Table of
Contents







U.S. SECURITIES AND EXCHANGE
COMMISSION


Washington, D.C.
20549




FORM 10-Q




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


SECURITIES
EXCHANGE ACT OF 1934




For the
quarterly period ended June 30, 2008




000-28745


(Commission
File No.)


______________





NATIONAL SCIENTIFIC
CORPORATION


(Name of
Registrant as Specified 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)


(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


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


Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act (check one):
  Large
      accelerated filer    o
                    Accelerated
      filer    o
                    Non-accelerated
      filero
                    Smaller
      reporting company    þ
  Indicate
by check mark if the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
  There
were 132,207,913 shares of Common Stock, par value $.01 per share, outstanding
at August 8, 2008.


Table of
Contents




NATIONAL SCIENTIFIC
CORPORATION


FORM 10-Q


TABLE OF CONTENTS




PagePart I
            Financial Information
            
            3Item 1.
            Financial Statements (unaudited)
            
            3Condensed Balance Sheets - As of June 30, 2008 (Unaudited)
      and September 30, 2007
            
            3Condensed Statements of Operations (Unaudited) - Three
      and nine months ended June 30, 2008
      and 2007
            
            4Condensed Statements of Cash Flows (Unaudited) - Nine
      months ended June 30, 2008 and 2007
            
            5Condensed Statement of Changes in Shareholders’ Deficit
      (Unaudited) - Nine months ended June 30,
2008
            
            6Notes to Condensed Financial Statements
            
            7Item 2.
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            
            17Item 3.
            Quantitative and Qualitative Disclosures About Market
      Risk
            
            22Item 4T.
            Controls and Procedures
            
            22Part II
            Other Information
            
            23Item 1.
            Legal Proceedings
            
            23Item 1A.
            Risk Factors
            
            23Item 2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            
            23Item 3.
            Defaults Upon Senior Securities
            
            23Item 4.
            Submission of Matters to a Vote of Security
      Holders
            
            23Item 5.
            Other Information
            
            23Item 6.
            Exhibits
            
            23Signatures
            
            24Exhibit
      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


June
      30,
                
                
                September
      30,2008
                
                
                2007ASSETS
                
                (Unaudited)
                
                
                (Audited)Current
      Assets:Cash
      and cash equivalents
                
                $
                2,355
                
                
                $
                85,887Trade
      receivables
                
                
                105,976
                
                
                
                6,216Inventory
                
                
                6,638
                
                
                
                22,900Other
      assets
                
                
                11,604
                
                
                
                68Total
      current assets
                
                
                126,573
                
                
                
                115,071Property
      and equipment, net
                
                
                311
                
                
                
                622Deposits
                
                
                2,340
                
                
                
                2,340Deferred
      financing costs, net
                
                
                11,200
                
                
                
                14,800Total
      assets
                
                $
                140,424
                
                
                $
                132,833LIABILITIES
      AND SHAREHOLDERS’ DEFICITCurrent
      Liabilities:Accounts
      payable – related
      parties
                
                $
                129
                
                
                $
                419Accounts
      payable – other
                
                
                168,855
                
                
                
                195,004Accrued
      expenses
                
                
                1,068,290
                
                
                
                883,400Due
      to factors
                
                
                81,700
                
                
                
                2,602Notes
      payable - related party
                
                
                143,181
                
                
                
                161,300Notes
      payable – other
                
                
                35,375
                
                
                
                80,875Total
      current liabilities
                
                
                1,497,530
                
                
                
                1,323,600Notes
      payable, less current portion, net of discount and beneficial conversion
      feature of $28,715 at June 30, 2008 and $37,945 at September 30,
      2007
                
                
                146,285
                
                
                
                137,055Total
      liabilities
                
                
                1,643,815
                
                
                
                1,460,655Commitments
      and contingencies
                
                
                –
                
                
                
                –Shareholders’
      deficit:Preferred
      stock, par value $0.10; 4,000,000 shares authorized, none issued and
      outstanding
                
                
                –
                
                
                
                –Common
      stock, par value $0.01; 187,000,000 shares authorized, and shares issued
      and outstanding of 122,082,913 at June 30, 2008 and 121,995,835 at
      September 30, 2007
                
                
                1,220,830
                
                
                
                1,219,959Additional
      paid-in capital
                
                
                22,715,368
                
                
                
                22,693,696Accumulated
      deficit
                
                
                (25,439,589
                )
                
                
                (25,241,477
                )Total
      shareholders’ deficit
                
                
                (1,503,391
                )
                
                
                (1,327,822
                )Total
      liabilities and shareholder’s deficit
                
                $
                140,424
                
                
                $
                132,833
 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
                  
                  
                  Nine
      months endedJune
      30,
                  
                  
                  June
      30,2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007Revenue
                  
                  $
                  158,749
                  
                  
                  $
                  216,372
                  
                  
                  $
                  530,504
                  
                  
                  $
                  401,088Cost
      of revenue
                  
                  
                  81,976
                  
                  
                  
                  109,456
                  
                  
                  
                  288,449
                  
                  
                  
                  202,941Gross
      profit
                  
                  
                  76,773
                  
                  
                  
                  106,916
                  
                  
                  
                  242,055
                  
                  
                  
                  198,147Costs
      and expensesSalaries
      and benefits
                  
                  
                  70,156
                  
                  
                  
                  60,110
                  
                  
                  
                  207,449
                  
                  
                  
                  193,961Research
      and development
                  
                  
                  42,706
                  
                  
                  
                  43,693
                  
                  
                  
                  127,414
                  
                  
                  
                  127,980Stock
      compensation
                  
                  
                  8,225
                  
                  
                  
                  7,336
                  
                  
                  
                  22,544
                  
                  
                  
                  15,267Other
                  
                  
                  47,574
                  
                  
                  
                  54,287
                  
                  
                  
                  146,335
                  
                  
                  
