**Table
            of Contents**
 **Index
            to Financial
            Statements**




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


**Washington,
      D.C. 20549**






**FORM
        10-KSB**
   ANNUAL
          REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 SECURITIES
        EXCHANGE ACT OF 1934
  For
          The
          Fiscal Year Ended **September 30, 2007**
 **000-28745**
 (Commission
        File No.)
 ______________
 
 **NATIONAL
        SCIENTIFIC CORPORATION**
 (Name
        of
        Small Business Issuer in its Charter)
 ______________
  **Texas**
                
                **86-0837077**(State
                    of Incorporation)
                
                (I.R.S.
                    Employer Identification No.)**8361
                    E. Evans Road, Suite 106**
                ****
                ******Scottsdale,
                    AZ**
                ****
                **85260-3617**(Address
                    of Principal Executive Offices)
                
                (Zip
                    Code)
  **(480)
          948-8324**
 (Issuers
        Telephone Number, Including Area Code)
 
 Securities
        registered under Section 12(b) of the Exchange Act:
 **Preferred
        Stock, $0.10 par value**
  Securities
        registered under Section 12(g) of the Exchange Act:
 **Common
        Stock, $0.01 par value**
  Check
        whether the issuer (1) filed all reports required
        to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12
        months (or for such shorter period that the registrant was required to file
        such
        reports) and (2) has been subject to such filing requirements for the past
        90
        days.  Yes x No o 
 Check
          if
          there is no disclosure of delinquent filers in response to Item 405 of
          Regulation S-B contained in this form and no disclosure will be contained,
          to
          the best of the registrant’s knowledge, in definitive proxy or information
          statements incorporated by reference in Part III of this Form 10-KSB or
          any
          amendment to this Form 10-KSB x .
 
 Indicate
          by check mark whether the registrant is a shell company (as defined in
          Rule
          12b-2 of the Exchange Act). Yes o No x
  Revenues
          for the fiscal year ended September 30, 2007 were $624,793.
  The
            aggregate market value of voting stock held by non-affiliates of National
            Scientific Corporation’s (“NSC’s”) common stock, as of December 27, 2007 was
            approximately $2,996,159 (based on the last sale price of such stock
            as reported
            by OTC BB Stock Market). The number of shares outstanding of the registrant’s
            common stock, as of December 27, 2007 was 122,280,557.
  Transitional
          Small Business Disclosure Format (Check One):  Yes o No x
 **Table
              of Contents**
 **Index
              to Financial
              Statements**
  **NATIONAL
        SCIENTIFIC CORPORATION**
 FORM
          10-KSB FOR THE FISCAL YEAR ENDED
          SEPTEMBER 30, 2007
 
 **TABLE
          OF CONTENTS**
  PagePart
                        IItem
                        1.
                    Description
                        of Business
                    3Item
                        2.
                    Properties
                    23Item
                        3.
                    Legal
                        Proceedings
                    23Item
                        4.
                    Submission
                        of Matters to a Vote of Security
                        Holders
                    24Part
                        IIItem
                        5.
                    Market
                        for Common Equity and Related Stockholder
                        Matters
                    24Item
                        6.
                    Management’s
                        Discussion
                        and Analysis of Financial Condition and Results of
                        Operations
                    28Item
                        7.
                    Financial
                        Statements
                    41Item
                        8.
                    Changes
                        in and Disagreements with Accountants on Accounting and
                        Financial Disclosure
                    41Item
                        8A.
                    Controls
                        and Procedures
                    41Item
                        8B.
                    Other
                        Information
                    42Part
                        IIIItem
                        9.
                    Directors,
                        Executive Officers, Promoters and Control Persons;
                        Compliance with Section 16(a) of the Exchange Act
                    42Item
                        10.
                    Executive
                        Compensation
                    45Item
                        11.
                    Security
                        Ownership of Certain Beneficial Owners and
                        Management
                    51Item
                        12.
                    Certain
                        Relationships and Related
                        Transactions
                    52Item
                        13.
                    Exhibits
                    53Item
                        14.
                    Principal
                        Accountant Fees and Services
                    54Signatures
                    56
 
 2
 **Table
                of Contents**
 **Index
                to Financial
                Statements**
 **PART
            I**
 
 **Forward
              Looking Information**
  This
              Form
              10-KSB contains certain forward-looking statements within the meaning
              of the
              Section 27A of the Securities Act of 1933 and Section 21E of the Securities
              Exchange Act of 1934. For this purpose, any statements contained in
              this Form
              10-KSB that are not statements of historical fact may be deemed to
              be forward
              looking statements. Without limiting the foregoing, words such as “may,” “will,”
“expect,” “believe,” “anticipate,” “estimate,” or “continue” or comparable
              terminology are intended to identify forward looking statements. These
              statements by their nature involve substantial risks and uncertainties
              and
              actual results may differ materially depending on a variety of factors,
              many of
              which are not within NSC’s control. These factors include, but are not limited
              to, economic conditions generally and in the industries in which NSC’s future
              customers participate; competition within NSC’s industry, including competition
              from much larger competitors; technological advances which could render
              NSC’s
              products less competitive or obsolete; failure by NSC to successfully
              develop
              new products or to anticipate current or prospective customers’ product needs;
              price increases or supply limitations for components purchased by NSC
              for use in
              its products; and delays, reductions, or cancellation of orders that
              may be
              placed with NSC. There can be no assurance that NSC will be able to
              develop its
              products or markets for its products in the future.
 
 **Item
                    1.**
                  **Description
                      of Business**
 
 **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.
 3
 **Table
                        of Contents**
 **Index
                        to Financial
                        Statements**
 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 and during fiscal year 2007, we have generally seen a steady
                increase
                in the sales of our its Travado IBUS. During fiscal 2007 our sales
                have
                consisted entirely of Travado IBUSTM products.
 
 ·
                        Revenue
                                for the fiscal
                                year
                                ended September 30, 2006 was $227,251, all derived
                                from the sale of
                                location tracking products and
                                services;
 ·
                        Revenue
                              for the fiscal year ended September 30, 2007 was $624,793,
                              all derived
                              from the sale of location tracking products and
                              services;
 ·
                        Net
                                losses were $945,293 for the fiscal year ending September
                                30,
                                2006;
 ·
                        Net
                                losses were $445,722 for the fiscal year ending September
                                30,
                                2007.
  We
                originally incorporated as a Texas corporation in 1953. We changed
                our name to
                National Scientific Corporation in 1996 and we began the activities
                described in
                this annual report. Our principal executive offices are located at
                8361 E. Evans
                Road, Suite 106, Scottsdale, Arizona 85260-3617. Our telephone number is
                (480) 948-8324. Our Internet site is
www.national-scientific.com.
 **Our
              Business**
  **Mobile
                DVR and Location Products**
  Most
                of
                our customers require monitoring and or tracking of a person or object,
                and
                reporting this information back to a central location.
  Our
                current MDVR technology has not been awarded any patents as of the
                date of this
                report and has been awarded trademark protection on one other. We
                use a
                combination of confidentiality agreements, copyright and other trade
                secret
                management techniques to protect our trade secrets.
  **Location
                Products**
  *Overview
                of This Technology*
  We
                have
                developed a group of mobile products with the capability to record
                high quality
                digital video, determine location and identify individuals and concatenate
                this
                information into a homogeneous information stream that can be easily
                displayed
                on a remote computer. We use a technology called Global Positioning
                System or
                GPS to determine location. These products report the location information
                as
                well as other desired information back to the user through a radio
                network. The
                products typically contain a small computer to provide the overall
                control and
                data processing capacity for the device. The products can be thought
                of as
                having three distinct pieces or systems. These are the data collection
                system,
                the data control & processing system, and the data transport system. This
                design concept is the basis for our Mobile DVR products. The diagram
                below shows
                in a general way how the system works with our products:
 4
 **Table
                  of Contents**
 **Index
                  to Financial
                  Statements**
  
