
            
            5Condensed
                Statement of Changes in Shareholders’ Equity
                (Deficit) (Unaudited) - Six months ended March 31, 2007 and
                2006
            
            6Notes
                to Condensed Financial Statements
            
            7Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition
                and Results of Operations
            
            20Item
                3.
            Controls
                and Procedures
            
            24Part
                II
            Other
                Information
            
            25Item
                1.
            Legal
                Proceedings
            
            25Item
                2.
            Changes
                in Securities and Use of
                Proceeds
            
            25Item
                3.
            Defaults
                Upon Senior Securities
            
            26Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            
            26Item
                5.
            Other
                Information
            
            26Item
                6.
            Exhibits
                and Reports on Form 8-K
            
            26Signatures
            
            27Exhibit
                31 - Certification Pursuant to Section 302 of the Sarbanes-Oxley
                ActExhibit
                32 - Certification Pursuant to Section 906 of the Sarbanes-Oxley
                Act





2
 **Table
          of Contents**




**PART
      1 - FINANCIAL INFORMATION**




**Item
              1.**
            **Financial
                Statements**


**NATIONAL
      SCIENTIFIC CORPORATION**




**Condensed
      Balance Sheets**




**March
                  31,**
              
              **September
                  30,****2007**
              
              **2006****ASSETS**
              
              **(Unaudited)**
              ****
              **(Audited)**Current
                  Assets:Cash
                  and cash equivalents
              
              $
              14,448
              
              $
              43,899Trade
                  receivables, net
              
              
              147,645
              
              
              141,498Inventory,
                  net
              
              
              8,156
              
              
              6,020Other
                  assets
              
              
              1,147
              
              
              5,570Total
                  current assets
              
              
              171,396
              
              
              196,987Property
                  and equipment, net
              
              
              830
              
              
              1,037Deposits
              
              
              2,340
              
              
              2,000Deferred
                  financing costs,net
              
              
              17,200
              
              
              19,600Total
                  assets
              
              $
              191,766
              
              $
              219,624**LIABILITIES
                  AND SHAREHOLDERS’ (DEFICIT)**Current
                  Liabilities:Accounts
                  payable - related parties
              
              $
              34,768
              
              $
              83,584Accounts
                  payable - other
              
              
              148,220
              
              
              165,593Accrued
                  expenses
              
              
              977,226
              
              
              848,446Due
                  to factors
              
              
              68,880
              
              
              104,400Notes
                  payable - related party
              
              
              159,000
              
              
              159,000Notes
                  payable - other
              
              
              81,875
              
              
              133,375Total
                  current liabilities
              
              
              1,469,969
              
              
              1,494,398Notes
                  payable, less current portion, net of discount and beneficial conversion
                  feature of $44,099 at March 31, 2007 and $50,252 at September 30,
                  2006
              
              
              130,901
              
              
              124,748Total
                  liabilities
              
              
              1,600,870
              
              
              1,619,146Commitments
                  and contingencies
              
              
              –
              
              
              –Shareholders’
                  (deficit):Preferred
                  stock, par value $0.10; 4,000,000 shares authorized, and no shares
                  issued
                  and outstanding
              
              
              –
              
              
              –Common
                  stock, par value $0.01; 187,000,000 shares authorized, and shares
                  issued
                  and outstanding of 111,127,066 at March 31, 2007 and 99,108,039
                  at
                  September 30, 2006
              
              
              1,111,271
              
              
              991,081Additional
                  paid-in capital
              
              
              22,574,764
              
              
              22,405,152Accumulated
                  deficit
              
              
              (25,095,139
              )
              
              (24,795,755
              )Total
                  shareholders’ (deficit)
              
              
              (1,409,104
              )
              
              (1,399,522
              )Total
                  liabilities and shareholder’s equity (deficit)
              
              $
              191,766
              
              $
              219,624
 
 The
        accompanying notes are an integral part of these condensed financial
        statements.




3
 **Table
          of Contents**




**NATIONAL
      SCIENTIFIC CORPORATION**





**Condensed
      Statements of Operations**


(Unaudited)




**Three
                  months ended**
              
              **Six
                  months ended****March
                  31,**
              
              **March
                  31,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**Revenues
              
              $
              46,500
              
              $
              10,152
              
              $
              184,716
              
              $
              87,831Cost
                  of Sales
              
              
              21,510
              
              
              4,120
              
              
              93,485
              
              
              56,959Gross
                  profit
              
              
              24,990
              
              
              6,032
              
              
              91,231
              
              
              30,872Costs
                  and expensesSalaries
                  and benefits
              
              
              62,529
              
              
              46,562
              
              
              133,851
              
              
              129,689Research
                  and development
              
              
              40,834
              
              
              46,465
              
              
              84,287
              
              
              134,543Stock
                  compensation
              
              
              4,931
              
              
              –
              
              
              7,931
              
              
              –Other
              
              
              34,330
              
              
              44,369
              
              
              69,273
              
              
              87,187Total
                  costs and expenses
              
              
              142,624
              
              
              137,396
              
              
              295,342
              
              
              351,419Loss
                  from operations
              
              
              (117,634
              )
              
              (131,364
              )
              
              (204,111
              )
              
              (320,547
              )Other
                  income (expense)Other
                  income
              
              
              25,000
              
              
              –
              
              
              25,740
              
              
              –Interest
                  expense
              
              
              (82,907
              )
              
              (20,491
              )
              
              (118,613
              )
              
              (36,900
              )Amortization
                  of deferred financing costs
              
              
              (1,200
              )
              
              (1,200
              )
              
              (2,400
              )
              
              (2,000
              )(59,107
              )
              
              (21,691
              )
              
              (95,273
              )
              
              (38,900
              )Loss
                  before income taxes
              
              
              (176,741
              )
              
              (153,055
              )
              
              (299,384
              )
              
              (359,447
              )Income
                  tax expense
              
              
              –
              
              
              –
              
              
              –
              
              
              –Net
                  loss
              
              $
              (176,741
              )
              $
              (153,055
              )
              $
              (299,384
              )
              $
              (359,447
              )Net
                  loss per common share, basic and diluted
              
              $
              (0.00
              )
              $
              (0.00
              )
              $
              (0.00
              )
              $
              (0.00
              )Weighted
                  average number of shares outstanding
              
              
              102,116,638
              
              
              95,876,681
              
              
              100,595,808
              
              
              95,479,030
 
 The
        accompanying notes are an integral part of these condensed financial
        statements *.*


4
 **Table
            of Contents**


**NATIONAL
      SCIENTIFIC CORPORATION**




**Condensed
      Statements of Cash Flows**


(Unaudited)





**Six
                  Months Ended**
                **March
                  31, 2007**
              
              **Six
                  Months Ended**
                **March
                  31, 2006**Cash
                  flows from operating activities:Net
                  loss
              
              $
              (299,384
              )
              $
              (359,447
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
              
              
              207
              
              
              3,321Stock
                  issued for services
              
              
              3,000
              
              
              –Stock
                  options issued for services
              
              
              4,931
              
              
              –Stock
                  issued to cure default of note payable
              
              
              66,000
              
              
              –Warrant
                  expense
              
              
              871
              
              
              –Amortization
                  of deferred financing costs
              
              
              2,400
              
              
              2,000Amortization
                  of debt discount
              
              
              5,160
              
              
              4,300Amortization
                  of beneficial conversion feature
              
              
              993
              
              
              828Changes
                  in assets and liabilities:Decrease
                  (increase) in inventory, net
              
              
              (2,136
              )
              
              5,908Decrease
                  (increase) in receivables, net
              
              
              (6,147
              )
              
              8,702Decrease
                  (increase) in other assets and deposits
              
              
              4,083
              
              
              (19,228
              )Increase
                  in accounts payable and accrued expenses
              
              
              107,591
              
              
              215,618Net
                  cash used in operating activities
              
              
              (112,431
              )
              
              (137,998
              )Cash
                  flows from financing activities:Increase
                  in notes payable
              
              
              20,725
              
              
              177,500Repayment
                  of notes payable
              
              
              (12,025
              )
              
              (16,900
              )Net
                  proceeds from factors
              
              
              (35,520
              )
              
              –Payment
                  of financing costs
              
              
              –
              
              
              (24,000
              )Proceeds
                  from issuance of common stock
              
              
              109,800
              
              
              –Net
                  cash provided by financing activities
              
              
              82,980
              
              
              136,600Net
                  (decrease) increase in cash and cash equivalents
              
              
              (29,451
              )
              
              (1,398
              )Cash
                  and cash equivalents, beginning of period
              
              
              43,899
              
              
              1,616Cash
                  and cash equivalents, end of period
              
              $
              14,448
              
              $
              218Supplementary
                  Disclosure of Cash Flow Information:Cash
                  paid for interest
              
              $
              11,860
              
              $
              625Conversion
                  of accounts payable and accrued expenses to equity
              
              $
              45,000
              
              $
              33,050Conversion
                  of notes payable and accrued expenses to equity
              
              $
              60,200
              
              $
              –Debt
                  discount and beneficial conversion feature
              
              $
              –
              
              $
              61,533
  The
          accompanying notes are an integral part of these condensed financial
          statements.





