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 March 31, 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 122,332,913 shares of Common Stock, par value $.01 per share, outstanding
at May 9, 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 March 31, 2008
      (Unaudited) and September 30, 2007
            
            3Condensed Statements of Operations (Unaudited) - Three
      and six months ended March 31, 2008
      and 2007
            
            4Condensed Statements of Cash Flows (Unaudited) - Six
      months ended March 31, 2008 and 2007
            
            5Condensed Statement of Changes in Shareholders’ Deficit
      (Unaudited) - Six months ended March 31,
2008
            
            6Notes to Condensed Financial Statements
            
            7Item 2.
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            
            16Item 3.
            Quantitative and Qualitative Disclosures About Market
      Risk
            
            21Item 4T.
            Controls and Procedures
            
            21Part II
            Other Information
            
            21Item 1.
            Legal Proceedings
            
            21Item 1A.
            Risk Factors
            
            22Item 2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            
            22Item 3.
            Defaults Upon Senior Securities
            
            22Item 4.
            Submission of Matters to a Vote of Security
      Holders
            
            22Item 5.
            Other Information
            
            22Item 6.
            Exhibits
            
            22Signatures
            
            23Exhibit
      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
      30,2008
                
                
                2007ASSETS
                
                (Unaudited)
                
                
                (Audited)Current
      Assets:Cash
      and cash equivalents
                
                $
                2,322
                
                
                $
                85,887Trade
      receivables, net
                
                
                47,392
                
                
                
                6,216Inventory,
      net
                
                
                15,340
                
                
                
                22,900Other
      assets
                
                
                12,633
                
                
                
                68Total
      current assets
                
                
                77,687
                
                
                
                115,071Property
      and equipment, net
                
                
                415
                
                
                
                622Deposits
                
                
                2,340
                
                
                
                2,340Deferred
      financing costs, net
                
                
                12,400
                
                
                
                14,800Total
      assets
                
                $
                92,842
                
                
                $
                132,833LIABILITIES
      AND SHAREHOLDERS’ DEFICITCurrent
      Liabilities:Accounts
      payable - related parties
                
                $
                –
                
                
                $
                419Accounts
      payable – other
                
                
                196,245
                
                
                
                195,004Accrued
      expenses
                
                
                1,032,284
                
                
                
                883,400Due
      to factors
                
                
                21,912
                
                
                
                2,602Notes
      payable - related party
                
                
                144,876
                
                
                
                161,300Notes
      payable - other
                
                
                79,875
                
                
                
                80,875Total
      current liabilities
                
                
                1,475,192
                
                
                
                1,323,600Notes
      payable, less current portion, net of discount and beneficial conversion
      feature of $31,792 at March 31, 2008 and $37,945 at September 30,
      2007
                
                
                143,208
                
                
                
                137,055Total
      liabilities
                
                
                1,618,400
                
                
                
                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 122,332,913 at March 31, 2008 and 121,995,835 at
      September 30, 2007
                
                
                1,223,330
                
                
                
                1,219,959Additional
      paid-in capital
                
                
                22,709,408
                
                
                
                22,693,696Accumulated
      deficit
                
                
                (25,458,296
                )
                
                
                (25,241,477
                )Total
      shareholders’ deficit
                
                
                (1,525,558
                )
                
                
                (1,327,822
                )Total
      liabilities and shareholder’s deficit
                
                $
                92,842
                
                
                $
                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
                
                
                Six
      months endedMarch
      31
                
                
                March
      312008
                
                
                2007
                
                
                2008
                
                
                2007Revenues
                
                $
                156,216
                
                
                $
                46,500
                
                
                $
                371,755
                
                
                $
                184,716Cost
      of Sales
                
                
                83,033
                
                
                
                21,510
                
                
                
                206,473
                
                
                
                93,485Gross
      profit
                
                
                73,183
                
                
                
                24,990
                
                
                
                165,282
                
                
                
                91,231Costs
      and expensesSalaries
      and benefits
                
                
                71,055
                
                
                
                62,529
                
                
                
                137,293
                
                
                
                133,851Research
      and development
                
                
                41,457
                
                
                
                40,834
                
                
                
                84,708
                
                
                
                84,287Stock
      compensation
                
                
                14
                
                
                
                4,931
                
                
                