 *Data
                Collection System*
  This
                system can be thought of as the “eyes and ears” of the product. It is comprised
                of two systems. One determines location of the product, while the
                other system
                records specific events that the customer may be interested in, such
                as a door
                opening on a school bus or the speed of the bus at a certain location.
                The
                location system determines the position of the product using a technology
                developed by the U.S. Government called the Global Positioning System,
                or GPS,
                as it is commonly known. The U.S. Government developed the system
                which consists
                of approximately 24 satellites that orbit the earth rapidly. It is
                a worldwide
                navigation support system that allows users of GPS receivers to determine
                their
                precise geographic locations to within a few meters in most cases.
                The network
                of satellites and their ground control and monitoring stations are
                maintained
                and operated by the United States Department of Defense, which maintains
                an
                ongoing satellite replenishment program to ensure continuous global
                system
                coverage. Access to the system for all users is currently provided
                free of
                charge by the U.S. Government.
  GPS
                works
                by ranging and triangulating the product’s position from a group of satellites.
                Of the 24 GPS satellites in orbit, a minimum of four is needed to
                reliably
                determine the product’s three-dimensional position. A GPS receiver measures
                distance by calculating the amount of time it takes a navigation
                and time
                reference radio signal from the satellite to make a one-way trip
                to the GPS
                receiver.
  GPS
                receivers typically are very compact; and it is not necessary to
                have a large
                dish antenna to receive GPS signals. Typical information that can
                be obtained
                from these GPS signals are latitude, longitude, elevation, speed,
                direction,
                date, and time.
 5
 **Table
                        of Contents**
 **Index
                        to Financial
                        Statements**
 The
                second part of this Data Collection System is customer specific.
                Many customers
                have additional types of data that they want to know or want collected
                relevant
                to a location. An example of this is, every time a child enters or
                leaves a
                school bus or the time and location that the bus stops. This data
                input system
                can therefore be customized to meet the exact needs of a customer.
  Another
                kind of data collection technology we use in some of our products
                is called
                RFID, which stands for Radio Frequency Identification. RFID devices
                are small
                radios that could be used to track information about people or objects.
                RFID
                provides a low-cost solution for certain kinds of tracking activities,
                especially short-range activities, typically less than a hundred
                feet. RFID
                devices are primarily used to determine if the object is close to
                a given
                location.
  Another
                kind of data collection technology we use in some of our products
                is called
                MDVR, which stands for mobile digital video recorder. MDVR devices
                use a small
                digital camera that takes up to 30 pictures per second and then stores
                these
                images electronically. When these individual pictures are ‘played back’, you see
                a movie of the recorded event. Schools are particularly interested
                in this type
                of technology in conjunction with GPS to monitor what is happening
                on their
                buses.
  *Data
                Control & Processing System*
  This
                system can be thought of as the “brains” of the product. A technical term for
                this system is an embedded system, meaning one that lives deep inside
                the
                overall product. An embedded system is a small special-purpose computer
                system
                built into a larger device. The reason we use an embedded system
                in our products
                is to keep cost to us low, so our products stay more competitive
                in price.
                Simple embedded systems can cost us as little as a few dollars each
                and use very
                little power compared to the desktop computers that many people are
                familiar
                with, which usually cost much more. On our embedded systems there
                is typically
                no disk drive, operating system, keyboard, or screen. Our embedded
                systems
                instead communicate with other computers by radio. These other computers
                typically have a keyboard and screens, and they are used to display
                our
                information.
  The
                programs that we run on these systems are custom designed and built
                by our
                software engineers. These programs are called firmware. The firmware
                controls
                how the data is collected, what data should be collected and what
                events should
                be monitored and reported, what should be ignored, and how, when
                and what data
                should be sent back to the user. As mentioned above, the system is
                relatively
                easy to customize, and the firmware is also easy to customize as
                it has been
                written in a modular fashion that allows changes to one section to
                be
                implemented without the need to completely re-write the program.
                This also helps
                us keep costs down.
  *Data
                Transport System*
  This
                system can be thought of as the “mouth” of the product. It communicates to the
                outside world where it is and what has happened. There are many different
                types
                of technology that can be used to transport this data back to the
                user,
                generally using some kind of wireless technology based on radios.
                We currently
                use cellular radios, satellite radios, Wi-Fi radios, and other special
                purpose
                radios.
  We
                use a
                cellular radio based on GSM cellular technology. GSM, or Global System
                for
                Mobile Communications, is a second-generation digital mobile telephone
                standard.
                GSM was initially developed as a pan-European collaboration, intended
                to enable
                mobile roaming between member countries. The global market for mobile
                computing
                was almost $55.6 billion in 2005 and $63.5 billion in 2006. At an
                average annual
                growth rate (AAGR) of 7.0%, this market will reach more than $88.9
                billion by
                2011. 
 6
 **Table
                        of Contents**
 **Index
                        to Financial
                        Statements**
  The
                cellular radios typically operate in “real time.” When an event occurs, the data
                is immediately transported back to a user at a remote location.
 While
                cellular coverage and reception is good in urban areas, it is less
                effective in
                rural areas and is non-existent in most wilderness areas. Sometimes
                our products
                are used in areas where there is poor or no cellular coverage. To
                overcome this
                we sometimes use a special radio that communicates with satellites
                orbiting the
                earth. This form of communication has the advantage that our products
                can be
                used in very remote areas almost anywhere in the world. The major
                downside is
                that these radios are large and expensive and the airtime usage costs
                can be
                high. Another problem associated with this technology is that, like
                GPS, these
                satellite radios work best when there is a clear line of site to
                the satellites;
                as such they may not work well indoors, or under dense foliage or
                in deep
                valleys. The satellite radios typically operate in “real time.” When an event
                occurs, the data is immediately transported back to the user. Some
                of our
                customers do not want to have the expense of a real time cellular
                or satellite
                connection, nor are they interested in having the data in real time.
                For this we
                use either a special purpose radio or a Wi-Fi radio.
  The
                Wi-Fi
                radio operates in a very similar manner to cordless phones found
                in many
                households. These phones typically consist of a base station and
                handset. Our
                system is very similar; it consists of a base station unit that receives
                data