5
 **Table
          of Contents**




**NATIONAL
      SCIENTIFIC CORPORATION**




**Condensed
      Statement of Changes in Shareholders’
Equity (Deficit)**


**For
      the Six Months Ended March 31, 2007**


(Unaudited)


**Common****Stock****Number
                      of**
                    **Shares**
                  
                  **Par
                      Value**
                  
                  **Additional**
                    **Paid-In**
                    **Capital**
                  
                  **Accumulated**
                    **Deficit**
                  
                  **Total**Balance
                      at September 30, 2006
                  
                  
                  99,108,039
                  
                  $
                  991,081
                  
                  $
                  22,405,152
                  
                  $
                  (24,795,755
                  )
                  $
                  $(1,399,522
                  )Stock
                      issued for servicesPrice
                      per share ranged$0.0385
                  
                  
                  25,974
                  
                  
                  260
                  
                  
                  740
                  
                  
                  –
                  
                  
                  1,000$0.0254
                  
                  
                  78,740
                  
                  
                  787
                  
                  
                  1,213
                  
                  
                  –
                  
                  
                  2,000Stock
                      options granted
                  
                  
                  –
                  
                  
                  –
                  
                  
                  4,931
                  
                  
                  –
                  
                  
                  4,931Stock
                      issued in exchange of accrued expenses for$0.035
                  
                  
                  714,286
                  
                  
                  7,143
                  
                  
                  17,857
                  
                  
                  –
                  
                  
                  25,000$0.030
                  
                  
                  666,667
                  
                  
                  6,666
                  
                  
                  13,334
                  
                  
                  –
                  
                  
                  20,000Private
                      placement of stockShares
                      issued for:$0.02
                  
                  
                  8,000,000
                  
                  
                  80,000
                  
                  
                  80,000
                  
                  
                  –
                  
                  
                  160,000$0.03
                  
                  
                  333,360
                  
                  
                  3,334
                  
                  
                  6,666
                  
                  
                  –
                  
                  
                  10,000Stock
                      issued to settle dispute regarding timing of interest payment
                      on
                      note
                  
                  
                  2,200,000
                  
                  
                  22,000
                  
                  
                  44,000
                  
                  
                  –
                  
                  
                  66,000Warrants
                      issued with debt
                  
                  
                  –
                  
                  
                  –
                  
                  
                  871
                  
                  
                  –
                  
                  
                  871Net
                      loss
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  (299,384
                  )
                  
                  (299,384
                  )Balance
                      at March 31, 2007
                  
                  
                  111,127,066
                  
                  $
                  1,111,271
                  
                  $
                  22,574,764
                  
                  $
                  (25,095,139
                  )
                  $
                  (1,409,104
                  )
 The
            accompanying notes are an integral part of
            these condensed financial statements.




6
 **Table
          of Contents**





**NATIONAL
      SCIENTIFIC CORPORATION**




**NOTES
        TO FINANCIAL STATEMENTS**
 **March
        31, 2007**
 **(Unaudited)**
   **1.**
              **Summary
                  of Significant Accounting Policies and Use of
                  Estimates**
  ***Nature
        of Business***
  Our
        primary business involves the research, development, manufacture, and sale
        of
        hardware and software computer products and devices that span a range of
        industries. The majority of our products are electronic location-determining
        devices and digital video recording devices. These devices typically use
        small,
        portable radios, in conjunction with equally small but powerful mobile
        computers, to help establish and report the physical location of people and
        objects to which these devices are attached. Some of our location technologies
        use Global Positioning System (GPS) technology to determine position. Others
        use
        small computers in conjunction with video cameras and other sensors to record
        incidents on school buses. We also have other products that use non-GPS
        technology to establish and then report position. We refer to our
        location-determining devices as our location tracking products, or as location
        tools.
  Our
        primary customer focus for these location-tracking products is the safety
        market, related in many cases to the safety of children. Our products and
        services help our customers keep better track of their children. Our products
        are also used to keep track of adults, and as well to track and monitor physical
        assets, such as equipment or vehicles. Our location tracking products are
        often
        sold as an integrated system, by using them in conjunction with software
        that
        screen displays maps and other pertinent information.
  We
        have
        focused extensively on developing location tools since early 2002, and our
        primary business objective is to generate revenue and profit from the sale
        of
        our location tracking products and related services. The sale of these products
        and services resulted in small amounts of revenue late in the fiscal year
        ended
        September 30, 2006.
  ***Basis
        of Presentation***
  The
        accompanying financial statements have been prepared by National Scientific
        Corporation (“NSC” or the “Company” or “We”), without audit, and reflect all
        adjustments that are, in the opinion of management, necessary for a fair
        statement of the results for the interim periods. The statements have been
        prepared in accordance with generally accepted accounting principles for
        interim
        financial reporting and Securities and Exchange Commission regulations. Certain
        information and footnote disclosures normally included in financial statements
        prepared in accordance with generally accepted accounting principles have
        been
        condensed or omitted pursuant to such rules and regulations. In the opinion
        of
        management, the financial statements reflect all adjustments (of a normal
        and
        recurring nature) that are necessary for a fair presentation of the financial
        position, results of operations and cash flows for the interim periods.
  These
        financial statements should be read in conjunction with the financial statements
        and notes thereto included in the Company’s annual
        report on
        Form 10-KSB for the fiscal year ended September 30, 2006.
  ***Going
        Concern***
 
 The
        financial statements have been prepared on the basis that the Company will
        continue as a going concern ,
        which
        assumes that adequate sources of financing will be obtained as required and
        that
        our assets will be realized and liabilities settled in the ordinary course
        of
        business. Accordingly, the financial statements do not include any adjustments
        related to the recoverability of assets and classification of assets and
        liabilities that might be necessary should we be unable to continue as a
        going
        concern.
 7
 **Table
              of Contents**
 The
        Company’s ability to continue as a going concern is contingent upon its ability
        to attain profitable operations and secure financing. There can be no assurance
        that additional financing will be available to us when needed or, if available,
        that it can be obtained on commercially reasonable terms. If we are not able
        to
        continue as a going concern, we would likely be unable to realize the carrying
        value of our assets reflected in the balances set out in our financial
        statements.
  The
        results of operations for the six months ended March 31, 2007 are not
        necessarily indicative of the results to be expected for the entire fiscal
        year.
 
 ***Use
        of Estimates***
 
 In
        preparing financial statements in conformity with generally accepted accounting
        principles, management is required 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 financial statements and revenues
        and
        expenses during the reported period. Actual results could differ from those
        estimates.
  ***Revenue
        Recognition***
  The
        Company recognizes revenue when persuasive evidence of an arrangement exists,
        the sales price is fixed or determinable, collection is reasonably assured
        and
        delivery of products has occurred or services have been rendered. Accordingly,
        the Company recognizes revenues upon shipment of product to customers.
  ***Fair
        Value of Financial Instruments***
  The
        Company’s financial instruments consist of cash and cash equivalents, accounts
        receivables, other receivables, accounts payable and accrued liabilities
        and
        notes payable. Unless otherwise noted, it is management’s opinion that the
        Company is not exposed to significant interest, currency or credit risks
        arising
        from these financial instruments. The fair value of these financial instruments
        approximates their carrying values, unless otherwise noted.
  ***Earnings
        per Share***
 
 Statement
        of Financial Accounting Standards No. 128, “Earnings per Share,” (“SFAS 128”)
        provides for the calculation of Basic and Diluted earnings per share. Basic
        earnings per share includes no dilution and is computed by dividing income
        available to common shareholders by the weighted average number of common
        shares
        outstanding for the period. Diluted earnings per share reflect the potential
        dilution of securities that could share in the earnings of the Company
        calculated using the treasury stock method.
  ***Stock-Based
        Compensation***
  Effective
        October 1, 2006, the Company adopted the fair value recognition provisions
        of
        Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based
        Payment” (“SFAS 123R”), using the modified prospective transition method and
        therefore the Company has not restated its results for prior periods. Under
        this
        transition method, stock-based compensation expense for the six months ended
        March 31, 2007 includes compensation expense for all stock-based compensation
        awards granted subsequent to October 1, 2006, based on the grant date fair
        value
        estimated in accordance with the original provision of Statement of Financial
        Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS
        123”). All stock based compensation awards were fully vested as of September
        30,
        2006. The Company recognizes these compensation costs on a straight-line
        basis
        over the requisite service period of the award, which in the case of option
        grants is ten years. Stock-based compensation expense for all stock-based
        compensation awards granted after October 1, 2006 is based on the grant-date
        fair value estimated in accordance with the provisions of SFAS
        123R.
 8
 **Table
              of Contents**
 We
        estimate fair value using the Black-Scholes option-pricing model. Assumptions
        used to estimate the compensation expense are determined as follows:
 