                14,319
                
                
                
                7,931Other
                
                
                62,608
                
                
                
                34,330
                
                
                
                98,761
                
                
                
                69,273Total
      costs and expenses
                
                
                175,134
                
                
                
                142,624
                
                
                
                335,081
                
                
                
                295,342Loss
      from operations
                
                
                (101,951
                )
                
                
                (117,634
                )
                
                
                (169,799
                )
                
                
                (204,111
                )Other
      income (expense)Other
      income
                
                
                –
                
                
                
                25,000
                
                
                
                –
                
                
                
                25,740Interest
      expense
                
                
                (21,772
                )
                
                
                (82,907
                )
                
                
                (44,620
                )
                
                
                (118,613
                )Amortization
      of deferred financing costs
                
                
                (1,200
                )
                
                
                (1,200
                )
                
                
                (2,400
                )
                
                
                (2,400
                )(22,972
                )
                
                
                (59,107
                )
                
                
                (47,020
                )
                
                
                (95,273
                )Loss
      before income taxes
                
                
                (124,923
                )
                
                
                (176,741
                )
                
                
                (216,819
                )
                
                
                (299,384
                )Income
      tax expense
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –Net
      loss
                
                $
                (124,923
                )
                
                $
                (176,741
                )
                
                $
                (216,819
                )
                
                $
                (299,384
                )Net
      loss per common share, basic and diluted
                
                $
                (0.00
                )
                
                $
                (0.00
                )
                
                $
                (0.00
                )
                
                $
                (0.00
                )Weighted
      average number of shares outstanding
                
                
                122,303,826
                
                
                
                102,116,638
                
                
                
                122,230,098
                
                
                
                100,595,808


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 endedMarch
      31,2008
                    
                    
                    2007Cash
      flows from operating activities:Net
      loss
                    
                    $
                    (216,819
                    )
                    
                    $
                    (299,384
                    )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
                    
                    
                    207
                    
                    
                    
                    207Stock
      issued for services
                    
                    
                    2,000
                    
                    
                    
                    3,000Stock
      options issued for services
                    
                    
                    12,319
                    
                    
                    
                    4,931Stock
      issued to cure default of note payable
                    
                    
                    –
                    
                    
                    
                    66,000Warrant
      expense
                    
                    
                    –
                    
                    
                    
                    871Amortization
      of deferred financing costs
                    
                    
                    2,400
                    
                    
                    
                    2,400Amortization
      of debt discount
                    
                    
                    5,160
                    
                    
                    
                    5,160Amortization
      of beneficial conversion feature
                    
                    
                    993
                    
                    
                    
                    993Changes
      in assets and liabilities:Decrease
      (increase) in inventory, net
                    
                    
                    7,560
                    
                    
                    
                    (2,136
                    )Increase
      in receivables, net
                    
                    
                    (41,176
                    )
                    
                    
                    (6,147
                    )Decrease
      (increase) in other assets and deposits
                    
                    
                    (12,565
                    )
                    
                    
                    4,083Increase
      in accounts payable and accrued expenses
                    
                    
                    154,470
                    
                    
                    
                    107,591Net
      cash used in operating activities
                    
                    
                    (85,451
                    )
                    
                    
                    (112,431
                    )Cash
      flows from financing activities:Increase
      in notes payable
                    
                    
                    –
                    
                    
                    
                    20,725Repayment
      of notes payable
                    
                    
                    (17,424
                    )
                    
                    
                    (12,025
                    )Net
      proceeds from factors
                    
                    
                    19,310
                    
                    
                    
                    (35,520
                    )Proceeds from issuance of common
      stock
                    
                    
                    –
                    
                    
                    
                    109,8001,886
                    
                    
                    
                    82,980Net
      decrease in cash and cash equivalents
                    
                    
                    (83,565
                    )
                    
                    
                    (29,451
                    )Cash
      and cash equivalents, beginning of period
                    
                    
                    85,887
                    
                    
                    
                    43,899Cash
      and cash equivalents, end of period
                    
                    $
                    2,322
                    
                    
                    $
                    14,448Supplementary
      Disclosure of Cash Flow Information:Cash
      paid for interest
                    
                    $
                    7,407
                    
                    
                    $
                    11,860Conversion
      of accounts payable and accrued expenses to equity
                    