                from the mobile unit that would be on the asset or vehicle being
                tracked. The
                base station is typically attached to a personal computer that takes
                the raw
                data from the radio and re-formats it into information that can be
                displayed by
                other computers on the Internet. Wi-Fi stands for “Wireless Fidelity” and is a
                technology in very common use to wirelessly connect personal computers
                to other
                computer networks, including the Internet.
  Our
                special purpose radios work in a very similar manner to the Wi-Fi
                radio, except
                that they can sometimes transmit data over longer distances.
  Wi-Fi
                radios operate in an unlicensed part of the radio spectrum and as
                such do not
                have any special government licensing fees associated with them.
                Because they
                operate in a license-free spectrum, the Federal Communications Commission
                (FCC)
                imposes some restrictions on the use of these radios. One major restriction
                is
                that the radio signal range is limited to about 300 feet.
  Since
                most of the time our product operates well beyond 300 feet from the
                base
                station, all the collected data is stored within the device for later
                transmission when the product comes back into that range again. When
                the vehicle
                or asset comes back into base-station range, the mobile units automatically
                download their information. We call this mode of operation “near time.” These
“near time” products do not incur any special airtime usage charges. As such,
                they can be significantly cheaper to operate than the cellular or
                satellite
                equivalents.
  Once
                the
                data is transmitted back to the user they can either display the
                information on
                our software (see below) or on some other computer application. 
 7
 **Table
                        of Contents**
 **Index
                        to Financial
                        Statements**
 **Outdoor
                Location Tools Products**
  ***Travado
                IBUS***TM System The Travado IBUSTM system comprises a small outdoor
                location and DVR module that is located on the bus and a software
                suite that is
                located on a base station back at the Transportation Department.
                The system is
                designed to monitor and track school or other buses as well as digitally
                record
                video. The data is automatically downloaded or transmitted via wireless
                technology such as Wi-Fi or high speed cellular back to the school
                base station
                without ever having to go to the bus to obtain the information. The
                unit can
                also log the children or passengers riding on the bus. We initially
                announced
                the IBUSTM product in April of 2003 in conjunction with Verify Systems (see
                *Strategic Relationships*). We announced the addition of digital video
                recording capability and changed the name to Travado IBUSTM in December of 2004.
                In December 2005 we announced the completion of the first major installation
                and
                deployment. Travado IBUSTM uses a GPS that allows it to determine its current
                location. The system also includes digital video cameras that record
                the bus
                ride. The system can also include an optional ID card reader. As
                the child
                enters the bus they simply swipe their ID card and a record is created
                of who
                got on the bus and where they got on the bus. As the bus travels
                along its route
                picking up passengers, there is a complete manifest and digital video
                recording
                of who is riding on the bus. At journey’s end the children simply swipe their ID
                cards as they disembark and another log is created. Should there
                be a difference
                in the logs, then the driver will be notified that there could be
                someone left
                on the bus. The Base Station provides a simple user interface to
                easily extract
                and view the data generated from the buses. This data can include
                the routes the
                buses have taken, the video recorded on the bus, and who is riding
                on the bus.
                We have developed TravadoTM tracking software, which is an internet-based mapping
                application that can be used to display the location on a computer
                screen of our
                Travado IBUSTM and other locator products in the field. TravadoTM tracking
                software is not sold as a stand-alone product, but instead is a service
                we offer
                to purchasers of our Travado IBUSTM and Travado MiniTM customers.
 We
                have
                produced and installed about 515 units to date. We have presented
                informational
                samples to various school districts, which are evaluating and testing
                them.
                There are currently ten school districts that have our systems installed
                in
                their fleet and we continue to run pilot projects using Travado IBUSTM with
                school districts. Sales of the product have steadily increased since
                we
                introduced the product in December 2004. As of the date of this report,
                Travado
                IBUSTM revenues, since inception, total approximately $1,174,000.We intend
                to
                market this product directly and through other sales channels. Our
                plan is to
                expand into markets beyond education, such as law enforcement and
                homeland
                security.
 ***Travado
                Mini***TM ***or Mini-T***TM Travado MiniTM or
                Mini-TTM is a small outdoor location product designed to provide real-time
                location and telemetry data of government and first responder vehicles.
                Much
                like our Travado IBUSTM product, the Travado Mini-TTM uses a GPS that allows it to
                determine its current location and sends this information in real-time
                over a
                Wi-Fi network. Testing was undertaken in Corpus Christi, Texas, on
                a citywide
                Wi-Fi mesh network developed by a team from Tropos with support from
                Intel (part
                of the Intel Digital Cities initiative). Our Mini-TTM unit successfully completed
                the evaluation stage and representatives from SAP and Intel made
                a presentation
                about the project at SAP’s Sapphire Boston event on May 17, 2005. The target
                market for this product includes fire, police and ambulance, as well
                as the
                education market. We have made very few commercially significant
                sales of this
                product as of the date of this report, with total revenues from this
                area at
                approximately $19,000 since we introduced the product in mid 2005.
                However, we
                believe the sales cycle in government entities can be long and protracted,
                due
                to budget cycles, especially for new safety technology, so we are
                uncertain if
                these low sales are likely to stay low or to increase in the future.
                Our plan is
                to market this product to law enforcement and homeland security markets.
 **Indoor
                Location Products**
  *Overview
                of This Technology*
  Indoor
                location presents many challenges that are not present in outdoor
                location. This
                is largely because GPS systems work poorly if at all when used indoors.
                While
                the GPS companies are working hard to overcome this limitation, there
                have not
                been any major breakthroughs as of yet. Most indoor location technology
                uses
                proprietary infrastructure and small radios called radio frequency
                identification tags, or RFID tags, which are typically small radio
                transmitters
                that run from battery power. 
 8
 **Table
                        of Contents**
 **Index
                        to Financial
                        Statements**
  During
                2003 and 2004 we did develop some indoor location technology, however
                we were
                unable to fully commercialize this technology and as such decided
                to shelve
                further development. We had two product lines in this area.  The first
                one is the ***WiFi TrackerTM.***WiFi TrackerTM is an indoor
                tracking product designed for tracking people and other assets. In
                March 2005 we
                froze development of this product. We migrated the technology to
                Mini-TTM where
                we are not reliant on extended battery operation (as the product
                operates in
                vehicles) and can still offer location telemetry in Digital Cities
                when GPS
                telemetry is denied. The second product is Gotcha*!®.* Gotcha!® is a
                small electronic product designed to alert parents or guardians when
                their small