                  123,560Total
      costs and expenses
                  
                  
                  168,661
                  
                  
                  
                  165,426
                  
                  
                  
                  503,742
                  
                  
                  
                  460,768Loss
      from operations
                  
                  
                  (91,888
                  )
                  
                  
                  (58,510
                  )
                  
                  
                  (261,687
                  )
                  
                  
                  (262,621
                  )Other
      income (expense)Other
      income
                  
                  
                  133,197
                  
                  
                  
                  –
                  
                  
                  
                  133,197
                  
                  
                  
                  25,740Interest
      expense
                  
                  
                  (21,402
                  )
                  
                  
                  (25,006
                  )
                  
                  
                  (66,022
                  )
                  
                  
                  (143,619
                  )Amortization
      of deferred financing costs
                  
                  
                  (1,200
                  )
                  
                  
                  (1,200
                  )
                  
                  
                  (3,600
                  )
                  
                  
                  (3,600
                  )110,595
                  
                  
                  
                  (26,206
                  )
                  
                  
                  63,575
                  
                  
                  
                  (121,479
                  )Income  (loss)
      before income taxes
                  
                  
                  18,707
                  
                  
                  
                  (84,716
                  )
                  
                  
                  (198,112
                  )
                  
                  
                  (384,100
                  )Income
      tax expense
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –Net
      income (loss)
                  
                  $
                  18,707
                  
                  
                  $
                  (84,716
                  )
                  
                  $
                  (198,112
                  )
                  
                  $
                  (384,100
                  )Net
      income (loss) per common share, basic and diluted
                  
                  $
                  (0.00
                  )
                  
                  $
                  (0.00
                  )
                  
                  $
                  (0.00
                  )
                  
                  $
                  (0.00
                  )Weighted
      average number of shares outstanding
                  
                  
                  122,310,935
                  
                  
                  
                  111,706,611
                  
                  
                  
                  121,364,762
                  
                  
                  
                  104,299,409


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)


Nine
      months endedJune
      30,2008
                    
                    
                    2007Cash
      flows from operating activities:Net
      loss
                    
                    $
                    (198,112
                    )
                    
                    $
                    (384,100
                    )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
                    
                    
                    311
                    
                    
                    
                    311Stock
      issued for services
                    
                    
                    2,000
                    
                    
                    
                    3,000Stock
      options issued for services
                    
                    
                    12,319
                    
                    
                    
                    5,794Stock
      issued to cure default of note payable
                    
                    
                    –
                    
                    
                    
                    66,000Warrant
      expense
                    
                    
                    8,224
                    
                    
                    
                    7,344Amortization
      of deferred financing costs
                    
                    
                    3,600
                    
                    
                    
                    3,600Amortization
      of debt discount
                    
                    
                    7,740
                    
                    
                    
                    7,740Amortization
      of beneficial conversion feature
                    
                    
                    1,490
                    
                    
                    
                    1,490Unclaimed
      note payable
                    
                    
                    (43,250
                    )
                    
                    
                    –Changes
      in assets and liabilities:Decrease
      (increase) in inventory
                    
                    
                    16,262
                    
                    
                    
                    (4,769
                    )Decrease
      (increase) in receivables
                    
                    
                    (99,760
                    )
                    
                    
                    20,951Decrease
      (increase) in other assets and deposits
                    
                    
                    (11,536
                    )
                    
                    
                    (3,251
                    )Increase
      in accounts payable and accrued expenses
                    
                    
                    158,451
                    
                    
                    
                    203,028Net
      cash used in operating activities
                    
                    
                    (142,261
                    )
                    
                    
                    (72,862
                    )Cash
      flows from financing activities:Increase
      in notes payable
                    
                    
                    –
                    
                    
                    
                    20,725Repayment
      of notes payable
                    
                    
                    (20,369
                    )
                    
                    
                    (13,025
                    )Net
      proceeds from factors
                    
                    
                    79,098
                    
                    
                    
                    (76,490
                    )Proceeds
      from issuance of common stock
                    
                    
                    –
                    
                    
                    
                    109,800Net
      cash provided by financing activities
                    
                    
                    58,729
                    
                    
                    
                    41,010Net
      decrease in cash and cash equivalents
                    
                    
                    (83,532
                    )
                    
                    
                    (31,852
                    )Cash
      and cash equivalents, beginning of period
                    
                    
                    85,887
                    
                    
                    
                    43,899Cash
      and cash equivalents, end of period
                    
                    $
                    2,355
                    
                    
                    $
                    12,047Supplementary
      Disclosure of Cash Flow Information:Cash
      paid for interest
                    
                    $
                    14,585
                    
                    
                    $
                    19,522Conversion
      of accounts payable and accrued expenses to equity
                    
                    $
                    5,000
                    
                    
                    $
                    127,680Conversion
      of notes payable and accrued expenses to equity
                    
                    $
                    –
                    
                    
                    $
                    60,200
 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’ Deficit


For
the Nine months Ended June 30, 2008


(Unaudited)
 
 Common
      StockNumber
      of Shares
                      
                      
                      Par
      Value
                      
                      
                      Additional
      Paid-In Capital
                      
                      
                      Accumulated
      Deficit
                      
                      
                      TotalBalance
      at September 30, 2007
                      
                      
                      121,995,835
                      
                      
                      $
                      1,219,959
                      
                      
                      $
                      22,693,696
                      
                      
                      $
                      (25,241,477
                      )
                      
                      $
                      (1,327,822
                      )Stock
      issued for servicesPrice
      per share$0.0288
                      
                      
                      34,722
                      
                      
                      
                      347
                      
                      
                      
                      653
                      
                      
                      
                      –
                      
                      
                      
                      1,000$0.0191
                      
                      
                      52,356
                      
                      
                      
                      524
                      
                      
                      
                      476
                      
                      
                      
                      –
                      
                      
                      