 **•**
              Expected
                  term is determined using a weighted average of the contractual
                  term and
                  vesting period of the award;**•**
              Expected
                  volatility is measured using the average of historical daily changes
                  in
                  the market price of the Company’s common stock over two years prior to the
                  award.;**•**
              Risk-free
                  interest rate is equivalent to the implied yield on U.S. Treasury
                  bills
                  with a remaining maturity equal to the expected term of the awards;
                  and,**•**
              Forfeitures
                  are based on the history of cancellations of similar awards granted
                  by the
                  Company and management’s analysis of potential
                  forfeitures.
  Prior
        to
        the adoption of SFAS 123R, the Company recognized stock-based compensation
        expense in accordance with Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees” (“APB 25”). In March 2005, the SEC
        issued Staff Accounting Bulletin No. 107 (“SAB 107”) regarding the SEC’s
        interpretation of SFAS 123R and the valuation of share-based payments for
        public
        companies. The Company has applied the provisions of SAB 107 in its adoption
        of
        SFAS 123R. See Note 2 to the financial statements for a further discussion
        on
        stock-based compensation.
  ***Recent
        Accounting Pronouncements***
  In
          September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
          No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
          Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106,
          and
          132(R)”. This statement requires employers to recognize the overfunded or
          underfunded status of a defined benefit postretirement plan (other than
          a
          multiemployer plan) as an asset or liability in its statement of financial
          position and to recognize changes in that funded status in the year in
          which the
          changes occur through comprehensive income of a business entity or changes
          in
          unrestricted net assets of a not-for-profit organization. This statement
          also
          requires an employer to measure the funded status of a plan as of the date
          of
          its year-end statement of financial position, with limited exceptions.
          The
          provisions of SFAS No. 158 are effective for employers with publicly traded
          equity securities as of the end of the fiscal year ending after December
          15,
          2006. The adoption of this statement is not expected to have a material
          effect
          on the Company’s future reported financial position or results of
          operations.
  In
          February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
          for Financial Assets and Financial Liabilities” (“SFAS 159”), which is effective
          for fiscal years beginning after November 15, 2007. This Statement permits
          entities to choose to measure many financial instruments and certain other
          items
          at fair value. The objective is to improve financial reporting by providing
          entities with the opportunity to mitigate volatility in reported earnings
          caused
          by measuring related assets and liabilities differently without having
          to apply
          complex hedge accounting provisions. The Company is currently evaluating
          the
          impact of SFAS 159 on its financial statements, but does not expect this
          new
          accounting pronouncement to have a material impact.
 **2.**
                **Issuance
                    of Common Stock**
  In
          February 2007, the Company commenced a private offering of restricted common
          stock and common stock purchase warrants. During the period ended March
          31,
          2007, the Company raised $170,000 consisting of $109,800 in cash and $60,200
          in
          debt forgiveness and issued 8,333,360 shares of restricted common stock
          and
          granted 2,720,000 warrants to purchase common stock at an exercise price
          of
          between $0.08 and $0.30 per share (market price on date of grant). 8,000,000
          shares were issued at an average market price of $0.02 per share and 333,360
          shares were issued at an average market price of $0.02 per share. No
          underwriters were involved in connection with this private placement. The
          sales
          and issuances of the securities issued pursuant to the foregoing private
          placement are exempt from registration under the Securities Act of 1933,
          as
          amended, pursuant to Section 4(2) thereof, and Rule 506 of Regulation
          D.
 9
 **Table
                of Contents**
 On
          March
          19, 2007, the Company issued 714,286 of its restricted common shares to
          Mr.
          Michael Grollman, at the closing price of $0.035 in lieu of his partial
          forgiveness of the Company’s back pay indebtedness to him.
  On
          March
          20, 2007, the Company issued 78,740 of its restricted common shares to
          Mr. Greg
          Szabo for services as a director, at the average closing price for the
          quarter
          ended December 31, 2006 of $0.0254 .
  On
          March
          20, 2007, the Company issued 25,974 of its restricted common shares to
          Mr. Greg
          Szabo for services rendered as a director, at the average closing price
          for the
          quarter ended September 30, 2006 closing price of $0.0385.
 
 On
          March
          23, 2007, the Company issued 666,667 of its restricted common shares to
          Mr.
          Graham Clark, at the closing price of $0.030 in lieu of his partial forgiveness
          of the Company’s back pay indebtedness to him.
  On
            March
            23, 2007, the Company issued 2,200,000 of its restricted common shares
            to
            a note holder, at the closing price of $0.030 to
            settle
            a dispute regarding payment timing of interest on the note.
 **3.**
                **Stock-Based
                    Compensation**
  ***Stock
          Options***
  On
        October 1, 2006, the Company adopted the fair value recognition provisions
        of
        SFAS 123R. Prior to October 1, 2006, the Company accounted for share-based
        payments under the recognition and measurement provisions of APB 25, and
        related
        Interpretations, as permitted by SFAS 123. In accordance with APB 25, no
        compensation cost was required to be recognized for options granted that
        had an
        exercise price equal to the market value of the underlying common stock on
        the
        date of grant.
  The
        Company adopted SFAS 123R using the modified prospective transition method.
        Under this transition method, compensation cost recognized in the three months
        ended March 31, 2007 includes compensation cost for all share-based payments
        granted subsequent to October 1, 2006, based on the grant-date fair value
        estimated in accordance with the provisions of SFAS 123R. All stock based
        compensation awards were fully vested as of September 30, 2006. The results
        for
        prior periods have not been restated.
  As
        of
        March 31, 2007, we have a stock-based compensation plan initially adopted
        in
        2000 wherein officers and employees were granted stock options. Under the
        2000
        Stock Option Plan, the purchase price must be at least 100% of the fair market
        value of our common stock (if the option is an incentive stock option), or
        at
        least 25% of the fair market value of our common stock at the time the option
        is
        granted (if the option is a nonqualified grant), or such higher price as
        may be
        determined by the Board of Directors at the time of grant. If however, an
        incentive stock option is granted to an individual who would, immediately
        before
        the grant, directly or indirectly own more than 10% of the total combined
        voting
        power of all our classes of stock, the purchase price of the shares of common
        stock covered by such incentive stock option may not be less than 110% of
        the
        fair market value of such shares on the day the incentive stock option is
        granted. As the price of the Company’s common stock is currently quoted on the
        OTC Bulletin Board, the fair market value of the common stock underlying
        options
        granted under the 2000 Stock Option Plan shall be the last closing sale price
        of
        the common stock on the day the options are granted. If there is no market
        price
        for the common stock, then our Board of Directors may, after taking all relevant
        facts into consideration, determine the fair market value of our common
        stock.
 Our
          board
          of directors adopted the 2000 Stock Option Plan effective January 1, 2001.
          Our
          stockholders formally approved the 2000 Stock Option Plan on February 14,
          2001.
 10
 **Table
              of Contents**
 As
        of
        March 31, 2007, we have issued options to purchase an aggregate of 4,346,756
        shares of our common stock, under the plan, leaving a balance of 2,653,244
        available for grant. Also as of March 31, 2007, 4,346,756 options are
        exercisable and , 4,346,756 are vested. We have reserved the right to issue
        a
        total of 7,000,000 shares of our common stock for issuance under the 2000
        Stock
        Option Plan.
 