                child wanders too far away from them.  The units are fully FCC
                certified and approved for operation in the U.S. The units are also
                certified
                for use in Canada. We received a successful trademark claim on Gotcha!®. We have
                manufactured this unit in quantity and made sales of this product
                of $103,000 in
                the two years ended September 30, 2004. However, in the year ended
                September 30,
                2005 sales of this product were $8,700. In the year ended September
                30, 2006
                sales of this product were $999. Accordingly, we marked down our
                inventory of
                Gotcha!® products, by $17,827 and $46,775 during the years ended September
                30,
                2006 and September 30, 2005 respectively, for estimated obsolescence
                based on
                assumptions about age of the inventory and current demand. We are
                currently not
                marketing this product and the inventory of Gotcha!® was fully written off
                against the reserve during the year ended September 30, 2007. **Location
                        Tools Products Sales and
                        Marketing**
 In
                  February 2005 we adjusted our focus to concentrate on the sales
                  and marketing of
                  our Travado IBUSTM system to local Arizona school districts. These efforts
                  culminated in appointing Auto Safety House as a local distributor
                  covering
                  Arizona and Nevada. Our first significant end-user was the Scottsdale
                  Unified
                  School District of Arizona, which has deployed our Travado IBUSTM system on
                  roughly half their fleet during 2005. Since then we have established
                  a reliable
                  reputation in Arizona and this has culminated in obtaining several
                  school
                  districts in Arizona, California, Oregon and Washington states.
                  We expect this
                  trend to continue throughout the coming year as more people become
                  familiar with
                  our technology and good references help promote the product. 
 9
 **Table
                          of Contents**
 **Index
                          to Financial
                          Statements**
  We
                  believe the products we have developed will be more readily marketable
                  by
                  licensing and/or collaborating with companies that have complementary
                  products
                  and are already established in the market segments of interest.
                  We have
                  undertaken a search for candidates and are in the process of conducting
                  due
                  diligence and preliminary negotiations with potential distributors
                  and partners.
                  In the School Bus arena there are basically three avenues to the
                  end customer:
                  direct sales where we attend major trade shows and call on the
                  customer
                  directly; bus distributors who sell buses to the customer, and
                  we can ‘piggy
                  back’ on their sales activity; and communications companies who also
                  call
                  directly on school districts selling radio communication equipment
                  and see our
                  products as another revenue generating tool.
  In
                  the
                  Digital Cities arena we have an informal relationship with a large
                  software
                  developer called SAP. We have supplied them development Mini-TTM units and they
                  are currently developing application software on our technology
                  platform. End
                  user pilots were started in 2006 with the product, and continue
                  through the date
                  of this report.
  We
                  are
                  also developing relationships with a number of security based companies
                  that
                  have openings in the mass transport market for either or TravadoTM or Mini-TTM
systems.
  We
                  believe that maintaining a close relationship with our customers
                  and providing
                  them with ongoing technical and marketing support is essential
                  to end user
                  customer satisfaction in the radio based wireless and semiconductor
                  communications industry. Our staff interacts with customers during
                  key stages of
                  design and production, provides customers with current product
                  application notes
                  and engineering data, maintains regular contact with our customers’ sales and
                  installation teams, and assists in the resolution of technical
                  problems. We
                  intend to assign a contract account manager to our largest customers,
                  who will
                  maintain regular contact with the customer to determine their product
                  needs and
                  concerns. Members of senior management are also involved with the
                  sales process
                  and intend to be involved in managing relationships with significant
                  customers.
                  As is typical of other new technologies, our location-based technologies
                  can
                  have a lengthy sales cycle that requires extensive application
                  engineering
                  support. We support potential customers’ activities and consider such support an
                  important element of our sales and marketing efforts.
 We
                  hired
                  a part-time marketing brand manager for our Gotcha!® product in 2004. The
                  marketing manager is responsible for finding and integrating distribution
                  channels for Gotcha!® into marketplaces worldwide. Her role has since expanded
                  to include the TravadoTM product line.
  We
                  are
                  marketing our location products worldwide through our internal
                  sales resources
                  including our website and other contract-based marketing resources
                  located
                  throughout the U.S., primarily in the school transportation sector.
                  Additionally, senior management devotes substantial time and effort
                  to
                  developing customer relationships and contracts.
  As
                  of the
                  date of this report, we have ongoing discussions with potential
                  distributors of
                  Travado IBUSTM in Arizona, Nevada, California, New York, Colorado, New Mexico,
                  Washington, and Texas. Our primary focus as a Company this coming
                  year is to
                  develop and sell this product into the education, public safety,
                  and related
                  markets.
  We
                  have
                  active sales representation now in place in the states of Washington,
                  Texas,
                  Arizona, Utah, Minnesota, California and Nevada.
  We
                  have
                  some early and limited efforts underway to market these products
                  in Mexico and
                  in other international markets.
  **Location
                  Tools and Location Services Industry**
  The
                  market for Location Tools with GPS-enabled products is projected
                  to grow during
                  the next few years. According to the Research & Consulting Outsource
                  Services, the worldwide GPS market will reach $30B by 2008 ("World
                  Global
                  Positioning Systems Market Forecast (2006-2008)”, published October, 2007). We
                  believe that the following are among the key factors underlying
                  the projected
                  industry growth in both business and consumer markets now and in
                  the near
                  future: 
 10
 **Table
                          of Contents**
 **Index
                          to Financial
                          Statements**
  ·
                              improved
                                      accuracy of GPS will lead to an increase in
                                      the functions of devices using
                                      GPS;
 ·
                              additional
                                    functions capable of being installed in devices
                                    addressing GPS
                                    applications;
 ·
                              increased
                                      efficiencies in being able to track valuable
                                      assets;
 ·
                              the
                                      ability to provide relevant information (e.g.
                                      traffic reports, weather
                                      reports, location of stores and restaurants
                                      relative to the location of
                                      the vehicle) to occupants of passenger
                                      vehicles;
 ·
                              the
                                      ongoing miniaturization of technology products;
                                      and
 ·
                              the
                                      trend toward combining navigation, communications,
                                      and information
                                      technologies in a single device for use in
                                      vehicles.
 