                      1,000Stock
      options granted
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      12,319
                      
                      
                      
                      –
                      
                      
                      
                      12,319Warrants
      extended by one year - fair value
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      9,099
                      
                      
                      
                      –
                      
                      
                      
                      9,099Warrants
      expired
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      (875
                      )
                      
                      
                      –
                      
                      
                      
                      (875
                      )Stock
      issued in exchange of accrued expenses for$0.0200
                      
                      
                      250,000
                      
                      
                      
                      2,500
                      
                      
                      
                      2,500
                      
                      
                      
                      –
                      
                      
                      
                      5,000Stock
      returned to treasury
                      
                      
                      (250,000
                      )
                      
                      
                      (2,500
                      )
                      
                      
                      (2,500
                      )
                      
                      
                      –
                      
                      
                      
                      (5,000
                      )Net
      loss for the nine months ended June 30, 2008
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      (198,112
                      )
                      
                      
                      (198,112
                      )Balance
      at June 30, 2008
                      
                      
                      122,082,913
                      
                      
                      $
                      1,220,830
                      
                      
                      $
                      22,715,368
                      
                      
                      $
                      (25,439,589
                      )
                      
                      $
                      (1,503,391
                      )
 The
accompanying notes are an integral part of these condensed financial
statements.


6
 Table of
Contents





NATIONAL SCIENTIFIC
CORPORATION




NOTES TO FINANCIAL
STATEMENTS
 June 30, 2008
 (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 based products and devices that span a range of
industries. The majority of our products are mobile computers configured as
digital video recording devices with location determining and tracking
capabilities. These devices typically use small powerful mobile computers, in
conjunction with equally small portable radios to establish, record and report
the physical location of people and objects to which these devices are attached.
Our location technologies typically use Global Positioning System (GPS)
technology to determine position. They also use small computers in conjunction
with video cameras and other sensors to record incidents on mobile systems,
especially 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
products.
 
 Our
primary customer focus for these location-tracking products is the safety
market, related in many cases to the safety of school age 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 displays maps and other pertinent information.
 
 Prior to
2002 we developed electronic component products, some of which are used in radio
equipment, and some of which have other applications in the electronics field,
such as in the memory systems of personal computers. Many of these electronic
component products have been issued U.S. patents. We focused extensively on
developing these products and patenting them from 1996 through early 2002, with
the objective of licensing these products to other electronic companies. In
early 2002, due to market conditions, our focus shifted away from further
development of our electronic component products, but we continue to explore
licensing opportunities for our component products.
 
 Since
2002, we began to focus on applications of electronic devices in the location
tools market. From 2002 through 2005, we were primarily engaged in product
development and market research and testing. During fiscal year 2005, the
Company increased its focus on its Travado IBUSTM, a location product that
entered the market in March 2005. Starting from the last two quarters of fiscal
year 2005 we have generally seen a steady increase in the sales of our Travado
IBUS. During fiscal year 2007 and the first nine months of fiscal year 2008 our
sales have consisted entirely of Travado IBUSTM products.
 
 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.
 7
 Table of
Contents
 These
financial statements should be read in conjunction with the financial statements
and notes included in the Company’s annual report on Form 10-KSB for the fiscal
year ended September 30, 2007 and the Company’s quarterly reports on Form 10-QSB
for the periods ended December 31, 2007 and March 31, 2008.
 
 The
results of operations for the nine months ended June 30, 2008 are not
necessarily indicative of the results to be expected for the entire fiscal
year.
 
 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.
 
 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. Our auditors have expressed substantial doubt about the Company’s
ability to continue as a going concern.
 
 We
continue to focus our efforts on improving overall liquidity through identifying
new business opportunities within the areas of our core competencies of wireless
security systems, reducing operating expenses, and limiting cash commitments for
future capital investments and new asset development. We have continued to
restrict new capital investment and new asset development, limiting projects to
those representing the best opportunities we can find for near term revenue
growth in the transportation sector. Additionally, we continue to evaluate
operating expenses in an effort to reduce or eliminate costs not required for us
to operate effectively.  We may elect to negotiate with some of our
creditors to reduce or restructure our debt obligations, for example with our
larger Note holders, although we cannot be sure of the outcomes of such
negotiations. We also in the past have chosen to compensate some consultants and
some staff using equity, and also to reduce our debt by allowing staff to
convert any accrued back pay to equity, and we are likely to continue this
practice in the near term to improve liquidity.
 
 The sale
or issue of additional equity would likely have a dilutive effect on existing
shareholders, if it were to occur.  No assurance can be given that we
will be able to obtain a new source of capital on terms that are acceptable to
us. If we are unable to obtain new capital, we may be forced to subject
ourselves to bankruptcy, reorganization, liquidation, dissolution or similar
proceeding.
 
 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.
 8
 Table of
Contents
 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 due to their short duration, unless otherwise
noted or their market interest rate.
 
 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
method, compensation cost recognized in the nine months ended June 30, 2008 and
2007 include compensation cost for all share-based payments, 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 October 1,
2006.
 
 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 the period equal to
      their expected term;
 •
                              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.
 Recent
Accounting Pronouncements
 
 In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which
defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007. We do not expect SFAS No. 157
will have a material effect on our financial statements.
 
 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.
 9
 Table of
Contents
 In June
2007, the FASB ratified EITF 06-11 “Accounting for the Income Tax Benefits of
Dividends on Share-Based Payment Awards” (“EITF 06-11”). EITF 06-11 provides
that tax benefits associated with dividends on share-based payment awards be
recorded as a component of additional paid-in capital. EITF 06-11 is effective,
on a prospective basis, for fiscal years beginning after December 15, 2007. We
do not expect EITF 06-11 will have a material impact on our financial
statements.
 
 In
December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51”.SFAS
160 establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. The
guidance will become effective for the fiscal year beginning after December 15,
2008. The Company does not expect SFAS 160  will have a material
impact on our financial statements.
 