 The
        following table summarizes the stock option activity during the first six
        months
        of fiscal 2007:
 
 **Weighted**
              
              **Weighted
                  Average****Number**
              
              **Average**
              
              **Remaining**
              
              **Aggregate**
              
              **Aggregate****of**
              
              **Exercise**
              
              **Contractual**
              
              **Fair**
              
              **Intrinsic****Shares**
              
              **Price**
              
              **Term
                  (1)**
              
              **Value**
              
              **Value
                  (2)**Options
                  Outstanding, September 30, 2006
              
              
              4,159,938
              
              $
              0.74
              
              
              5.80
              
              $
              60,673Granted
              
              
              186,818
              
              
              0.03
              
              
              9.80
              
              
              4,930Exercised
              
              
              –
              
              
              –
              
              
              
              
              
              –Forfeited
                  or expired
              
              
              –
              
              
              –
              
              
              
              
              
              –Options
                  Outstanding, March 31, 2007
              
              
              4,346,756
              
              $
              0.71
              
              
              6.56
              
              $
              65,603
              
              $
              8,556Options
                  Exercisable March 31, 2007
              
              
              4,346,756
              
              $
              0.71
              
              
              6.56
              
              $
              65,603
              
              $
              8,556____________
 (1)
              Remaining
                  contractual term is presented in
                  years
 (2)
                The
                    aggregate intrinsic value is calculated as the difference between
                    the
                    exercise price of the underlying awards andthe
                    closing price of our common stock as of March 31, 2007, for those
                    awards
                    that have an exercise price currentlybelow
                    the closing price as of March 31, 2007. Awards with an exercise
                    price
                    above the closing price as ofMarch
                    31, 2007 of $0.05 are considered to have no intrinsic
                    value.
  During
          the six months ended March 31, 2007, no options were
          exercised, expired or forfeited.
 As
          required by SFAS 123R, the fair value of each grant is estimated on the
          date of
          the grant using the Black-Scholes option pricing method for footnote disclosure
          with the following assumptions to value options for the six months ended
          March
          31, 2007:
 Risk
                    -free interest rate
                4.46%
                    to 4.65%Expected
                    life (years)
                10Expected
                    volatility
                91.4%
                    to 181.8%Expected
                    dividends
                NoneForfeitures
                    assumed
                None
 11
 **Table
                of Contents**
 The
          following table summarizes the status of stock options outstanding at March
          31,2007:
  **Stock
                    Options Outstanding**
                
                **Stock
                    Options Exercisable****Range
                    of Exercise Prices**
                
                **Number
                    of**
                  **Shares**
                
                **Weighted
                    Average Remaining Contractual**
                  **Term
                    (1)**
                
                **Weighted
                    Average Exercise Price**
                
                **Number
                    of**
                  **Shares**
                
                **Weighted
                    Average Exercise Price**$0.02
                    to $0.03
                
                
                150,117
                
                
                9.75
                
                $
                0.03
                
                
                150,117
                
                $
                0.03$0.04
                    to $0.04
                
                
                407,382
                
                
                9.50
                
                $
                0.04
                
                
                407,382
                
                $
                0.04$0.05
                    to $0.46
                
                
                2,479,257
                
                
                6.04
                
                $
                0.18
                
                
                2,479,257
                
                $
                0.18$1.84
                    to $1.84
                
                
                1,000,000
                
                
                3.67
                
                $
                1.84
                
                
                1,000,000
                
                $
                1.84$2.00
                    to $3.00
                
                
                310,000
                
                
                3.81
                
                $
                2.49
                
                
                310,000
                
                $
                2.49Total
                
                
                4,346,756
                
                
                6.56
                
                $
                0.71
                
                
                4,346,756
                
                $
                0.71____________(1)  
Remaining
                  contractual term is presented in
                  years.
 The
        following table illustrates the effect on net loss and loss per share for
        the
        three and six months ended March 31, 2006 if the Company applied the fair
        value
        recognition provisions of SFAS 123 to stock-based compensation:
 
 **Three
                  months ended**
                **March
                  31, 2006**
              
              **Six
                  months ended**
                **March
                  31, 2006**Net
                  loss as reported
              
              $
              (153,055
              )
              $
              (359,447
              )Deduct:
                    Total stock based compensation as determined under the fair value
                    method
              
              
              –
              
              
              –Add:
                    Total stock based compensation recorded in the statements of
                    operations
              
              
              –
              
              
              –Pro
                  forma net loss
              
              $
              (153,055
              )
              $
              (359,447
              )Loss
                  per share as reported
              
              $
              (0.00
              )
              $
              (0.00
              )Loss
                  per share, pro forma
              
              $
              (0.00
              )
              $
              (0.00
              )
 
 As
        required by SFAS 123, as amended, the fair value of each grant is estimated
        on
        the date of grant using the Black-Scholes option pricing method for pro forma
        footnote disclosure. During the six months March 31, 2006, the Company did
        not
        grant any options to employees under the 2000 Stock Option Plan.
 12
 **Table
              of Contents**
 ***Warrants***
  The
        following table summarizes the warrant activity during the first six months
        of
        fiscal 2007:
 
 **Weighted**
              
              **Weighted
                  Average****Number**
              
              **Average**
              
              **Remaining**
              
              **Aggregate**
              
              **Aggregate****of**
              
              **Exercise**
              
              **Contractual**
              
              **Fair**
              
              **Intrinsic****Shares**
              
              **Price**
              
              **Term
                  (1)**
              
              **Value**
              
              **Value
                  (2)**Warrants
                  Outstanding, September 30, 2006
              
              
              15,384,197
              
              $
              0.15
              
              
              2.36
              
              $
              103,492Granted
              
              
              3,220,000
              
              
              0.12
              
              
              1.94
              
              
              52,656Exercised
              
              
              –
              
              
              –
              
              
              –
              
              
              –Cancelled
              
              
              (250,000
              )
              
              0.04
              
              
              4.42
              
              
              (8,801
              )Warrants
                  Outstanding, March 31, 2007
              
              
              18,354,197
              
              $
              0.17
              
              
              1.92
              
              $
              147,347
              
              $
              14,050___________
 (1)
                Remaining
                    contractual term is presented in
                    years.
 (2)
                The
                    aggregate intrinsic value is calculated as the difference between
                    the
                    exercise price of the underlying awards and the
                    closing price of our common stock as of March 31, 2007, for those
                    awards
                    that have an exercise price currently below
                    the closing price as of March 31, 2007. Awards with an exercise
                    price
                    above the closing price as of March
                    31, 2007 of $0.05are
                    considered to have no intrinsic
                    value.
 Assumptions
            utilized to value warrants were as follows:
 Risk-free
                  interest rate
              4.60%
                  to 4.82%Expected
                  life (years)
              2
                  to 5Expected
                  volatility
              83.5%
                  to 181.2%Expected
                  dividends
              NoneForfeitures
                  assumed
              None
  On
        December 20, 2006 a note for $50,000, with a maturity date of November 6,
        2006,
        was extended to March 31, 2007. The extension agreement included an extension
        fee of $1,000 and 500,000 warrants to purchase our common stock at $0.035
        at any
        time before December 8, 2011. The warrants were determined to have a debt
        discount of $9,672. The extension fee of $1,000 and debt discount of $9,672
        were
        incurred in connection with a short-term loan and were fully amortized as
        interest expense in the quarter ended December 31, 2006. On March 9, 2007,
        as
        part of our private placement offering of February 2007, the lender requested
        to
        exchange the principal amount of the loan of $50,000 for 2,500,000 shares
        of
        restricted common stock and 400,000 warrants to purchase common stock at
        an
        exercise price of $0.08 per share and  400,000
        warrants to purchase common stock at an exercise price of $0.15 per share.
        The
        2,500,000 shares were issued at an average market price of $0.02 per share.
        The
        lender returned
        250,000 warrants of the 500,000 warrants issued as part of the extension
        agreement of December 20, 2006. On March 9, 2009 the fair value of $8,801
        for
        the 250,000 returned warrants was credited back to interest expense. All
        interest due on the loan was fully paid.
  During
        the three months ended March 31, 2007, no share purchase warrants were exercised
        or have expired and no warrants were forfeited during the same
        quarter.
 13
 **Table
              of Contents**
 The
        following table summarizes the status of outstanding warrants at March 31,
        2007:
 
 **Warrants
                  Outstanding**
              
              **Warrants
                  Exercisable****Range
                  of Exercise Prices**
              
              **Number
                  of Shares**
              
              **Weighted
                  Average Remaining Contractual Term (1)**
              
              **Weighted
                  Average**
                **Exercise
                  Price**
              
              **Number
                  of Shares**
              
              **Weighted
                  Average**
                **Exercise
                  Price**$0.035
                  to $0.035
              