 To
                  date,
                  many market leaders in the location services industry have concentrated
                  primarily on vehicle or asset tracking segments of the markets
                  associated with
                  providing information to owners of fleet vehicles or assets. Real
                  time tracking
                  information of a vehicle or asset is often delivered by linking
                  a GPS receiver
                  to a device that is connected to a cellular network, allowing location
                  of the
                  vehicle or asset to be automatically transmitted to a base station
                  via the
                  Internet twenty-four hours a day. The user can, if needed, immediately
                  contact
                  an appropriate provider of emergency services. In addition, this
                  allows those
                  parties who are monitoring the location of the vehicle or asset
                  to ensure that
                  delivery and service fleet operations are using the most effective
                  method of
                  getting to a location, or to dispatch roadside assistance and emergency
                  services, such as police or ambulances. The primary users include
                  owners of
                  expensive vehicles. This market is a segment of the overall GPS
                  Telematics
                  services market. The GPS Telematics market includes all vehicle
                  mounted GPS
                  systems that report their location remotely, typically using cellular
                  phone
                  related devices. In October 2002 market consulting firm Frost and
                  Sullivan
                  reported that revenue from this market segment exceeded $1B in
                  2003, and that
                  the segment market may surpass $2.1B by 2008. Emergency assistance
                  mandates,
                  such as the U.S. Federal Communications Commission’s E911 Phase II initiative
                  that require the manufacturers of cell phones and the providers
                  of wireless
                  communication to ensure that the location of a cell phone user
                  can be determined
                  with relative accuracy in emergency situations may also expand
                  other wireless
                  location product opportunities.
 NSC
                  has
                  decided to concentrate in a specialized segment of this market,
                  the School Bus
                  market. By combining a number of technologies namely DVR, student
                  tracking, and
                  GPS we have developed a product that offers a number of compelling
                  features and
                  benefits.
  The
                  products are aimed for the emerging but fragmented video security
                  and
                  surveillance market. In the post 9/11 world, surveillance and security
                  is
                  fueling the growth for OEMs and chip makers alike, according to
                  iSuppli Corp.*
                  (El Segundo, Calif.)
  Global
                  revenue for video surveillance equipment--such as embedded DVRs
                  and IP video
                  servers--will grow to $11.9 billion by 2011, up from $6.6 billion
                  in 2006*,
                  according to the research firm. Semiconductors associated with
                  this segment,
                  including DSPs, interface logic, image sensors and memory, will
                  account for
                  about $2 billion in revenue by 2011.
  In
                  the
                  2005-2006 school year, it was estimated by School Transportation
                  News that there
                  were 25.1 million pupils transported daily by 474,380 school buses.
                  The buses
                  traveled a total of 4.3 billion miles annually, and in excess of
                  $12B was spent
                  in transporting them during that time.
  In
                  the
                  United States, School Districts purchased a total of 45,163 new
                  buses in 2006 an
                  increase of 10% from 2005. It was further estimated by School Bus
                  Fleet that in
                  the school year 2005-06 41% of the respondents to their survey
                  had video in more
                  than 60% of their fleet. In fact over 40% of the respondents had
                  less than 20%
                  of their fleet equipped with video. According to School Bus Fleet,
                  they assume
                  that the majority of the pre-2004 systems are VCR systems and not
                  digital
                  systems. A 2006 survey done by School Bus Fleet of the 100 largest
                  school
                  districts found that 73.2% of those districts see a need to track
                  buses using
                  GPS. Regarding child tracking there are less than 3% of buses equipped
                  with this
                  technology. 
 11
 **Table
                          of Contents**
 **Index
                          to Financial
                          Statements**
  **Mobile
                  DVR Customers**
  Our
                  ideal
                  customers for Travado IBUSTM are school districts that have fleet in excess of 30
                  buses, where they can gain significant savings in time and effort
                  in maintaining
                  their video recording equipment and tape libraries. We reach these
                  potential
                  customers through a variety of avenues mentioned above. We also
                  have had
                  interest in this product from both the military and homeland security
                  who are
                  both interested in a more rugged version of our product.
  We
                  will
                  continue to market Mini-TTM through partners such as SAP and let our applications
                  provider provide most of the initial sales effort.
  **Location
                  Tools Products - Government Regulation**
  Since
                  our
                  location-based products are based on the use, in most cases, of
                  radio
                  technology, we are required to comply with a variety of Federal,
                  State, and
                  local regulations regarding the use of radio devices. The primary
                  set of
                  regulations that concerns our products are those promulgated by
                  the Federal
                  Communication Commission, or FCC, which is tasked with managing
                  the use of the
                  radio spectrum in the United States. We have two strategies for
                  compliance with
                  these regulations. First, we have certain products, such as our
                  Gotcha!® child
                  safety product, which we have independently tested and certified
                  for compliance
                  by the FCC or their approved third party laboratories. In the case
                  of Gotcha!®,
                  we achieved this certification, called a Grant of Equipment Authorization,
                  on
                  July 26, 2003, and we were issued FCC identifier number Q79-703
                  as a result.
                  This process typically takes several months and creates testing
                  costs of between
                  $5,000 and $10,000 per device certification. In other cases, we
                  elect to
                  purchase complete and certified radio systems to incorporate into
                  our products
                  that have already achieved this certification. This is the case
                  with our Travado
                  IBUSTM product, which uses 2.4GHz Wi-Fi radios manufactured by a supplier
                  of ours
                  that has already achieved this certification. Using this second
                  approach
                  typically accelerates time to market over the first approach outlined,
                  but may
                  add to the cost of manufacturing the product over the long term.
 In
                  November 2004, we received radio frequency use approval from the
                  government of
                  Canada for our Gotcha!® product, known as “CA” approval, IC: 5521A-P and IC:
                  5522A-C for the parent unit and child unit, respectively. This
                  is one of the
                  steps required to sell products like Gotcha!® in Canada.
  For
                  markets outside the United States, we may be required to comply
                  with other
                  government regulations regarding the use of radios. For example,
                  the “CE”
certification, formally called the “European Union EMC” program, has
                  similarities in part to the FCC certification program in the United
                  States.
                  While we design our products to meet this and other important international
                  regulations, we have not formally applied for the “European Union EMC”
certification on any of our products, but may choose to do so in
                  the future,
                  when we believe we have more time to devote to developing sales
                  channels in
                  those international markets. We may also be required to comply
                  with government
                  regulations regarding the export of certain kinds of technology.
                  To date, we
                  have no plans to export our technology to areas where such special
                  U.S.
                  government export restrictions might be in force, such as to Cuba.
  An
                  important additional aspect of FCC government regulation that affects
                  our
                  location tools products is the management of the cellular airwaves.
                  In
                  particular, the FCC mandate entitled E911-Phase II puts a burden
                  on cellular
                  network operators to provide position information of cellular phone
                  users to
                  within approximately 100 feet of accuracy in the very near future.
                  Some cellular
                  network operators can provide this today. We believe that some
                  of our products
                  based on cellular devices and GPS can in the future be manufactured
                  without the
                  GPS unit, while still being able to accurately determine location.
                  This may
                  allow us to penetrate new markets by lowering the cost and size
                  of some of our
                  products. 
 12
 **Table
                          of Contents**
 **Index
                          to Financial
                          Statements**
  **Location
                  Tools Products - Environmental Regulation**
  There
                  are
                  few if any special environmental compliance concerns unique to
                  us that would be
                  different than those that apply to other design companies in the
                  United States
                  in general. This is principally because we use third parties to
                  manufacture and
                  distribute our location tools products, and in the opinion of management,
                  the
                  significant environmental risks associated with our electronic
                  products relate
                  to the manufacturing of these units, not the design function.
  **Location
                  Tools Products - Research and Development**
  Over
                  the
                  last two full fiscal years, we have spent approximately $356,000
                  directly
                  accounted for as pure research and development of our products
                  overall,
                  including semiconductor products and location tools products. In
                  addition to
                  these direct expenses, our small staff spends considerable time
                  and indirect
                  resources in this area, and we estimate that in excess of 50% of
                  the available
                  personnel resources are involved in research and development of
                  our location
                  tools products over the last three years. We have conducted several
                  simulations
                  and/or developed working prototypes of most of our products. We
                  have
                  successfully developed and sold several location products, most
                  prominently our
                  Travado IBUSTM products. We will continue to conduct research in several areas,
                  especially for new location services products, however most of
                  the ongoing
                  effort will now be switched to sustaining development that will
                  concentrate on
                  extended product testing and refinement. Our limited research into
                  new location
                  tools products is expected to be in military tracking markets,
                  and first
                  responder safety markets.
  In
                  late
                  2004, we entered into a joint research and development program
                  with TurboWorx of
                  Connecticut. This firm specializes in developing computing software
                  that can
                  efficiently handle large amounts of information by spreading its
                  load macros
                  across many smaller computer systems. Given the large amount of
                  information
                  produced by our location devices, especially video information,
                  our engineers
                  believe that this TurboWorx technology may offer us great advantages
                  as our
                  product lines develop. This work remains long term on our product
                  road map, but
                  due to a series of financial difficulties at TurboWorx, they no
                  longer play an
                  active role for us in any immediate product plans (See *Strategic
                  Relationships Including Marketing Firms, Material Suppliers, and
                  Distributors* below).
  We
                  have
                  also worked closely with the research arm of SAP on the development
                  of certain
                  features in our Mini-TTM products (See *Strategic Relationships Including
                  Marketing Firms, Material Suppliers, and Distributors* below).
  The
                  following table summarizes the current development status of each
                  of our current
                  location tools products. The categories below have the following
                  meanings:
 ·
                              “Product
                                        Name” refers to the device we described in the
                                        section just
                                        above;
 ·
                              “Proof
                                      of Concept Prototype Built” means that we produced early samples in a
                                      laboratory or test facility to demonstrate
                                      the concept of the product’s
                                      viability in a limited fashion. These early
                                      prototypes are not useful for
                                      commercial sale without additional research
                                      and development, and will
                                      likely not be available for testing by third
                                      parties;
 ·
                              “Pre-Production
                                        Prototype Tested and Available” means a form of the product was created
                                        and tested that would be directly useful
                                        for commercial sale, should we
                                        decide to manufacture it on a large enough
                                        scale, and that interested
                                        third parties may receive samples from us
                                        that they can fully test in
                                        their own environment, should they so
                                        desire;
 ·
                              “Design
                                        Available for Licensing from Us” means that we either hold patent rights
                                        or other trade secret rights to create this
                                        product, and that we are able
                                        and willing to enter into agreements with
                                        other parties for them to
                                        license from us these rights for their
                                        use;
 ·
                              “Production
                                        Device Available for Sale” means that either we or another third party
                                        under license to use is manufacturing this
                                        product currently, and is
                                        offering it for general sale in the marketplace
                                        today.
 13
 **Table
                                of Contents**
 **Index
                                to Financial
                                Statements**
 **Pre-Production**
                        