 In
December 2007, the FASB issued SFAS No. 141 (Revised) “Business Combinations”.
SFAS 141 (Revised) establishes principles and requirements for how the acquirer
of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. The statement also provides guidance for recognizing
and measuring the goodwill acquired in the business combination and determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. The
guidance will become effective for the fiscal year beginning after December 15,
2008. The Company does not expect this new accounting pronouncement to have a
material impact on our financial statements.
 
 In
March 2008, the FASB issued FASB Statement No. 161 “Disclosures about Derivative
Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 requires companies
with derivative instruments to disclose information that should enable
financial-statement users to understand how and why a company uses derivative
instruments, how derivative instruments and related hedged items are accounted
for under FASB Statement No. 133, “Accounting for Derivative Instruments and
Hedging Activities,” and how derivative instruments and related hedged items
affect a company’s financial position, financial performance and cash flows.
SFAS 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. We do not expect SFAS 161
will have a material impact on our financial statements.
  In May
2008, the Financial Accounting Standards Board (FASB) issued Statements of
Financial Standards No. 162 (SFAS 162), “The Hierarchy of Generally Accepted
Accounting Principles.” SFAS 162 is intended to improve financial reporting by
identifying a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements that are presented in
conformity with U.S. generally accepted accounting principles (GAAP) for
nongovernmental entities.
 
 Prior to
the issuance of SFAS 162, GAAP hierarchy was defined in the American Institute
of Certified Public Accountants (AICPA) Statement on Auditing Standards No. 69
(SAS 69), “The Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles.” SAS 69 has been criticized because it is directed to the
auditor rather than the entity. SFAS 162 addresses these issues by establishing
that the GAAP hierarchy should be directed to entities because it is the entity
(not its auditor) that is responsible for selecting accounting principles for
financial statements that are presented in conformity with GAAP.
 
 SFAS 162
is effective 60 days following the SEC’s approval of the Public Company
Accounting Oversight Board Auditing amendments to AU Section 411, “The Meaning
of Present Fairly in Conformity with Generally Accepted Accounting Principles.”
The Company does not expect SFAS 162 to have a material effect on its
consolidated financial statements.
 10
 Table of
Contents
 2.
                Stock-Based
      Compensation
  The
Company accounts for stock-based compensation utilizing the fair value
recognition provisions of SFAS 123R.
  As of
June 30, 2008, the Company has the following stock-based compensation
plan:
 Stock
Options
 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.
 
 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.
 
 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.  On October 1, 2006, the Company adopted the fair value
recognition provisions of SFAS 123R. All stock based compensation awards were
fully vested as of October 1, 2006; therefore, the results for prior periods
have not been restated.
 
 As of
June 30, 2008, we have granted options to purchase an aggregate of 5,271,756
shares of our common stock, under the plan, leaving a balance of 1,728,244
available for grant. Also as of June 30, 2008, 5,271,756 options are exercisable
and 5,271,756 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.
 
 During
the nine months ended June 30, 2008, the following options were
granted:
  On
October 9, 2007, 20,000 options were granted to Greg Szabo, a director, for
board services. The weighted average grant date fair value of these options was
$0.008.  Stock based compensation of $158 was recognized in the
financial statements using the Black-Scholes option pricing model value on the
grant date. The options have a life of ten years, an exercise price of $0.0212
and vested immediately.
 
 On
November 14, 2007, 225,000 options were granted to Graham Clark, a director. The
compensation committee as an incentive to retain key staff members approved this
grant. The weighted average grant date fair value of these options was
$0.016.  Stock based compensation of $3,579 was recognized in the
financial statements using the Black-Scholes option pricing model value on the
grant date. The options have a life of ten years, an exercise price of $0.03 and
vested immediately.
 11
 Table of
Contents
 On
November 14, 2007, 100,000 options were granted to Greg Szabo, a director. The
compensation committee approved this grant. The weighted average grant date fair
value of these options was $0.016.  Stock based compensation of $1,591
was recognized in the financial statements using the Black-Scholes option
pricing model value on the grant date. The options have a life of ten years, an
exercise price of $0.03 and vested immediately.
  On
November 14, 2007, 100,000 options were granted to Michael Grollman, a director.
The compensation committee as an incentive to retain key staff members approved
this grant. The weighted average grant date fair value of these options was
$0.016.  Stock based compensation of $1,591 was recognized in the
financial statements using the Black-Scholes option pricing model value on the
grant date. The options have a life of ten years, an exercise price of $0.03 and
vested immediately. Also, on November 14, 2007, in lieu of taking a larger
grant, 450,000 options granted to Michael Grollman on December 1, 2000 at an
exercise price of $1.84 were canceled and exchanged for 450,000 options having
an exercise price of $0.03.The incremental cost of the modified award recognized
in the financial statements was $4,785.
 
 On
January 14, 2008, 20,000 options were granted to Greg Szabo, a director, for
board services. The weighted average grant date fair value of these options was
$0.0189.  Stock based compensation of $379 was recognized in the
financial statements using the Black-Scholes option pricing model value on the
grant date. The options have a life of ten years, an exercise price of $0.019
and vested immediately.
 
 On April
11, 2008, 20,000 options were granted to Greg Szabo, a director, for board
services. The weighted average grant date fair value of these options was
$0.0118.  Stock based compensation of $236 was recognized in the
financial statements using the Black-Scholes option pricing model value on the
grant date. The options have a life of ten years, an exercise price of $0.016
and vested immediately.
 
 During
the nine months ended June 30, 2008, no options were exercised.
 