              
              750,000
              
              
              4.420
              
              $
              0.035
              
              
              750,000
              
              $
              0.035$0.036
                  to $0.036
              
              
              200,000
              
              
              2.130
              
              $
              0.036
              
              
              200,000
              
              $
              0.036$0.050
                  to $0.500
              
              
              450,000
              
              
              2.340
              
              $
              0.050
              
              
              450,000
              
              $
              0.050$0.062
                  to $0.062
              
              
              135,000
              
              
              1.240
              
              $
              0.062
              
              
              135,000
              
              $
              0.062$0.080
                  to $0.080
              
              
              800,000
              
              
              1.840
              
              $
              0.080
              
              
              800,000
              
              $
              0.080$0.090
                  to $0.090
              
              
              50,000
              
              
              1.470
              
              $
              0.090
              
              
              50,000
              
              $
              0.090$0.100
                  to $0.100
              
              
              3,588,497
              
              
              2.430
              
              $
              0.100
              
              
              3,588,497
              
              $
              0.100$0.110
                  to $0.110
              
              
              7,750,700
              
              
              2.020
              
              $
              0.110
              
              
              7,750,700
              
              $
              0.110$0.130
                  to $0.130
              
              
              640,000
              
              
              0.020
              
              $
              0.130
              
              
              640,000
              
              $
              0.130$0.150
                  to $0.150
              
              
              880,000
              
              
              1.840
              
              $
              0.150
              
              
              880,000
              
              $
              0.150$0.200
                  to $0.200
              
              
              480,000
              
              
              1.840
              
              $
              0.200
              
              
              480,000
              
              $
              0.200$0.300
                  to $0.300
              
              
              80,000
              
              
              1.840
              
              $
              0.300
              
              
              80,000
              
              $
              0.300$0.350
                  to $0.350
              
              
              1,000,000
              
              
              0.250
              
              $
              0.350
              
              
              1,000,000
              
              $
              0.350$0.500
                  to $0.500
              
              
              1,275,000
              
              
              0.250
              
              $
              0.500
              
              
              1,275,000
              
              $
              0.500$0.750
                  to $0.750
              
              
              275,000
              
              
              0.250
              
              $
              0.750
              
              
              275,000
              
              $
              0.75018,354,197
              
              
              
              
              
              
              
              
              18,354,197__________(1)  
Remaining
                contractual term is presented in years.
 
 **4.**
                  **Trade
                      Receivables**
  Trade
            receivables are net of reserves:
  **March
                  31, 2007**
                **(Unaudited)**
              
              **September
                  30, 2006**
                **(Audited)**Trade
                  receivables
              
              $
              147,645
              
              $
              141,498Less:
                  reserves
              
              
              –
              
              
              –$
              147,645
              
              $
              141,498
 14
 **Table
              of Contents**
 On
        September 7, 2005, we entered into a factoring agreement with United Capital
        Funding (UCF) of Florida. UCF is a specialized financial services firm offering
        Accounts Receivable Management and working capital funding via factoring.
        We
        expect to improve our cash flow with this arrangement. Under the arrangement,
        we
        sell to UCF as absolute owner, invoices that we submit to UCF to be factored.
        Upon purchase, UCF assumes the risk of non-payment on purchased invoices,
        so
        long as the cause of non-payment is solely due to the occurrence of an
        insolvency event. As collateral securing the obligations, we grant UCF a
        continuing first priority security interest in all accounts and related
        inventory. Notwithstanding the creation of the above security interest, our
        relationship with UCF is one of Seller and Purchaser of accounts, and not
        that
        of lender and borrower. However, as there is certain recourse for non-payment,
        the accounts receivable are recorded at the estimated realizable value, net
        of
        allowances and the net advanced amount from UCF is recorded as an obligation
        at
        March 31, 2007 and September 30, 2006. The initial and periodic factoring
        fee is
        .45% of the face amount of factored invoices. The factoring period is five
        days
        and the purchase price is 80% of the face amount, excluding sales tax. UCF
        typically advances to us 80% of the total amount of invoices factored, excluding
        sales tax. UCF retains 20% of the outstanding factored invoices as a reserve,
        which it holds until the customer pays the factored invoice to UCF.
  As
        of
        March 31, 2007, Trade Receivables of $147,645 included factored invoices
        totaling $91,704. As of September 30, 2006, Trade Receivables of $141,498
        included factored invoices totaling $140,875.
  **5.**
                **Inventory,
                    net**
 Inventories,
          primarily finished goods, are stated at the lower of cost or market values.
          Cost
          is determined on a FIFO (first-in, first-out) basis.
  Inventory,
          net consisted of the following at March 31, 2007 and September 30,
          2006:
  **March
                  31, 2007**
                **(Unaudited)**
              
              **September
                  30, 2006**
                **(Audited)**Inventory,
                  gross
              
              $
              72,758
              
              $
              70,622Less:
                  reserve for obsolescence
              
              
              (64,602
              )
              
              (64,602
              )Inventory,
                  net
              
              $
              8,156
              
              $
              6,020
  We
        marked
        down our inventory of Gotcha!® products, during the two years ended September
        30, 2006 by $64,602 for estimated obsolescence based on assumptions about
        age of
        the inventory and current demand.
  **6.**
                  **Accrued
                      Expenses**
 
 Accrued
        expenses consisted of the following at March 31, 2007 and September 30,
        200 6 **:**
 15
 **Table
              of Contents**
 **March
                  31, 2007**
                **(Unaudited)**
              
              **September
                  30, 2006**
                **(Audited)**Salaries
                  and vacation pay - current management and staff
              
              $
              692,850
              
              $
              585,678Salaries
                  and vacation pay - former employee
              
              
              29,375
              
              
              29,375Payroll
                  taxes for back pay
              
              
              45,936
              
              
              37,342Interest
              
              
              135,007
              
              
              101,698Employee
                  stock retainage pool
              
              
              50,250
              
              
              50,250Other
                  liabilities
              
              
              23,808
              
              
              44,103$
              977,226
              
              $
              848,446
 
 **7.**
                  **Notes
                      Payable and Long-Term
                      Debt**
  As
        of
        March 31, 2007 and September 30, 2006, all long-term debt consisted of the
        following notes payable:
 
 `
              
              **March
                  31, 2007**
                **(Unaudited)**
              
              **September
                  30, 2006**
                **(Audited)**Non-interest
                  bearing note payable, due June 2006; unsecured;repayment
                  may be made by the Company with either cash or itsrestricted
                  common stock or a combination of cash and stock
              
              $
              43,250
              
              $
              43,2506%
                  note payable to a related party; unsecured; principal andinterest
                  payable on demand; unsecured
              
              
              159,000
              
              
              159,000Non-interest
                  bearing note payable; unsecured; payable on demand
              
              
              –
              
              
              1,000Non-interest
                  bearing note payable; unsecured; payable on demand
              
              
              –
              
              
              1,500Non-interest
                  bearing note payable; unsecured; payable on demand
              
              
              1,000
              
              
              1,00012%
                  note payable; secured; payable on demand
              
              
              11,625
              
              
              16,62512%
                  note payable; secured; payable on demand
              
              
              20,000
              
              
              20,0008%
                  note payable; unsecured; principal payable in full in November
                  2010;with
                  semi-annual interest payments in May and November
              
              
              175,000
              
              
              175,00012%
                  note payable; secured; payable on demand
              
              
              –
              
              
              50,0006%
                  note payable; unsecured; payable on demand with 30 days prior
                  notice
              
              
              6,000
              
              
              –415,875
              
              
              467,375Less:Current
                  portion of long term debt
              
              
              (240,875
              )
              
              (292,375
              )Discount
              
              
              (36,980
              )
              
              (42,140
              )Beneficial
                  conversion feature
              
              
              (7,119
              )
              
              (8,112
              )Long-term
                  debt, net of current portion
              
              $
              130,901
              
              $
              124,748
 16
 **Table
              of Contents**
 On
        June
        11, 2003, the Company issued a three-year interest free convertible note
        of
        $43,250, with no payments required of the Company until the end of the
        three-year period, to its then-Director Mr. Lou Ross for past services rendered
        (See 10-KSB report for the year ended September 30, 2003). The Company can
        pay
        this note at any time with either cash or its common restricted stock or
        a
        combination of cash and stock, at its sole discretion. The Company intends
        to
        convert this note to its restricted common stock upon request from Mr. Ross.
        Mr.
        Ross retired from the Company’s board on September 30, 2003.
 
 On
        February 24, 2005, March 28, 2005, May 2, 2005, and May 27, 2005 our Chairman,
        Michael Grollman made new personal loans to the Company totaling $159,000
        to
        assist us with working capital needs. The loans are evidenced by a demand
        note
        that provides for repayment within five business days of a demand notice
        from
        Mr.Grollman, with interest of 6% compounded annually from June 1, 2005. As
        of
        March 31, 2007, these loans were outstanding.
  On
        November 1, 2005, as an important phase in the current years financing plan,
        we
        entered into a financing program with a U.S. investment fund. The terms of
        this
        program include a five-year Note payable at maturity in November 2010 for
        $175,000, at an effective annual interest rate of 8%. Interest is due and
        payable semi-annually on May 1 st and
        November 1 st for each
        year in which the note is outstanding. The transaction also included 1,200,000
        restricted common shares and a conversion/exchange option to convert the
        principal amount and any unpaid interest of the Note into common shares at
        a per
        share conversion price of $0.0525. These shares include weighted average
        anti-dilution provisions, as well as piggyback registration rights.
        Additionally, the Note has various put and call rights. The 1,200,000 restricted
        common shares were recorded at $0.043, which was the five-day average market
        closing price of our stock. The note and common stock were issued with a
        debt
        discount of $51,600 and a beneficial conversion feature of $9,933. The discount
        and beneficial conversion feature are being amortized to interest expense
        over
        the term of the note, which is approximately 60 months. The issuance of the
        shares resulted in deferred financing costs of $24,000. The deferred financing
        costs are being amortized over the term of the note, which is approximately
        60
        months, and are included in the statement of operations as financing
        costs. Lateness
        was disputed regarding interest payments of May 1, 2006 and November
        1, 2006. On March 23, 2007, the dispute was cured with the issue
        of
        2,200,000 restricted shares of our common stock. The stock was valued at
        $0.030, the
        closing market price of our stock on March 23, 2007, and $66,000
        was recorded as interest expense in the quarter ended March 31, 2007.