                        **Design**
                        
                        **Production****Proof
                            of**
                        
                        **Prototype**
                        
                        **Available**
                        
                        **Device****Concept**
                        
                        **Tested**
                        
                        **For
                            Licensing**
                        
                        **Available****Product
                            Name**
                        
                        **Prototype
                            Built**
                        
                        **&
                            Available**
                        
                        **From
                            Us**
                        
                        **For
                            Sale**Travado
                              IBUSTM System
                        
                        Complete
                        
                        Complete
                        
                        Yes
                        
                        YesTravadoTM
                              Mini or Mini-TTM
                        
                        Complete
                        
                        Complete
                        
                        Yes
                        
                        YesGotcha!®
                        
                        Complete
                        
                        Complete
                        
                        Yes
                        
                        YesWiFi
                              TrackerTM
                        
                        Complete
                        
                        Complete
                        
                        Yes
                        
                        Yes
 
 **Location
                  Tools** - **Patents and Trademarks**
 
 We
                  were
                  granted a United States trademark on our Gotcha!® location tool for child safety
                  applications in May of 2004.
  **Location
                  Tools Products and Services Competition**
  The
                  market for communications and information products related to location-based
                  services is highly competitive and we expect competition to increase
                  in the
                  general marketplace. We believe that the principal competitive
                  factors that will
                  differentiate the various competitors in this marketplace will
                  be product
                  features, quality, customer service, brand, advertising, price
                  positioning,
                  time-to-market, and availability. The market for GPS-based products
                  is
                  relatively recent as a direct result of the U.S. Government’s removal of the GPS
                  based filters in May 2000 to allow for more accurate tracking.
                  Many of the
                  companies in the vehicle tracking market have expensive systems
                  that are
                  permanently installed into the vehicle and often involve a fee-based
                  monthly
                  subscription service. Most of our products are removable, and some
                  can be used
                  without incurring any monthly airtime charges. Many GPS device
                  vendors have been
                  offering products to the marine, aviation, and outdoors enthusiast
                  markets for
                  several years. We do not generally compete in those markets. For
                  the personal
                  safety locating products markets, we consider our principal competitors
                  in the
                  consumer market to be Wherify, Digital Angel, Angel Alert, and
                  Child Guard. For
                  our commercial vehicle and asset tracking markets, our principal
                  competitors
                  include @Road, Axiom Navigation, ALK, and Thales Navigation. There
                  are
                  approximately 100 other smaller companies offering similar products
                  and services
                  that we presently offer. There is significant other competition
                  from large
                  competitors in the GPS/Navigation market, including General Motors-OnStar®
system. We have no current plans to directly compete with major
                  automotive
                  suppliers for in-vehicle navigation solutions, due to the amount
                  of resources
                  required to successfully compete.
 Regarding
                  the School Bus market there are three distinct segments in which
                  we operate.
                  These are Bus Tracking, Video Recording, and Student Tracking.
  In
                  the
                  Bus Tracking segment there are currently 13 companies offering
                  GPS based school
                  bus tracking and another 22 dabbling in the periphery of tracking
                  systems, such
                  as route and fleet optimization. The most notable competitors in
                  this segment
                  are @Roads, Every Day Wireless, and Honeywell Video Systems. Most
                  of these
                  systems currently require the user to go to the bus and plug in
                  a computer drive
                  of some kind in order to download the data, others only display
                  the GPS
                  co-ordinates and speed on a tape or DVR recording. Our system allows
                  users to
                  automatically download and map the route as well as displaying
                  speed and
                  location on a DVR recording.
  In
                  the
                  Video Recording segment there are at least 22 competitors all offering
                  a
                  conventional tape recorder style product. When you look at those
                  companies
                  offering DVR the number drops to 12. These products all require
                  the ‘video
                  technician’ to go out to the bus to collect the hard drive and then download
                  the
                  contents at a special workstation. With our product users do not
                  need to go out
                  to the bus to get video. A user can be at a different location
                  and request and
                  get the desired video. Notable competitors in this segment are
                  Honeywell Video
                  Systems, Gatekeeper, REI, and Seon. 
 14
 **Table
                          of Contents**
 **Index
                          to Financial
                          Statements**
  In
                  Student Tracking we were only able to determine one competitor
                  of note, Every
                  Day Wireless, however a few mobile phone companies are beginning
                  to offer
                  products in this area..
  When
                  you
                  consider that each of these three components bought individually
                  as stand alone
                  products can cost well in excess of $6,000 per bus, the NSC TravadoTM product
                  offers significant competitive advantage as our retail price is
                  significantly
                  less than this figure, often less than 1⁄2 of this amount, depending on the volume
                  requirements and features requested by a given customer.
  As
                  of the
                  date of this report we have not been able to find anyone who can
                  offer a bundled
                  product like the Travado IBUSTM.
  **Semiconductor
                  Products**
  **Overview**
  The
                  semiconductor products market is of secondary focus for us because
                  we believe
                  that we have a better chance of generating revenue from the sale
                  of our location
                  tools. This is based on our assessment of the current state of
                  the semiconductor
                  market, the current level of maturity of our semiconductor products,
                  the skills
                  of our staff, and our current size and capital structure. However,
                  we believe
                  that over a long period of time we may be able to extract value
                  from the
                  semiconductor products we have, because none of our patents in
                  this area will
                  expire until at least 2017 if we continue to pay required patent
                  maintenance
                  fees, which we intend to do. As a result, we continue to operate
                  in this market,
                  although we commit very few current resources to it, relative to
                  what we commit
                  to the location tools market.
 We
                  intend
                  to maintain key elements of our portfolio of semiconductor intellectual
                  property
                  because we believe there is potential for the products we might
                  offer to
                  prospective licensees in the future, as the technology required
                  to manufacture
                  some of these designs is developed by others. There is no assurance
                  that the
                  technology required to manufacture some of these designs will ever
                  be developed,
                  or that when it is developed, that our patents will still be
                  enforceable.
  The
                  largest target market for our products is the electronic memory
                  market, which is
                  the target for our TMOS® product. Electronic memory is used widely in many
                  computer related products, such as personal computers. Our other
                  patents tend to
                  fall into the “discrete device market,” which the Semiconductor Industry
                  Association (SIA) defines as discrete components including power
                  transistors and
                  radio frequency solutions that are found in wireless consumer products.
                  These
                  kinds of products are used widely in radios. These technologies
                  form an
                  important part of communications systems worldwide through voice
                  and data
                  communications networks, cordless and cellular wireless telephony
                  systems and
                  emerging cable and wireless broadband communications networks.
  Our
                  sales
                  and marketing efforts for semiconductor products are limited to
                  our web presence
                  on our own internet site, our presence in the United States Patent
                  and Trademark
                  office database and website.
  We
                  filed
                  patent applications on a number of product designs between 1997
                  and 2002
                  relating to semiconductor products. During this time we brought
                  eight major
                  research and development projects to the patent or patent application
                  stage. The
                  United States Patent and Trademark Office, the USPTO awarded our
                  first U.S.
                  patent June 15, 1999. All of our products in this area are based
                  on paper
                  designs, with limited laboratory work having been performed on
                  some of them. Our
                  primary semiconductor and electronic device products and related
                  patent filings
                  include the following areas:
 15
 **Table
                          of Contents**
 **Index
                          to Financial
                          Statements**
 **Product
                            Name**
                        