 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 with the following
assumptions to value options for the nine months ended June 30, 2008 and
2007:
  2008
                  
                  2007Risk
      - free interest rate
                  
                  2.66%
      to 4.23%
                  
                  4.46%
      to 5.03%Expected
      life (years)
                  
                  5
                  
                  5Expected
      volatility
                  
                  116.0%
      to 126.6%
                  
                  91.4%
      to 184.8%Expected
      dividends
                  
                  None
                  
                  NoneForfeitures
      assumed
                  
                  None
                  
                  NoneWeighted
      average grant date fair value
                  
                  $0.0157
                  
                  $0.0280
 
 The
following table summarizes the stock option activity during the first nine
months of fiscal year 2008:
 12
 Table of
Contents
 Weighted
                  
                  
                  Weighted
      AverageNumber
                  
                  
                  Average
                  
                  
                  Remaining
                  
                  
                  Aggregateof
                  
                  
                  Exercise
                  
                  
                  Contractual
                  
                  
                  IntrinsicShares
                  
                  
                  Price
                  
                  
                  Term
      (1)
                  
                  
                  Value
      (2)Options
      Outstanding, September 30, 2007
                  
                  
                  4,786,756
                  
                  
                  $
                  0.74
                  
                  
                  
                  6.16Granted
                  
                  
                  935,000
                  
                  
                  
                  0.03Exercised
                  
                  
                  –
                  
                  
                  
                  –Forfeited
      or expired
                  
                  
                  (450,000
                  )
                  
                  
                  1.84Options
      Outstanding, June 30, 2008
                  
                  
                  5,271,756
                  
                  
                  $
                  0.43
                  
                  
                  
                  5.97
                  
                  
                  $
                  –Options
      Exercisable June 30, 2008
                  
                  
                  5,271,756
                  
                  
                  $
                  0.43
                  
                  
                  
                  5.97
                  
                  
                  $
                  –____________
 (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 June 30, 2008, for those awards that have an exercise
      price currently below the closing price as of June 30, 2008. Awards with
      an exercise price above the closing price of $0.015 as of June 30, 2008
      are considered to have no intrinsic
value.
 Warrants
 
 During
the nine months ended June 30, 2008, no awards were granted, no share purchase
warrants were exercised, and no warrants were forfeited.
 
 On June
24, 2008, three year warrants previously issued to purchase 135,000 shares of
common stock with an exercise price of $0.062 expired.
 
 On June
25, 2008, our board of directors resolved to instruct management to extend the
expiration date of 2,550,000 warrants previously set to expire on June 30, 2008,
by twelve months.  The warrants, issued to purchase 2,550,000 shares
of common stock exercisable at prices ranging from $0.35 to $0.75 per share were
issued between July  2003 and March 2004 in connection with the June
2003 Private Placement Memorandum.  The fair value of these warrants,
on June 30, 2008, determined to be $9,099 was expensed as stock based
compensation.
 
 The
following assumptions were utilized to value warrants during the nine months
ended June 30, 2008 and 2007:
  2008
                  
                  2007Risk
      - free interest rate
                  
                  2.36%
                  
                  4.60%
      to 4.91%Expected
      life (years)
                  
                  1
                  
                  2
      to 5Expected
      volatility
                  
                  228.0%
                  
                  83.5%
      to 184.8%Expected
      dividends
                  
                  None
                  
                  NoneForfeitures
      assumed
                  
                  None
                  
                  NoneWeighted
      average grant date fair value
                  
                  $0.0037
                  
                  $0.0147
  13
 Table of
Contents
 The
following table summarizes the warrant activity during the first nine months of
fiscal year 2008:
 
 Weighted
                  
                  Weighted
      AverageNumber
                  
                  Average
                  
                  Remaining
                  
                  Aggregateof
                  
                  Exercise
                  
                  Contractual
                  
                  IntrinsicShares
                  
                  Price
                  
                  Term
      (1)
                  
                  Value
(2)Warrants
      Outstanding, September 30, 2007
                  
                  
                  17,714,197
                  
                  $
                  0.17
                  
                  
                  1.56Granted
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –Exercised
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –Expired
                  
                  
                  (135,000)
                  
                  
                  –
                  
                  
                  –Warrants
      Outstanding, June 30, 2008
                  
                  
                  17,579,197
                  
                  $
                  0.18
                  
                  
                  1.18
                  
                  $
                  –____________
 (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 June 30, 2008, for those awards that have an exercise
      price currently below the closing price as of June 30, 2008. Awards with
      an exercise price above the closing price as of June 30, 2008 of $0.015
      are considered to have no intrinsic
value.
 3.
                  Trade
      Receivables
 Trade
Receivables of $105,976 at June 30, 2008 included factored invoices totaling
$102,125. Trade Receivables of $6,216 at September 30, 2007 included factored
invoices totaling $2,602. There were no reserves for doubtful accounts at June
30, 2008 and September 30, 2007, as all amounts were deemed
collectible.
 4.
                Inventory
  Inventories,
primarily purchased parts and finished goods, are stated at the lower of cost or
market values. Cost is determined on a FIFO (first-in, first-out) basis. There
were no reserves at June 30, 2008 and September 30, 2007.
 5.
                  Accrued
      Expenses
  Accrued
expenses consisted of the following at June 30, 2008 and September 30, 2007:
 
 June
      30, 2008
                      (Unaudited)
                    
                    
                    September
      30, 2007
                      (Audited)Salaries
      and vacation pay - current management and staff
                    
                    $
                    764,286
                    
                    
                    $
                    575,727Salaries
      and vacation pay - former employee
                    
                    
                    29,375
                    
                    
                    
                    29,375Payroll
      taxes for accrued back pay
                    
                    
                    58,565
                    
                    
                    
                    40,781Interest
                    
                    
                    198,442
                    
                    
                    
                    156,271Employee
      stock retainage pool
                    
                    
                    –
                    
                    
                    
                    50,250Other
      liabilities
                    
                    
                    17,622
                    
                    
                    