                    $
                    5,000
                    
                    
                    $
                    45,000Conversion
      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 Six months Ended March 31, 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
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      12,083
                      
                      
                      
                      –
                      
                      
                      
                      12,083Stock
      issued in exchange of accrued expenses for:$0.0200
                      
                      
                      250,000
                      
                      
                      
                      2,500
                      
                      
                      
                      2,500
                      
                      
                      
                      –
                      
                      
                      
                      5,000Net
      loss for the six months ended March 31, 2008
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      (216,819
                      )
                      
                      
                      (216,819
                      )Balance
      at March 31, 2008
                      
                      
                      122,332,913
                      
                      
                      $
                      1,223,330
                      
                      
                      $
                      22,709,408
                      
                      
                      $
                      (25,458,296
                      )
                      
                      $
                      (1,525,558
                      )
 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, 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 six 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 report on Form 10-QSB
for the fiscal period ended December 31, 2007.
 
 The
results of operations for the six months ended March 31, 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 six months ended March 31, 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.
 2.
                Issuance of Common
      Stock
  On
February 20, 2008 the Company issued 52,356 of its restricted common shares to
Greg Szabo, a director, for board services for the quarter ended March 31, 2008
at the average closing price of the Company’s stock, during the previous
quarter, of $0.0191.
 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 the SFAS 123R method whereby, compensation cost recognized in
the six months ended March 31, 2008 and 2007 includes 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; therefore, the results for prior periods have not
been restated.
 
 As of
March 31, 2008, 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.
 10
 Table of
Contents
  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.
 
 As of
March 31, 2008, we have issued options to purchase an aggregate of 5,251,756
shares of our common stock, under the plan, leaving a balance of 1,748,244
available for grant. Also as of March 31, 2008, 5,251,756 options are
exercisable and 5,251,756 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 six months ended March 31, 2008, the following options were
granted:
 
 On
October 9, 2007, 20,000 optionswere 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.
 
 On
November 14, 2007, 225,000 optionswere 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.
 
 On
November 14, 2007, 100,000 optionswere granted to Greg
Szabo, 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.
 
 On
November 14, 2007, 100,000 optionswere 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 using the Black-Scholes option pricing model value
on the grant date. The options have a life of ten years. 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. $4,785, was
recognized as the incremental compensation cost of the modified award in the
financial statements.
 
 On
January 14, 2008, 20,000 optionswere 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.
 
 During
the sixmonths ended
March 31, 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 six months ended March 31, 2008 and
2007:
 
 2008
                        
                        2007Risk
      - free interest rate
                        
                        3.06%
      to 4.23%
                        
                        4.46%
      to 4.65%Expected
      life (years)
                        
                        5
                        
                        10Expected
      volatility
                        
                        116.0%
      to 124.9%
                        
                        91.4%
      to 181.8%Expected
      dividends
                        
                        None
                        
                        NoneForfeitures
      assumed
                        
                        None
                        
                        NoneWeighted
      average grant date fair value
                        
                        $0.005
      to $0.018
                        
                        $0.0220
      to $0.0599
 11
 Table of
Contents
 The
following table summarizes the stock option activity during the first six months
of fiscal year 2008:
 
 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
                        
                        
                        915,000
                        
                        
                        
                        0.03Exercised
                        
                        
                        –
                        
                        
                        
                        –Forfeited
      or expired
                        
                        
                        (450,000
                        )
                        
                        
                        1.84Options
      Outstanding, March 31, 2008
                        
                        
                        5,251,756
                        
                        
                        $
                        0.43
                        
                        
                        
                        5.70
                        
                        
                        $
                        –Options
      Exercisable March 31, 2008
                        
                        
                        5,251,756
                        
                        
                        $
                        0.43
                        
                        
                        
                        5.70
                        
                        
                        $
                        –____________
 (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 ofMarch 31, 2008, for those awards that have an
      exercise price currently below the closing price as ofMarch 31, 2008. Awards with an exercise price
      above the closing price of $0.010 as ofMarch 31, 2008are considered to have no
      intrinsic value.
 
 Warrants
 
 During
the six months ended March 31, 2008, no awards were granted, no share
purchase warrants were exercised, and no warrants were forfeited.
 