                        **Use
                            and Function of Product**Heterojunction
                              Bipolar Transistor
                        
                        Used
                              in the manufacture of digital circuits found in devices
                              such as cellular
                              phones, personal computers and automotive circuitry.
                              Transistors provide
                              electronic control over current flow, and are a part
                              of many electronic
                              circuits. Heterojunction bipolar transistors are used
                              most frequently in
                              power amplifiers, radio frequency integrated circuits
                              and other
                              circuits.Monolithic
                              Inductor
                        
                        Used
                              in a wide range of electronic circuits for telecommunications
                              applications. The inductor’s most common application is as a component of
                              a radio frequency circuit used to manipulate radio
                              waves into certain
                              other electrical signals. The inductor does this, usually
                              in conjunction
                              with a capacitor, by producing an amplified current
                              when stimulated by a
                              specific frequency of radio signal.Distributed
                              Amplifier
                        
                        Used
                              in all electronic products that require some level
                              of power increase such
                              as telecommunications, microwave, internet communications,
                              automotive and
                              bio-medical products as well as automated manufacturing
                              products.TMOS®
                              Memory
                        
                        Used
                              in digital computing devices such as microcomputers
                              and workstations and
                              battery powered devices such as personal data appliances
                              and cellular
                              phones that require a memory function.Mode
                              Dielectric Resonator
                        
                        Used
                              in many applications including microwave oscillators,
                              narrowband microwave
                              filters, radar detectors, speed guns, automatic door
                              openers, cellular
                              portable phones, and global positioning satellites.
                              The resonator’s most
                              common application is as a component of a radio frequency
                              circuit used to
                              manipulate radio waves into certain other electrical
                              signals. The
                              resonator does this by producing a current of predictable
                              size when
                              stimulated by a specific frequency of radio
                              signal.High
                              Frequency Wireless Transceiver
                        
                        Allows
                              the transmission and reception of radio waves and is
                              used in a variety of
                              wireless devices.Communications
                              Receiver with
                            Integrated
                              IF Filter and Method
                        
                        This
                              device is intended to allow for the self-tuning of
                              certain radio elements,
                              such as the VCO. We believe this self-tuning function
                              could allow
                              manufactures of VCO and related devices to produce
                              more accurate ratios at
                              a lower price, since the post-manufacturing tuning
                              process many use today
                              could be skipped.
  **Semiconductor
                  Products - Patents and Trademarks**
 
 We
                  have
                  applied for U.S. patents relating to these technologies, most of
                  which have
                  already been issued. These include the following, all of which
                  have a 20-year
                  life following date of filing. 
 16
 **Table
                          of Contents**
 **Index
                          to Financial
                          Statements**
 
 **Expected****Patent****Expiration****Product
                            Name**
                        
                        **Summary
                            of Patent Information**
                        
                        **Date**Heterojunction
                              Bipolar Transistor
                        
                        On
                              September 29, 1997, we filed a U.S. Patent application
                              for a
                              Heterojunction Bipolar Transistor (HBT). U.S. Patent
                              5,912,481 was issued
                              for this device on June 15, 1999. We were also successful
                              in our
                              Continuation in Process application on this device,
                              as the United States
                              Patent and Trademark Office issued us a patent on January
                              9, 2001 under
                              U.S. Patent 6,171,920, covering intellectual property
                              required to
                              manufacture this transistor. The assignment of this
                              patent to us is
                              recorded at USPTO at reel no: 0111356, frame 0934.
                        
                        Sep.
                              2017Distributed
                              Amplifier
                        
                        On
                              July 10, 1998, we filed a U.S. Patent application for
                              a Distributed
                              Amplifier. The U.S. Patent Office issued a Notice of
                              Allowance on this
                              application on September 29, 1999. U.S. Patent 6,008,694
                              was received for
                              this device on December 28, 1999. On May 23, 2001,
                              we a filed a U.S.
                              Patent application for a Monolithic Balanced RF Power
                              Amplifier, another
                              version of this product. U.S. Patent 6,424,227 was
                              issued for this device
                              on July 23, 2002.The assignments for these patents
                              to us have recorded
                              directly on the issued patents from the USPTO.
                        