                    30,996$
                    1,068,290
                    
                    
                    $
                    883,400
 14
 Table of
Contents
 6.
                  Notes Payable and Long-Term
      Debt
  As of
June 30, 2008 and September 30, 2007, long-term debt consisted of the following
notes payable:
 
 June
      30, 2008
                  (Unaudited)
                
                
                September
      30, 2007
                  (Audited)Non-interest
      bearing note payable, due on demand; unsecured;repayment
      may be made by the Company with either cash or itsrestricted
      common stock or a combination of cash and stock
                
                $
                –
                
                
                $
                43,2508%
      note payable to a related party; unsecured; principal andinterest
      due on demand
                
                
                143,181
                
                
                
                161,30012%
      note payable; secured; due on demand
                
                
                11,625
                
                
                
                11,62512%
      note payable; secured; due 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
                
                
                
                175,0006%
      note payable; unsecured; due on demand with 30 days prior
      notice
                
                
                3,750
                
                
                
                6,000353,556
                
                
                
                417,175Less:Current
      portion of long term debt
                
                
                (178,556
                )
                
                
                (242,175
                )Discount
                
                
                (24,080
                )
                
                
                (31,820
                )Beneficial
      conversion feature
                
                
                (4,635
                )
                
                
                (6,125
                )Long-term
      debt, net of current portion
                
                $
                146,285
                
                
                $
                137,055
 
 The
aggregate maturities of long-term debt were as follows:
 
 June
      30, 2008
                  (Unaudited)
                
                
                September
      30, 2007
                  (Audited)2008
                
                $
                178,556
                
                
                $
                242,1752009
                
                
                –
                
                
                
                –2010
                
                
                175,000
                
                
                
                175,000$
                353,556
                
                
                $
                417,175


7.
                  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 income (loss) per
share includes no dilution and is computed by dividing income (loss) available
to common shareholders 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 and nine months
ended June 30, 2008 and 2007.
 15
 Table of
Contents
 Three
      months ended
                            
                            
                            Nine
      months endedJune
      30,
                            
                            
                            June
      30,2008
                            
                            
                            2007
                            
                            
                            2008
                            
                            
                            2007Net
      income (loss)
                            
                            $
                            18,707
                            
                            
                            $
                            (84,716
                            )
                            
                            $
                            (198,112
                            )
                            
                            $
                            (384,100
                            )Weighted
      average shares:Average
      shares outstanding
                            
                            
                            122,310,935
                            
                            
                            
                            111,706,611
                            
                            
                            
                            121,364,762
                            
                            
                            
                            104,299,409Effect
      of diluted shares
                            
                            
                            –
                            
                            
                            
                            –
                            
                            
                            
                            –
                            
                            
                            
                            –Average
      shares outstanding adjusted for dilutive effect
                            
                            
                            122,310,935
                            
                            
                            
                            111,706,611
                            
                            
                            
                            121,364,762
                            
                            
                            
                            104,299,409Income
      (loss) per share - basic
                            
                            $
                            0.00
                            
                            
                            $
                            (0.00
                            )
                            
                            $
                            (0.00
                            )
                            
                            $
                            (0.00
                            )Income
      (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):
 
 June
      30, 2008
                            
                            
                            June
      30, 2007Options
                            
                            
                            5,271,756
                            
                            
                            
                            4,216,756Warrants
                            
                            
                            17,579,197
                            
                            
                            
                            17,714,197Potential
      common equivalents
                            
                            
                            22,850,953
                            
                            
                            
                            21,930,953
 8.
                  Subsequent
      Events
 None.


16
 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. This report
should be read in conjunction with the financial statements and other
information included in the Company’s annual report on Form 10-KSB for the
fiscal year ended September 30, 2007, which is incorporated herein by
reference  and the Company’s quarterly reports on Form 10-QSB for the
periods ended December 31, 2007 and March 31, 2008.
 
 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
primary business involves the research, development, manufacture, and sale of
hardware and software computer based products and devices that span a range of
industries. The majority of our products are mobile computers configured as
digital video recording devices with location-determining and tracking
capabilities. These devices typically use small powerful mobile computers, in
conjunction with equally small portable radios to establish, record and report
the physical location of people and objects to which these devices are attached.
Our location technologies typically use Global Positioning System (GPS)
technology to determine position. They also use small computers in conjunction
with video cameras and other sensors to record incidents on mobile systems,
especially 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
products.
 
 Our
primary customer focus for these location-tracking products is the safety
market, related in many cases to the safety of school age 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.
 
 Prior to
2002 we developed electronic component products, some of which are used in radio
equipment, and some of which have other applications in the electronics field,
such as in the memory systems of personal computers. Many of these electronic
component products have been issued U.S. patents. We focused extensively on
developing these products and patenting them from 1996 through early 2002, with
the objective of licensing these products to other electronic companies. In
early 2002, due to market conditions, our focus shifted away from further
development of our electronic component products, but we continue to explore
licensing opportunities for our component products.
 17
 Table of
Contents
 Since
2002, we began to focus on applications of electronic devices in the location
tools market. From 2002 through 2005, we were primarily engaged in product
development and market research and testing. During fiscal year 2005, the
Company increased its focus on its Travado IBUSTM, a location product that
entered the market in March 2005. Starting from the last two quarters of fiscal
year 2005, we have generally seen a steady increase in the sales of our Travado
IBUS. During fiscal year 2007 and the first nine months of fiscal year 2008 our
sales have consisted entirely of Travado IBUSTM products.
 
 Three
Months Ended June 30, 2008 Compared to Three Months Ended June 30,
2007
 
 Revenue
 
 Revenue
decreased 26.6% to $158,749 for the three months ended June 30, 2008, from
$216,372 for the three months ended June 30, 2007. This decrease in revenue was
the result of a 23% decrease in unit shipments of Travado IBUSTM systems and a
4.7 % reduction in average sales unit price due to using indirect distribution
channels. The primary reason for this change in revenue was that we had a single
large contract in Washington State that was being fulfilled in 2007 and we did
not have a single large project in 2008. Putting aside the impact of this single
large project from the prior year, revenue from other customers improved by
approximately 42% from approximately $111,512 in the three months ended June 30,
2007 to $158,749 in the three months ended June 30, 2008.
 