 The
following assumptions were utilized to value warrants during the six months
ended March 31, 2007:
 
 2007Risk
      - free interest rate
                        
                        4.60%
      to 4.82%Expected
      life (years)
                        
                        2
      to 5Expected
      volatility
                        
                        83.5%
      to 181.2%Expected
      dividends
                        
                        NoneForfeitures
      assumed
                        
                        NoneWeighted
      average grant date fair value
                        
                        $0.016
 12
 Table of
Contents
 The
following table summarizes the warrant activity during the first six 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
                        
                        
                        –
                        
                        
                        –
                        
                        
                        –Cancelled
      or expired
                        
                        
                        –
                        
                        
                        –
                        
                        
                        –Warrants
      Outstanding, March 31, 2008
                        
                        
                        17,714,197
                        
                        $
                        0.17
                        
                        
                        1.31
                        
                        $
                        –____________
 (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, 2008, for
      those awards that have an exercise price currently below the closing price
      as of March 31, 2008. Awards with an exercise price above the closing
      price as of March 31, 2008 of $0.010 are considered to have no intrinsic
      value.
 4.
                  Trade
      Receivables
 Trade
receivables are net of reserves:
 
 March
      31, 2008
                    (Unaudited)
                  
                  September
      30, 2007
                    (Audited)Trade
      receivables
                  
                  $
                  47,392
                  
                  
                  $
                  6,216Less:
      reserves
                  
                  
                  –
                  
                  
                  
                  –$
                  47,392
                  
                  
                  $
                  6,216
 
 Trade
Receivables of $47,392 at March 31, 2008 included factored invoices totaling
$21,912. Trade Receivables of $6,216 at September 30, 2007 included factored
invoices totaling $2,602.
 5.
                Inventory,
      net
  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.
 
 Inventory,
net consisted of the following at March 31, 2008 and September 30,
2007:
 
 March
      31, 2008
                    (Unaudited)
                  
                  September
      30, 2007
                    (Audited)Inventory,
      gross
                  
                  $
                  15,340
                  
                  
                  $
                  22,900Less:
      reserve for obsolescence
                  
                  
                  –
                  
                  
                  
                  –Inventory,
      net
                  
                  $
                  15,340
                  
                  
                  $
                  22,900
 13
 Table of
Contents
 6.
                  Accrued
      Expenses
  Accrued
expenses consisted of the following at March 31, 2008 and September 30,
2007:
 
 March 31,
      2008
                      (Unaudited)
                    
                    
                    September 30,
      2007
                      (Audited)Salaries
      and vacation pay - current management and staff
                    
                    $
                    694,307
                    
                    
                    $
                    575,727Salaries
      and vacation pay - former employee
                    
                    
                    29,375
                    
                    
                    
                    29,375Payroll
      taxes for accrued back pay
                    
                    
                    50,112
                    
                    
                    
                    40,781Interest
                    
                    
                    187,359
                    
                    
                    
                    156,271Employee
      stock retainage pool
                    
                    
                    50,250
                    
                    
                    
                    50,250Other
      liabilities
                    
                    
                    20,881
                    
                    
                    
                    30,996$
                    1,032,284
                    
                    
                    $
                    883,400
 7.
                  Notes Payable and Long-Term
      Debt
  As of
March 31, 2008 and September 30, 2007, long-term debt consisted of the following
notes payable:
 
 March
      31, 2008
                        (Unaudited)
                      
                      
                      September 30,
      2007
                        (Audited)Non-interest
      bearing note payable on demand; unsecured;repayment
      may be made by the Company with either cash or itsrestricted
      common stock or a combination of cash and stock
                      
                      $
                      43,250
                      
                      
                      $
                      43,2508%
      note payable to a related party; unsecured; principal andinterest
      payable on demand
                      
                      
                      144,876
                      
                      
                      
                      161,30012%
      note payable; secured; payable on demand
                      
                      
                      11,625
                      
                      
                      
                      11,62512%
      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
                      
                      
                      
                      175,0006%
      note payable; unsecured; payable on demand with 30 days prior
      notice
                      
                      
                      5,000
                      
                      
                      
                      6,000399,751
                      
                      
                      
                      417,175Less:Current
      portion of long term debt
                      
                      
                      (224,751
                      )
                      
                      
                      (242,175
                      )Discount
                      
                      
                      (26,660
                      )
                      