In
        March
        and April 2006 we secured short-term loans in the aggregate principal amount
        of
        $3,500. The loans are unsecured and non-interest bearing and payable on demand.
        $2,500 of these loans was repaid in February 2007.
  On
        April
        27, 2006, we secured a short-term loan of $16,625 from a shareholder. The
        loan
        carries an origination/placement fee of $500 and has a perfectible security
        interest a) prior to delivery in any assets purchased for the fulfillment
        of a
        customer’s order dated March 16, 2006, and b) in any receivable resulting from
        the fulfillment of the customer’s purchase order. The interest rate on the loan
        is 12%. The transaction also included 100,000 warrants to purchase our common
        stock at $0.036 at any time before April 27, 2009. The note had an approximate
        maturity date of June 15, 2006. At September 30, 2006 and March 31, 2007
        this
        note was in default. A partial payment towards principal and interest of
        $5,258
        was made on October 6, 2006.
  On
        May
        31, 2006, we secured a short-term loan of $20,000 from a shareholder. The
        loan
        carries an origination/placement fee of $500 and has a perfectible security
        interest a) prior to delivery in any assets purchased for the fulfillment
        of
        Clover Park, WA’s order and b) in any receivable resulting from the fulfillment
        of the Clover Park purchase order. The interest rate on the loan is 12%.
        The
        transaction also included 100,000 warrants to purchase our common stock at
        $0.036 at any time before May 31, 2009. The note had a maturity date of July
        10,
        2006. At September 30, 2006 and March 31, 2007 this note was in
        default.
 17
 **Table
              of Contents**
 On
        August
        8, 2006, we secured a short-term loan of $50,000 from a shareholder. The
        loan
        carries an origination/placement fee of $2,000 and has a perfectible security
        interest a) in the purchase orders of Gilbert School District and Jefferson
        County School District and b) a lien on property owned by Graham Clark at
        15449
        N. Cabrillo Drive, Fountain Hills, AZ 85268. The interest rate on the loan
        is
        12%. The transaction also included 500,000 warrants to purchase our common
        stock
        at $0.035 at any time before August 8, 2011. The note had a maturity date
        of
        November 6, 2006. On December 20, 2006 a note for $50,000, with a maturity
        date
        of November 6, 2006, was extended to March 31, 2007. The extension agreement
        included an extension fee of $1,000 and 500,000 warrants to purchase our
        common
        stock at $0.035 at any time before December 8, 2011. The warrants were
        determined to have a debt discount of $9,672. The extension fee of $1,000
        and
        debt discount of $9,672 were incurred in connection with a short-term loan
        and
        were fully amortized as interest expense in the quarter ended December 31,
        2006.
        On March 9, 2007, as part of our private placement offering of February 2007,
        the lender requested to exchange the principal amount of the loan of $50,000
        for
        2,500,000 shares
        of
        restricted common stock and 400,000 warrants to purchase common stock at
        an
        exercise price of $0.08 per share and  400,000
        warrants to purchase common stock at an exercise price of $0.15 per share.
        The
        2,500,000 shares were issued at an average market price of $0.02 per share.
        The
        lender returned
        250,000 warrants of the 500,000 warrants issued as part of the extension
        agreement of December 20, 2006. On March 9, 2007 the fair value of $8,801
        for
        the 250,000 returned warrants was credited back to interest expense. All
        interest due on the loan was fully paid.
  On
        December 27, 2006, we signed a loan agreement with an employee for $8,000.
        The
        loan is unsecured and carries an interest rate of 6%. The note is payable
        on
        demand with 30 days prior notice On February 27, 2007 we made payment of
        $2,000
        towards the principal amount.
  On
        or
        around January 15, 2007 we secured short-term thirty-day loans totaling $12,725
        from four shareholders. The loans are unsecured and non-interest bearing
        or
        carry nominal interest only. In February 2007, these loans were repaid in
        cash
        or, at the request of the lenders, were exchanged for equity as part of our
        private placement offering of February 2007.
  The
        aggregate maturities of long-term debt were as follows:
 
 2007
              
              $
              240,8752008
              
              
              –2009
              
              
              –2010
              
              
              –2011
              
              
              175,000$
              415,875
  **8.**
                  **Earnings
                      Per Share**
 
 Statement
        of Financial Accounting Standards No. 128, “Earnings per Share,” provides
        for the calculation of Basic and Diluted earnings per share. Basic earnings
        per
        share includes no dilution and is computed by dividing income available to
        common stockholders by the weighted average number of common shares outstanding
        for the period.
  The
        following table reconciles weighted average shares outstanding to amounts
        used
        to calculate basic and diluted earnings per share for the three months ended
        March 31, 2007 and March 31, 2006.
 18
 **Table
                of Contents**
 **Three
                    months ended**
                
                **Six
                    months ended****March
                    31,**
                
                **March
                    31,****2007**
                ****
                ****
                **2006**
                ****
                ****
                **2007**
                ****
                ****
                **2006**Net
                    (loss)
                
                $
                (176,741
                )
                $
                (153,055
                )
                $
                (299,384
                )
                $
                (359,447
                )Weighted
                    average shares:Average
                    shares outstanding
                
                
                102,116,638
                
                
                95,876,681
                
                
                100,595,808
                
                
                95,479,030Effect
                    of dilutive shares
                
                
                –
                
                
                –
                
                
                –
                
                
                –Average
                    shares outstanding adjusted for dilutive effect
                
                
                102,116,638
                
                
                95,876,681
                
                
                100,595,808
                
                
                95,479,030(Loss)
                    per share - basic
                
                $
                (0.00
                )
                $
                (0.00
                )
                $
                (0.00
                )
                $
                (0.00
                )(Loss)
                    per share - diluted
                
                $
                (0.00
                )
                $
                (0.00
                )
                $
                (0.00
                )
                $
                (0.00
                )
 
 Incremental
        common shares (not included in denominator of diluted earnings per share
        because
        of their anti-dilutive nature):
 
 **March
                  31, 2007**
              
              **March
                  31, 2006**Options
              
              
              4,346,756
              
              
              3,789,257Warrants
              
              
              18,354,197
              
              
              15,434,197Potential
                  common equivalents
              
              
              22,700,953
              
              
              19,223,454
  **9.**
                  **Subsequent
                        Events**
 None.


19
 **Table
          of Contents**


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


**SAFE
          HARBOR STATEMENT**
  Statements
          contained herein that are not historical fact may be forward-looking statements
          within the meaning of Section 27A of the Securities Act of 1933, as amended,
          and
          Section 21E of the Securities Exchange Act of 1934, as amended. We use
          words and
          phrases such as “should be,” “will be,” “believes,” “expects,” “anticipates,”
“plans,” “intends,” “may” and similar expressions to identify forward-looking
          statements. Forward-looking statements are made based upon our belief as
          of the
          date that such statements are made. These forward-looking statements are
          based
          largely on our current expectations and are subject to a number of risks
          and
          uncertainties, many of which are beyond our control. You should not place
          undue
          reliance on these forward-looking statements, which apply only as of the
          date of
          such documents. Our actual results could differ materially from those
          anticipated in these forward-looking statements for many reasons, including
          the
          risks faced by us described above and elsewhere in this report.
  **General**
  The
          following is management’s discussion and analysis of certain significant factors
          affecting our financial position and operating results during the periods
          included in the accompanying condensed financial statements. Except for
          the
          historical information contained herein, the matters set forth in this
          report
          are forward-looking statements.
 
 **Overview**
  Our
            business focuses on the research, development, and sale of location tools
            used
            to track or monitor people or objects such as vehicles or other mobile
            equipment. We also own devices and designs that are used in the semiconductor
            and electronics industries.
 
 From
            1996
            to 2002, we engaged primarily in developing devices and designs that
            are used in
            the semiconductor and electronics industries. This resulted in a number
            of U.S.
            patents, but did not produce any significant amount of revenue. Additionally,
            during the period from 2000 to 2001 we engaged in the business of distributing
            electronic and other semiconductor-related products to customers in Asia
            and the
            United States in order to generate revenue. In 2001, we discontinued
            those
            activities because they did not produce the profit margins we had originally
            expected.
 