 Gross
Profit
 
 Gross
profit decreased to $76,773 for the three months ended June 30, 2008 from
$106,916 for the three months ended June 30, 2007 and the gross profit margin
decreased to 48.4% from 49.4% in the respective periods. The decrease in gross
profit and gross profit margin during the three months ended June 30, 2008 was
primarily due to reduced sales volume and reduced average selling price caused
by the change in sales channel mix.
 
 Salaries
and Benefits
 
 Salaries
and benefits, of administration and marketing personnel increased to $70,156 for
the three months ended June 30, 2008 from $60,110 for the three months ended
June 30, 2007. The increase resulted primarily from higher payroll taxes in the
quarter to June 30, 2008.
 
 Research
and Development
 
 Research
and development expenditures of $42,706 for the three months ended June 30, 2008
remained almost flat compared to $43,693 for the three months ended June 30,
2007. 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.
 
 Stock
Compensation
 
 Stock
compensation for the three months ended June 30, 2008 of $8,225 remained almost
flat compared to $7,336 for the three months ended June 30, 2007.
 Other
Expenses
 
 Other
expenses decreased to $47,574 in the three months ended June 30, 2008 from
$54,287 in the three months ended June 30, 2007. The decrease resulted primarily
from decreases of approximately $26,900 in factors’ fees, delivery costs,
accountant fees, filing fees, selling and marketing expenses and warranty and
system upgrade expenses offset by increases of approximately $20,200 in board
fees, insurance costs, shareholders’ meeting expenses, and travel
expenses.
 18
 Table of
Contents
 Other
Income
 
 Other
income, during the three months ended June 30, 2008, reflects a gain on
extinguishment of liabilities of $133,197. This relates to the extinguishment of
amounts previously considered to be owed by the Company.
 
 Interest
Expense
 
 Interest expense decreased to $21,402
during the three months ended June 30, 2008 from $25,006 during the three months
ended June 30, 2007. The
decrease is mainly attributable to a reduction in interest rates as a result of
reduced prime rates.
 
 Amortization
of Deferred Financing Costs
 
 Amortization
of deferred financing costs for the three months ended June 30, 2008 and 2007
and remained flat at $1,200.
  Nine
Months Ended June 30, 2008 Compared to Nine Months Ended June 30,
2007
 
 Revenue
 
 Revenue
increased 32.3% to $530,504 for the nine months ended June 30, 2008, from
$401,088 for the nine months ended June 30, 2007. The increased revenue resulted
primarily from a 44.2% increase in unit sales of Travado IBUSTM products, offset
by an 8.3% decrease in the average unit sales price. The decreased average unit
sales price reflects the impact on price of the sales mix between distributors
and direct sales to end-user customers. The percentage of direct unit sales to
end- customers decreased to 48.4%, of total sales, during the nine months ended
June 30, 2008, from 85.8% of total sales, for the nine months ended June 30,
2007. Sales to end-user customers would typically have a higher unit sales price
than sales to distributors.
 
 Gross
Profit
 
 Gross
profit increased to $242,055 for the nine months ended June 30, 2008 from
$198,147 for the nine months ended June 30, 2007. The higher gross profit
dollars are attributable to the higher sales volume. However, gross profit
margin decreased to 45.6% from 49.4% in the respective periods. The decrease in
gross profit margin during the nine months ended June 30, 2008 was primarily due
to reduced average selling price caused by the change in sales channel
mix.
 
 Salaries
and Benefits
 
 Salaries
and benefits, of administration and marketing personnel increased to $207,449
for the nine months ended June 30, 2008 from $193,961 for the nine months ended
June 30, 2007. The increase resulted primarily from higher payroll taxes in the
nine months ended June 30, 2008.
 Research
and Development
 
 Research
and development expenditures for the nine months ended June 30, 2008 and 2007
remained flat at approximately $127,000. 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.
 
 19
  Stock
Compensation
 
 Stock
compensation increased to $22,544 for the nine months ended June 30, 2008 from
$15,267 for the nine months ended June 30, 2007. The increase in the nine months
ended June 30, 2008 is mainly attributable to the fair value of option awards
used as incentives to retain key staff and board members.
 
 Other
Expenses
 
 Other
expenses increased to $146,335 in the nine months ended June 30, 2008 from
$123,560 in the nine months ended June 30, 2007. The increase resulted primarily
from increases of approximately $38,300 in insurance costs, shareholders’
meeting expenses, accountant fees, legal costs, warranty and system upgrade
expenses offset by decreases of approximately $15,600 in factors’ fees, selling
expenses, travel and rent.
  Other
Income
 
 Other
income, during the nine months ended June 30, 2008, reflects a gain on
extinguishment of liabilities of $133,197. This relates to the extinguishment of
amounts previously considered to be owed by the Company. Other income of $25,740
in the nine months ended June 30, 2007 consisted primarily of the extinguishment
of an unclaimed accrued expense related to a fully amortized
investment.
 
 Interest
Expense
 
 Interest
expense decreased to $66,022 during the nine months ended June 30, 2008 from
$143,619 during the nine months ended June 30, 2007, primarily because interest
expense during the nine months ended June 30, 2007 included a one time charge of
$66,000 representing the value of stock issued to settle a dispute regarding the
timing of interest payments on a note and approximately $10,000 of beneficial
conversion feature expense not incurred in the first nine months of fiscal year
2008.
 
 Amortization
of Deferred Financing Costs
 
 Amortization
of deferred financing costs for the nine months ended June 30, 2008 and 2007
remained flat at $3,600.
 