                      
                      (31,820
                      )Beneficial
      conversion feature
                      
                      
                      (5,132
                      )
                      
                      
                      (6,125
                      )Long-term
      debt, net of current portion
                      
                      $
                      143,208
                      
                      
                      $
                      137,055
 14
 Table of
Contents
 The
aggregate maturities of long-term debt were as follows:
 
 March
      31, 2008
                        (Unaudited)
                      
                      
                      September
      30, 2007
                        (Audited)2008
                      
                      
                      224,751
                      
                      
                      
                      242,1752009
                      
                      
                      –
                      
                      
                      
                      –2010
                      
                      
                      175,000
                      
                      
                      
                      175,000$
                      399,751
                      
                      
                      $
                      417,175


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 loss per share
includes no dilution and is computed by dividing 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 six months
ended March 31, 2008 and 2007.
 
 Three
      months ended
                          
                          
                          Six
      months endedMarch
      31,
                          
                          
                          March
      31,2008
                          
                          
                          2007
                          
                          
                          2008
                          
                          
                          2007Net
      (loss)
                          
                          $
                          (124,923
                          )
                          
                          $
                          (176,741
                          )
                          
                          $
                          (216,819
                          )
                          
                          $
                          (299,384
                          )Weighted
      average shares:Average
      shares outstanding
                          
                          
                          122,303,826
                          
                          
                          
                          102,116,638
                          
                          
                          
                          122,230,098
                          
                          
                          
                          100,595,808Effect
      of diluted shares
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          –Average
      shares outstanding adjusted for dilutive effect
                          
                          
                          122,303,826
                          
                          
                          
                          102,116,638
                          
                          
                          
                          122,230,098
                          
                          
                          
                          100,595,808(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,
      2008
                          
                          March
      31, 2007Options
                          
                          
                          5,251,756
                          
                          4,346,756Warrants
                          
                          
                          17,714,197
                          
                          18,354,197Potential
      common equivalents
                          
                          
                          22,965,953
                          
                          22,700,953
 9.
                  Subsequent
      Events
 None.


15
 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  as well as previous Form 10-QSB reports covering the period
ended December 31, 2007.
 
 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.
 16
 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 half year of fiscal year 2008 our
sales have consisted entirely of Travado IBUSTM products.
  Three Months Ended
March 31, 2008 Compared to Three Months Ended March 31, 2007
 
 Revenues
 
 Revenues
improved by approximately 236% to $156,216 for the three months ended March 31,
2008 from $46,500 for the three months ended March 31, 2007 largely due to a
470% increase in the number of Travado IBUSTM products sold.
 
 Gross
Profit
 
 Gross
profit increased to $73,183 for the three months ended March 31, 2008 from
$24,990 for the three months ended March 31, 2007 primarily due to higher volume
of Travado IBUSTM sales. However, gross profit margin as a percentage of
revenues, decreased from 54% to
47%in the three months ended March 31, 2008 mainly because the average
unit selling price of 81% of our unit sales in the 2008 quarter, were priced
lower according to a 2006 bid which expires on April 30, 2008.
  Salaries
and Benefits
 
 Salaries
and benefits, of administration and marketing personnel increased to $71,055 for
the three months ended March 31, 2008 from $62,529 for the three months ended
March 31, 2007. The increase is mainly attributable to the hiring of sales and
manufacturing part-time staff.
 
 Research
and Development
 
 Research
and development expenditures of $41,457 for the three months ended March 31,
2008 remained almost flat when compared to $40,834 for the three months ended
March 31, 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 March 31, 2008 totaled $14 compared to
$4,931 for the three months ended March 31, 2007. The decrease in the quarter
ended March 31, 2008 is mainly attributable to an adjustment of $1,600 reducing
the fair value of option awards recorded in the prior quarter.
 Other
Expenses
 
 Other
expenses totaled $62,608 in the three months ended March 31, 2008 compared to
$34,330 in the three months ended March 31, 2007.The increase
resulted primarily from increased, factors’ fees of approximately $4,000,
insurance costs of approximately $3,000, delivery costs of approximately $1,000,
principal accountant fees of approximately $3,000, professional fees of
approximately $3,000, shareholders’ meeting expenses not incurred in the
comparative prior quarter of approximately $4,000, selling expenses of
approximately $1,000, marketing and trade show expenses of approximately $2,000
and warranty expenses of approximately $6,000 for the set up of a warranty
reserve and the upgrade of customer systems.   17
 Table of
Contents
 Other
Income
 