 In
            2002,
            we began to focus on applications of electronic devices in the location
            tools
            market. We also began to decrease our focus on semiconductor designs
            and
            devices, due primarily to difficult market conditions in the semiconductor
            industry.
  Our
            first
            shipment and sale of our consumer-oriented location tools began with
            the sale
            and shipment of our FollowitTM product in August 2002.
 
 Our
            sales
            during the two fiscal years ended September 30, 2004, consisted largely
            of sales
            of our Gotcha!® child safety product, and to a lesser extent of our GPS related
            products, including IBUSTM to Verify Systems, and early prototype versions of the
            TrakJackTM product to Positus Corp.
 
 During
            fiscal year 2005, the Company increased its focus on its newer business-oriented
            products, such as Travado IBUSTM, which entered the market in March 2005, and
            decreased its focus on consumer products, such as Gotcha!® and FollowitTM.
            Starting from the last two quarters of fiscal year 2005 and during fiscal
            year
            2006, we have generally seen a gradual increase in the sales of our
            business-oriented products, although we can make no assurance that this
            trend
            will continue into any future periods. During fiscal 2007 sales have
            consisted
            entirely of Travado IBUSTM products.
 20
 **Table
                of Contents**
 **Three
          Months Ended March 31, 2007 Compared to Three Months Ended March 31,
          2006**
 
 **Revenues**
  Revenues
          improved by 358% to $46,500 for the three months ended March 31, 2007 from
          $10,152 for the three months ended March 31, 2006. All of the revenues
          during
          the quarters ended March 31, 2007 and March 31, 2006 were generated from
          sales
          of our Travado IBUSTM products.
 
 **Gross
          Profit**
  Gross
          profit increased to $24,990 for the three months ended March 31, 2007 from
          $6,032 for the three months ended March 31, 2006 due to the higher volume
          of
          sales.The gross profit margin decreased to 54% from 59% in the respective
          periods as approximately 70% of the revenue in the quarter ended March
          31, 2006
          comprised of higher margin system upgrades.
 
 **Salaries
          and Benefits**
  Salaries
          and benefits, of administration and marketing personnel increased to $62,529
          for
          the three months ended March 31, 2007 from $46,562 for the three months
          ended
          March 31, 2006 primarily because the total for the quarter ended March
          31 ,
          2006
          was reduced by approximately $19,500 for excess payroll taxes.
 
 **Research
          and Development**
  Research
          and development expenditures decreased to $40,834 for the three months
          ended
          March 31, 2007 from $46,465 for the three months ended March 31, 2006 as
          the
          Company has focused an increasingly significant amount of its time and
          energy on
          development of new sources of revenue through the building of new customer
          relationships.
 
 **Stock
          Compensation**
  Stock
          compensation for the three months ended March 31, 2007 totaled $4,931.
          There was
          no stock compensation in the three months ended March 31, 2006.
 
 **Other
          Expenses**
  Other
          expenses decreased in the three months ended March 31, 2007 to $34,330
          from
          $44,369 in the three months ended March 31, 2006 as a result of reductions
          in
          depreciation, insurance costs, telephone, insurance, rent and statutory
          filing
          fees. The expense reductions were somewhat offset by increases in expenses
          such
          as factor’s fees, accountant’s fees and travel expenses.
 
 **Other
          Income**
  Other
          i ncome
          of
          $25,000 in the three months ended March 31, 2007 consisted primarily of
          the
          reversal to revenue of unclaimed accrued placement agents fees of a fully
          amortized investment. There was no other income in the quarter ended March
          31,
          2006.
 21
 **Table
                  of Contents**
 **Interest
          Expense**
  Interest
            expense increased to $82,907 during the three months ended March
            31,
            2007 from $20,491 for the three months ended March
            31,
            2006. The increase primarily reflects the value of stock issued
            to
            settle a dispute regarding payment timing of interest on the
            note.
 
 **Amortization
          of Deferred Financing Costs**
  During
          the three months ended March 31, 2007 and March 31, 2006, amortization
          of
          deferred financing costs, amounted to $1,200.
 
 **Six
          Months Ended March 31, 2007 Compared to Six Months Ended March 31,
          2006**
 
 **Revenues**
 
 Revenues
          improved by 110% to $184,716 for the six months ended March 31, 2007 from
          $87,831 for the six months ended March 31, 2006. All of the revenues during
          the
          six months ended March 31, 2007 were generated from sales of our Travado
          IBUSTM
products. During the six months ended March 31, 2006, $86,862 or 99% of
          the
          revenue was derived from our business-oriented products such as Travado
          IBUSTM,
          while our consumer-oriented products such as Gotcha® generated $999 or 1% of the
          revenue.
 
 **Gross
          Profit**
 
 Gross
          profit increased to $91,231 for the six months ended March 31, 2007 from
          $30,872
          for the six months ended March 31, 2006 due to the higher volume of sales,
          and
          the gross profit margin increased to 49% from 35% due to higher average
          unit
          selling prices in the half year ended March 31, 2007.
 
 **Costs
          and Expenses**
  Costs
          and
          expenses decreased to $295,342 for the six months ended March 31, 2007
          from
          $351,419 for the six months ended March 31, 2006.
 
 **Salaries
          and Benefits**
  Salaries
          and benefits, of administration and marketing personnel increased to $133,851
          for the six months ended March 31, 2007 from $129,689 for the six months
          ended
          March 31, 2006 primarily because the total for the six months ended March
          31 ,
          2006
          was reduced by approximately $19,500 for over accrued payroll taxes.
 
 **Research
          and Development**
 
 Research
          and development expenditures decreased to $84,287 for the six months ended
          March
          31, 2007 from $134,543 for the six months ended March 31, 2006 mainly because
          two engineers took a leave of absence in January 2006 and were not replaced.
          The
          Company has focused an increasingly significant amount of its time and
          energy on
          development of new sources of revenue through the building of new customer
          relationships. The Company has also spent and plans to spend resources
          on the
          development of strategic partnerships with other technology firms to assist
          us
          in taking products to market faster. The Company will continue to explore
          innovative ways to take its technology expertise and products to market,
          across
          its entire portfolio of semiconductor and location electronics related
          devices.
 22
 **Table
                of Contents**
 **Stock
          Compensation**
  Stock
          compensation for the six months ended March 31, 2007 totaled $7,931. There
          was
          no stock compensation in the six months ended March 31, 2006.
 **Other
            Expenses**
  Other
          expenses decreased in the six months ended March 31, 2007 to $69,273 from
          $87,187 in the six months ended March 31, 2006 as a result of reductions
          in
          depreciation, insurance costs, telephone, insurance, rent, accountant’s fees and
          statutory filing fees. The expense reductions were somewhat offset by increases
          in expenses such as factor’s fees and travel expenses.
 
 **Other
          Income**
  Other
          i ncome
          of
          $25,740 in the six months ended March 31, 2007 consisted primarily of the
          reversal to revenue of unclaimed accrued placement agents fees of a fully
          amortized investment. There was no other income in the six months ended
          March
          31, 2006.
 
 **Interest
          Expense**
 Interest
              expense increased to $118,613 during the six months ended March 31,
              2007
              from $36,900 for the six months ended March 31,
              2006.
              The increase primarily reflects the value of stock issued to settle
              a
              dispute regarding payment timing of interest on the note.
 **Amortization
            of Deferred Financing Costs**
 
 During
          the six months ended March 31, 2007, amortization of deferred financing
          costs
          increased to $2,400 from $2,000 for the six months ended March 31,
          2006.
  **Liquidity
          and Capital Resources**
 