 Unclaimed
Note and Trade Payables
  Unclaimed
note and trade payables reflect gains on extinguishment of liabilities of
$77,947 during the nine months ended June 30, 2008. This relates to the
extinguishment of amounts previously considered to be owed by the
Company.
 
 Prior
Years Accruals Not Required
 
 Prior years accruals not required of
$55,250 during the nine months ended June 30, 2008, reflects the extinguishment
of the Stock Retainage Program balance, accumulated with the return to treasury
of shares issued to former employees. The Company does not intend to use the
program to issue shares to retain its employees.
 20
 Table of
Contents
  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
June 30, 2008, the Company had cash and cash equivalents of $2,355, total
current assets of $126,573 and total liabilities of $1,643,815 including notes
payable of $355,556 gross of debt discount and beneficial conversion feature,
accounts payable of $168,984, accrued expenses of $1,068,290 and amounts due to
factors of $81,700. The accounts payables total of $168,984 included invoices of
approximately $38,000 aged over three years. The accrued expenses total of
$1,068,290 included $764,286 of unpaid wages and vacation pay.
 
 Cash used
in operating activities during the nine months ended June 30, 2008 of $142,261
represents a $69,399 increase from the amount used in operating activities
during the nine months ended June 30, 2007. The increase was primarily due to
changes in accounts receivable and increases in accounts payable and accrued
expenses during the nine months ended June 30, 2008 compared to the nine months
ended June 30, 2007, offset by the net loss of $198,112 in the nine months ended
June 30, 2008 compared to the net loss of $384,100 the nine months ended June
30, 2007.
 
 Cash used
in financing activities during the nine months ended June 30, 2008 of $58,729
represents a $17,719 increase from the amount provided by financing activities
during the nine months ended June 30, 2007. Financing activities during the nine
months ended June 30, 2008 included the repayment of notes payable of $20,369
offset by net proceeds from factors of $79,098. Financing activities during the
nine months ended June 30, 2007 included the receipt of proceeds from notes
payable of $20,725 and net proceeds from the issuance of common stock of
$109,800, offset by the repayment of notes payable of $13,025 and net proceeds
from factors of $76,490.
 
 We
believe that our current cash position as of June 30, 2008, 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. Our auditors have expressed substantial doubt about the Company’s
ability to continue as a going concern.
  Other
Subsequent Events
 
 Subsequent
to June 30, 2008, several key projects were successfully completed. We launched
two new product lines which will take advantage of our growing indirect
distribution channels. These new products focus directly on improved
reliability, improved margin and ease of use. They are also a direct substitute
for the existing DVR’s already in the market and as such offer us significant
growth potential. The technology employed has a very positive impact on
reliability and also allows us to be very price competitive.
 21
 Table of
Contents
 As of the
date of this report, the company had a backlog of orders for its DVR systems of
approximately $204,000. The Company has noted in the past few years that sales
in the September-ending quarter for its products tend to be stronger than in the
June-ending quarter. This is typically due to government fiscal year-end
effects, and on imminent business that is likely to arise from the good current
sales pipeline being generated from the new products. The company therefore, has
reason to believe that the current quarter would continue to support that
seasonal up-trend, although management believes there is still significant
uncertainty on any final results for the current quarter.
 
 In order
to support this trend and allow for possible growth in revenues, the Company is
exploring various avenues for possible new debt and debt consolidation over the
course of the next several months of up to $500,000 although no firm decisions
in this area have been made by its board, and there is no assurance that such
financing would be available on acceptable terms. Part of this effort may
include an expansion of the conversion of employee back pay debt to a
significant amount of restricted company common stock, at then-current market
prices, which has previously been authorized by its board.  Also,
early payoff of some large notes to creditors outside of the Company may be
considered, as would licensing to third parties of some of the Company’s IBUS
technology, if a fair price can be established.
 ITEM 3.
                      Quantitative
      and Qualitative Disclosures About Market
Risk
  Not
required under Regulation S-K for “smaller reporting
companies.”


Item
      4T.
            Controls and
      Procedures




(a)    
Evaluation of Disclosure Controls and Procedures
 
 Disclosure
controls and procedures are designed with an objective of ensuring that
information required to be disclosed in our periodic reports filed with the
Securities and Exchange Commission, such as this Quarterly Report on Form 10-Q,
is recorded, processed, summarized and reported within the time period specified
by the Securities and Exchange Commission. Disclosure controls also are designed
with an objective of ensuring that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Acting
Chief Financial Officer, in order to allow timely consideration regarding
required disclosures.
  (b)    
Management’s Report on Internal Control over Financial Reporting
 
 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 June 30, 2008,
of the design and operation of the Company’s disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e). Based upon that
evaluation, the Chief Executive Officer and Acting Chief Financial Officer
concluded that the Company’s disclosure controls and procedures are
effective.
 
 (c)    
Changes in Internal Control over Financial Reporting
 
 There
have been no changes in our internal control over financial reporting during the
quarter ended June 30, 2008 that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
 22
 Table of
Contents


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, 2007. 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
      1A.
                  Risk
    Factors
  Carefully
consider the risk factors set forth in the Annual Report on Form 10-KSB for the
fiscal year ended September 30, 2007 that could materially affect our business,
financial condition or future results. The risk factors set forth in our Annual
Report on Form 10-KSB for the fiscal year ended September 30, 2007 have not
materially changed.


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




None.




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





Exhibit
              Number
            
            Description13
            
            Form
      10-KSB Annual Report For The Fiscal Year Ended September 30, 2007 (1)31
            
            Certification
      Pursuant to Section 302 of the Sarbanes-Oxley Act32
            
            Certification
      Pursuant to Section 906 of the Sarbanes-Oxley
  Act




(1)
              Filed
      on or around December 31, 2007, on Form
  10-KSB.




23
 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
      CORPORATIONDate: 
      August 14, 2008
            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





24