 Other
income of $25,000 in the three months ended March 31, 2007 consisted of the
reversal to revenue of an unclaimed accrued expense related to a fully amortized
investment. There was no other income in the three months ended March 31,
2008.
  Interest
Expense
 
 Interest
expense of   $21,772 during the three months ended March 31, 2008
decreased from $82,907 during the three months ended March 31, 2007, primarily
because the second quarter of fiscal year 2007 included a one time charge of
$66,000 representing the value of stock issued to settle a dispute regarding
timing of interest payment on a note.
 
 Amortization
of Deferred Financing Costs
 
 Amortization
of deferred financing costsforthe three months ended March 31, 2008 remained flat at $1,200 when compared
to thethree months ended March 31, 2007.
 
 Six Months Ended
March 31, 2008 Compared to Six Months Ended March 31, 2007
 
 Revenues
 
 Revenues
improved by approximately 101% to $371,755 for the six months ended March 31,
2008 from $184,716 for the six months ended March 31, 2007 largely due to a 142%
increase in the number of Travado IBUSTM products sold.
 
 Gross
Profit
 
 Gross
profit increased to $165,282 for the six months ended March 31, 2008 from
$91,231 for the six months ended March 31, 2007. The higher gross profit
dollars are attributable to the higher sales volume. However, gross profit
margin as a percentage of revenues, decreased from 49% to 45%in the
six months ended March 31, 2008 mainly because the average unit selling price of
32% of our unit sales in the 2008 fiscal period, were priced lower according to
a 2006 bid which expires on April 30, 2008.
 Salaries
and Benefits
 
 Salaries
and benefits, of administration and marketing personnel increased to $137,293
for the six months ended March 31, 2008 from $133,851 for the six months ended
March 31, 2007. The increase is mainly attributable to the hiring of sales and
manufacturing part-time staff.
  Research
and Development
 
 Research
and development expenditures of  $84,708 for the six months ended
March 31, 2008 remained almost flat when compared to  $84,287 for the
six months ended March 31, 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 six months ended March 31, 2008 totaled $14,319 compared to
$7,931 for the six months ended March 31, 2007. The increase in the half-year
ended March 31, 2008 is mainly attributable to the fair value of option awards
used as incentives to retain key staff members
 18
 Table of
Contents
 Other
Expenses
 
 Other
expenses totaled $98,761 in the six months ended March 31, 2008 compared to
$69,273 in the six months ended March 31, 2007.The increase
resulted primarily from increased, factors’ fees of approximately $2,000,
insurance costs of approximately $3,000, delivery costs of approximately $3,000,
principal accountant fees of approximately $6,000, professional fees of
approximately $1,000, shareholders’ meeting expenses not incurred in the
comparative prior quarter of approximately $2,000, selling expenses of
approximately $3,000, marketing and trade show expenses of approximately $2,000
and warranty expenses of approximately $9,000 for the set up of a warranty
reserve and the upgrade of customer systems. The increases were somewhat offset
by decreases in rent and travel expenses.
 
 Other
Income
 
 Other
income of $25,740 in the six months ended March 31, 2007 consisted primarily of
the reversal to revenue of an unclaimed accrued expense related to a fully
amortized investment. There was no other income in the six months ended March
31, 2008.
 
 Interest
Expense
 
 Interest
expense of  $44,620 during the six months ended March 31, 2008
decreased from $118,613 during the six months ended March 31, 2007, primarily
because the second quarter of fiscal year 2007 included a one time charge of
$66,000 representing the value of stock issued to settle a dispute regarding
timing of interest payment on a note and approximately $10,000 of beneficial
conversion feature expense not incurred in the first six months of fiscal year
2008.
 
 Amortization
of Deferred Financing Costs
 
 Amortization
of deferred financing costsforthe six months ended March 31, 2008 of $2,400 was unchanged when compared
to thesix months ended March 31, 2007.
 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, 2008, the Company had cash and cash equivalents of $2,322, total
current assets of $77,687 and total liabilities of $1,618,400 including notes
payable of $399,751 gross of debt discount and beneficial conversion feature,
accounts payable of $196,245, accrued expenses of $1,032,284 and amounts due to
factors of $21,912. The accounts payables total of $196,245 included invoices of
approximately $73,000 that are aged over three years. The accrued expenses total
of $1,032,284 included approximately $694,307 of unpaid wages and vacation
pay.
 