 We
          have
          financed our operations primarily through the sale of common stock and
          warrants
          in the public and private market, and to a very limited extent and only
          just
          recently, through the sale of our products. The
          Company has recently initiated product-marketing efforts after several
          years of
          research and development and has not yet reached break even in terms of
          both
          cash flow and profitability.
  As
          of
          March 31, 2007, t he
          Company had cash and cash equivalents of
          $14,448, total current assets of $171,396 and total liabilities of $1,600,870
          including notes payable of $371,776, accounts payable of $182,988, accrued
          expenses of $977,226 and amounts due to factors of $68,880. The accounts
          payables total of $182,988 included invoices of approximately $75,000 that
          are
          aged over three years. The accrued expenses total of $977,226 included
          approximately $592,000 of unpaid wages.
  Cash
          used
          in operations was $112,431 for the six months ended March 31, 2007 compared
          with
          $137,998 for the six months ended March 31, 2006. The decrease in cash
          used in
          operations resulted from the decrease in research and development expenses
          and
          other expenses.
  Net
          cash
          provided by financing activities was $82,980 for
          the
          six months ended March 31, 2007 compared
          to $136,600 in the
          six
          months ended March 31, 2006. The decrease reflects lower debt financing
          from
          notes payable partially offset by higher proceeds from the issuance of
          common
          stock and net
          proceeds from factors.
 23
 **Table
                of Contents**
  We
            believe that our current cash position as of March 31, 2007, including
            cash
            funds arising from the exercise of outstanding options, from equity placement
            sales and other capital raising efforts, loans from officers, product
            sales, and
            continued aggressive expense management to be sufficient to continue
            operations
            for the next twelve months. We also believe that we may be able to reduce
            outstanding liabilities through negotiations with our creditors, or possibly
            negotiate to extend the payment schedule for these debts. In the event
            these
            approaches do not provide us with adequate working capital, we may be
            required
            to further curtail or reduce our development activities, seek alternative
            funding sources, or seek protection under reorganization laws. The
            Company’s ability to continue as a going concern is contingent upon its ability
            to attain profitable operations and secure financing. There can be no
            assurance
            that additional financing will be available to us when needed or, if
            available,
            that it can be obtained on commercially reasonable terms. If we are not
            able to
            continue as a going concern, we would likely be unable to realize the
            carrying
            value of our assets reflected in the balances set out in our financial
            statements.
  **Other
            Results of Operations**
  On
              March
              31, 2007, we had an order backlog of approximately $442,065. This
              backlog was created by an increase during the last two fiscal quarters
              in Travado order volume, as well as limitations on parts availability
              for new Travado units as well as cash on hand for new inventory,
              which began to ease towards the end of March 2007. The bulk of
              this
              backlog was expected to ship during the next fiscal quarter. This
              backlog included customers in the Phoenix and Tucson areas, as well as
              customers in Oregon and Washington.
 **Other
            Subsequent Events**
  As
              of May
              15, 2007, our order backlog for Travado was approximately $473,000.
              This backlog was in part a holdover from the lower than expected
              shipments from the previous quarter, and in part due to new orders
              being received from both existing and new customers. The bulk of this
              backlog is expected to ship during the current fiscal quarter. We now
              have
              active school districts in the Phoenix and Tucson areas, as well
              as
              customers in Oregon, Washington and California which all contributed
              to the backlog. We believe the addition of the school district
              in California may be especially significant, due to the substantial
              size of this market, and the importance of a reference site in
              a
              local area to the Travado sale process.
  We
              also
              have a significant number of proposals out for consideration at present,
              they include new districts in the states of Arizona, Washington,
              Michigan and Texas.
  Our
              board
              also announced a tentative plan for a shareholders meeting in September
              2007, intending to take advantage of recent SEC rulings regarding
              Internet Availability of Proxy Materials, which could be especially
              convenient for shareholders as well as a cost savings item for
              the
              Company. A formal statement from the Company regarding this meeting
              is expected shortly, as the implications of this new rule become clearer.
              The Company's board also postponed any immediate action on M&A activity,
              while leaving the plan active, so that management could more fully
              focus its efforts on operations, as this was expected to be the most
              effective pathway during the current quarter to improving shareholders
              value.


**Item
              3.**
            **Controls
                and Procedures**


Our
        management has responsibility for establishing and maintaining adequate internal
        control over financial reporting for us. Our management uses a framework
        for
        establishing these internals controls. This framework includes review of
        accounting detailed records on at least a quarterly basis by multiple senior
        officers of National Scientific, at least one of whom operates outside of
        the
        corporate finance and accounting area, and one of whom operates within the
        area
        of corporate finance and accounting. This review process includes review
        of
        significant accounting records and source documents, such as general journal
        entry records, accounts payable records, and monthly bank statement
        reconciliations. Documentary records are kept of this review
        process.
 24
 **Table
              of Contents**
 The
        Company carried out an evaluation, under the supervision and with the
        participation of the Company’s management, including its Chief Executive Officer
        and Acting Chief Financial Officer, of the effectiveness, as of March 31,
        2007,
        of the design and operation of the Company’s disclosure controls and procedures
        pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief
        Executive Officer and Acting Chief Financial Officer concluded that the
        Company’s disclosure controls and procedures are effective.
  There
        have been no changes in our internal control over financial reporting during
        the
        period ended March 31, 2007 that have materially affected, or are reasonably
        likely to materially affect, the Company’s internal control over financial
        reporting.
  Our
        management believes that upon significant future growth in the number of
        accounting transactions we process, perhaps within the next year, additional
        review and enhancement of internal controls will be required. Our management
        is
        planning to assign additional staff resources to assist with support for
        growth
        in the internal controls area when the increase in transaction velocity dictates
        this as a prudent step in order to maintain our effective level of internal
        controls.
  Our
        external auditors, for the year ended September 30, 2006, Epstein Weber &
Conover, PLC have not issued an attestation report on management’s assessment of
        the Company’s internal control over financial reporting, as it is not yet
        required since the Company has less than $75 million in “public
        float.”


**PART
        II - OTHER INFORMATION**




**Item
              1.**
            **Legal
                Proceedings**




The
      Company is involved in legal actions in the ordinary course of its business,
      including those outlined in the Company’s annual report on Form 10-KSB for the
      fiscal year ended September 30, 2006. Although the outcome of any such legal
      actions cannot be predicted, in the opinion of management, there are no legal
      proceedings pending or asserted against or involving the Company the net outcome
      of which are likely to have a material adverse effect upon the financial
      position or results of operations of the Company.




**Item
              2.**
            **Changes
                in Securities and Use of
                Proceeds**




In
        February 2007, the Company commenced a private offering of restricted common
        stock and common stock purchase warrants. During the period ended March 31,
        2007, the Company raised $170,000 consisting of $109,800 in cash and $60,200
        in
        debt forgiveness and issued 8,333,360 shares of restricted common stock and
        granted 2,720,000 warrants to purchase common stock at an exercise price
        of
        between $0.08 and $0.30 per share. 8,000,000 shares were issued at an average
        market price of $0.02 per share and 333,360 shares were issued at an average
        market price of $0.02 per share. No underwriters were involved in connection
        with this private placement. The sales and issuances of the securities issued
        pursuant to the foregoing private placement are exempt from registration
        under
        the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof,
        and
        Rule 506 of Regulation D.
  On
        March
        19, 2007, the Company issued 714,286 of its restricted common shares to Mr.
        Michael Grollman, at the closing price of $0.035 in lieu of his partial
        forgiveness of the Company’s back pay indebtedness to him.
  On
        March
        20, 2007, the Company issued 78,740 of its restricted common shares to Mr.
        Greg
        Szabo, at the average closing price of $0.0254 for services as a
        director.
  On
        March
        20, 2007, the Company issued 25,974 of its restricted common shares to Mr.
        Greg
        Szabo, at the average closing price of $0.0385 for services rendered as a
        director.
 25
 **Table
              of Contents**
 On
        March
        23, 2007, the Company issued 666,667 of its restricted common shares to Mr.
        Graham Clark, at the closing price of $0.030 in lieu of his partial forgiveness
        of the Company’s back pay indebtedness to him.
 On
          March
          23, 2007, the Company issued 2,200,000 of its restricted common shares
          to
          a note holder, at the closing price of $0.030
          to
          settle a dispute regarding payment timing of interest on the note.


**Item
              3.**
            **Defaults
                Upon Senior Securities.**




None.




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




None.





**Item
              5.**
            **Other
                Information.**




None.




**Item
              6.**
            **Exhibits
                and Reports on Form 8-K.**





**(a)**
            **Exhibits**





**Exhibit**
              **Number**
            
            **Description**31
            
            Certification
                Pursuant to Section 302 of the Sarbanes-Oxley Act32
            
            Certification
                Pursuant to Section 906 of the Sarbanes-Oxley
                Act





**(b)**
            **Reports
                on Form 8-K**




The
      Company filed one Report on Form 8-K on February 5, 2007 relating to the
      resignation of its Certifying Accountant with a letter from the outgoing
      Certifying Accountant indicating no accounting disagreements with
      management.




The
      Company filed one Report on Form 8-K on February 14, 2007 relating to the
      selection of its new  Certifying  Account ing
      firm.




26
 **Table
          of Contents**




**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the Registrant caused this report to be signed on its behalf by the
      undersigned, thereunto duly authorized.




**NATIONAL
                SCIENTIFIC CORPORATION**Date: 
                May 15, 2007
            By:
            /s/
                Michael A. GrollmanMichael
                A. Grollman
              Director,
                Chief Executive Officer, Acting Chief
              Financial
                Officer and Chairman




By:
            /s/
                Graham L. ClarkGraham
                L. Clark
              Director,
                President, and Secretary




By:
            /s/
                Gregory SzaboGregory
                Szabo
              Director





27