 Cash used
in operations was $85,451 for the six months ended March 31, 2008 compared to
$112,431 for the six months ended March 31, 2007.
 
 Net cash
provided by financing activities was $1,886 for the six months ended March 31,
2008 compared to $82,980 for the six months ended March 31, 2007. The higher
financing activities in the six months ended March 31, 2007 mainly reflects net
proceeds from the issuance of common stock.
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 Table of
Contents
 We
believe that our current cash position as of March 31, 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
 
 As of
March 31, 2008, the company had a backlog of orders for its Travado IBUSTM
systems of approximately $ 126,000. As of the date of this report, most of this
backlog had been shipped, and a current backlog of approximately $ 97,000
existed. The Company has noted in the past few years that sales in the
June-ending quarter for its products tend to be stronger than in the
March-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. 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 a 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.
  After
providing lawful notice, the annual meeting of the stockholders of National
Scientific Corporation was held at the Scottsdale Thunderbird Suites, 7515 East
Butherus Drive, Scottsdale, Arizona, on April 30, 2008, at 10 o’clock, a.m. Full
minutes of the meeting are available at the Company’s offices in Scottsdale, a
summary is offered here. A shareholder list was presented, showing that as of
the March 7, 2008 record date, 122,332,913 shares of Common Stock were issued
and outstanding, all of which were entitled to be voted at the meeting. A quorum
was established. The first matter voted on was Proposal No. 1, the election of
directors. As provided in the Proxy Statement, Michael A. Grollman, Graham L.
Clark, and Gregory Szabo have been nominated by the Board of Directors for
election as members of the Board of Directors of the Company for a term of
office expiring at the 2009 Annual Meeting of Shareholders, or until a successor
is elected and qualified. Proposal No. 2, as described in the Proxy Statement,
said that Semple, Marchal & Cooper, LLP should be ratified for appointment
as independent auditor for National Scientific Corporation for the fiscal year
ending September 30, 2008.
  The
voting on the Proposals took place after appropriate motions. After the votes
were counted, the Inspector of Elections gave her report as follows: “ I have
counted the ballots and, of the 85,776,539 shares of Common Stock present in
person or by proxy and entitled to be voted at this meeting, at least 84,748,716
votes were cast FOR the election of Michael A. Grollman, Graham L. Clark, and
Gregory Szabo as members of the Board of Directors of the Company, which is more
than a majority of the shares represented at this meeting. With respect to
Proposal No.2, 84,155,808 shares were cast FOR Proposal No. 2. Thus, persons
holding a majority of the outstanding shares of the Company’s Common Stock voted
for the adoption of Proposal No. 2.” The motions were
determined to have passed, and shortly thereafter, the formal meeting was
adjourned.
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 Table of
Contents
 After the
meeting, management presented a brief informal review of operations to any
interested shareholders, and answered questions, after a safe harbor disclosure
was reviewed. Among other things, management underlined a goal for the next year
of attempting to continue its growth in revenues while maintaining strong
control over expense growth. Possible efforts to reduce debt on the balance
sheet were discussed; these included the continuing efforts to attempt to get
debt holders to accept equity in place of their debt, including some older
vendors, and some employees. Refinancing of some existing debt was also
discussed. A possible program to reduce outstanding shares of common stock
through a reserve split was also discussed, although this was not a program
management announced, just a possible direction for sometime in the future. Some
new directions in product R&D were discussed as well, including smaller and
more reliable devices for future bus sales. No specifics were disclosed,
however, and no demonstrations given. After this the discussion
ended.
  Item 3.
                      Quantitative
      and Qualitative Disclosures About Market
Risk
  Not
required under Regulation S-K for “smaller reporting
companies.”


Item 4T.
            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 senior officers
of National Scientific. 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.
  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, 2008,
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, 2008 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, 2007, Semple, Marchal &
Cooper, LLP 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, 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.


21
 Table of
Contents
  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.




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 Table of
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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: 
      May 15, 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





23