                        Jul.
                              2018TMOS®
                              Memory
                        
                        On
                              December 17, 1997, we filed a U.S. Patent application for a High
                              Performance N-Channel Metal-Oxide-Semiconductor (NMOS)
                              Static Random
                              Access Memory (SRAM). U.S. Patent 6,104,631 was received
                              for this device
                              on August 15, 2000. We were also successful in our
                              Continuation in Process
                              application on this device, as the United States Patent
                              and Trademark
                              Office issued us a patent on October 9, 2001 under
                              U.S. Patent 6,301,147.
                              The assignment of these patents to us is recorded directly
                              on the issued
                              patents from the USPTO.
                        
                        Dec.
                              2017Mode
                              Dielectric Resonator
                        
                        On
                              June 18, 1998, we filed a U.S. Patent application for
                              a Mode Dielectric
                              Resonator. The U.S. Patent Office issued a Notice of
                              Allowance for this
                              application on August 1, 2000. The U.S. Patent and
                              Trademark Office issued
                              us U.S. Patent 6,169,467 for this device on January
                              2, 2001. The
                              assignment of this patent to us is recorded at USPTO
                              at reel number:
                              011358, frame 0462.
                        
                        Jun.
                              2018High
                              Frequency Wireless Transceiver
                        
                        Patent
                              Pending.
                        
                        PendingCommunications
                              Receiver with
                            Integrated
                              IF Filter and Method
                        
                        Patent
                              Pending
                        
                        Pending
 
 We
                  have
                  filed patent applications for other semiconductor-related patents
                  since 2000,
                  including some improvements to the above existing products as well
                  as on related
                  devices. The commercial importance of these inventions and the
                  final disposition
                  of these applications are uncertain. At this time, we are not actively
                  pursuing
                  patent protection outside the United States for these semiconductor
                  products. We
                  also hold the U.S. trademark to the word TMOS®, awarded to us July 1, 2003, U.S.
                  Trademark registration number 2732825. The commercial significance
                  of this
                  patent award and any new provisional patent filing are not known
                  at this time. 
 17
 **Table
                          of Contents**
 **Index
                          to Financial
                          Statements**
  **Semiconductor
                  Products - Government Regulation**
 
 Since
                  our
                  semiconductor products are used, in most cases, as parts of radios,
                  our
                  customers are required to comply with a variety of Federal, State,
                  and local
                  regulations regarding the use of radio devices. The primary set
                  of regulations
                  that concern our customers’ products are those promulgated by the Federal
                  Communication Commission, or FCC, which is tasked with managing
                  the use of the
                  radio spectrum in the United States. However, since this is our
                  customers’
responsibility and not ours, we do not believe we are subject to
                  any special
                  level of government regulation in this line of business other than
                  that which
                  would be faced by other U.S. Companies in general.
  We
                  may
                  also be required to comply with government regulations regarding
                  the export of
                  certain kinds of technology. To date, we have no plans to export
                  our technology
                  to areas where such U.S. government export restrictions might be
                  in force, such
                  as to Cuba.
  **Semiconductor
                  Products - Environmental Regulation**
 
 There
                  are
                  numerous environmental regulations that affect the manufacturing
                  of
                  semiconductor products in general. However, there are few if any
                  special
                  environmental compliance concerns unique to us that would be different
                  from
                  those that apply to other companies in the United States in general.
                  This is
                  principally because we use third parties to manufacture and distribute
                  our
                  semiconductor products, as our business model is based on licensing
                  our designs
                  to others, who then bear the main costs of complying with the environmental
                  rules that directly relate to manufacturing these final goods.
                  Should any single
                  manufacturer be subject to special enforcement action in this area,
                  we would
                  retain the right to switch to another manufacturer, as we currently
                  have no
                  exclusive manufacturing relationships in this area.
  **Semiconductor
                  Products - Research and Development**
  We
                  have
                  conducted little research and development of our semiconductor
                  products since
                  2002. Since fiscal year 2002, we have spent less than $25,000 on
                  research and
                  development of our semiconductor products and $17,760 for legal
                  services
                  required to protect patents for all of our products.
  The
                  following table summarizes the current development status of each
                  of our current
                  semiconductor products.
 
 **Pre-Production**
                        
                        **Design**
                        
                        **Production****Proof
                            of**
                        
                        **Prototype**
                        
                        **Available**
                        
                        **Device****Concept**
                        
                        **Tested**
                        
                        **for
                            Licensing**
                        
                        **Available****Product
                            Name**
                        
                        **Prototype
                            Built**
                        
                        **&
                            Available**
                        
                        **From
                            Us**
                        
                        **For
                            Sale**TMOS®
                              Memory
                        
                        Complete
                        
                        No
                        
                        Yes
                        
                        NoMode
                              Dielectric Resonator
                        
                        Complete
                        
                        Complete
                        
                        Yes
                        
                        NoHigh
                              Frequency Wireless Transceiver
                        
                        Complete
                        
                        No
                        
                        Yes
                        
                        NoDistributed
                              Amplifier
                        
                        Complete
                        
                        No
                        
                        Yes
                        
                        NoMonolithic
                              Inductor
                        
                        Complete
                        
                        No
                        
                        Yes
                        
                        NoHeterojunction
                              Bipolar Transistor
                        
                        No
                        
                        No
                        
                        Yes
                        
                        NoCommunications
                              Receiver Filter
                        
                        No
                        
                        No
                        
                        No
                        
                        No
 18
 **Table
                          of Contents**
 **Index
                          to Financial
                          Statements**
  **Strategic
                  Relationships Including Marketing Firms, Material Suppliers, and
                  Distributors**
  This
                  section covers relationships that may involve both location tools
                  products and
                  semiconductor products, as some of these suppliers and distributors
                  may be
                  active in both areas. However, since most of our business activity
                  since 2002
                  relates to the location tools products, you can assume unless otherwise
                  stated
                  below that the primary purpose of these relationships has to do
                  with the
                  location tools product line.
  In
                  February 2007, we entered into an informal agreement with McCandless
                  of Arizona
                  (a distributor offering a full line of school and commercial buses
                  manufactured
                  by IC Corporation, Collins , and  Midbus) located in Phoenix. AZ to
                  distribute and install our Travado Products for its customers.
                  To date, there
                  have been several significant orders fulfilled through this channel.
  In
                  April
                  2007, we entered into an informal agreement with Canyon State Bus
                  Sales (the
                  factory authorized Blue Bird school and activity bus dealer for
                  the state of
                  Arizona) located in Phoenix. AZ to distribute and install our Travado
                  Products
                  for its customers. To date, there have been several significant
                  orders fulfilled
                  through this channel.
  In
                  September 2006 we entered into an informal agreement with Zepco
                  (a manufacturer
                  and distributor of automotive data recorders) located in Richardson,
                  Texas, to
                  distribute our Travado Product in Texas. To date there have been
                  several
                  significant Requests for Quotation (RFQ) generated from this relationship.
  In
                  April
                  2006 we entered into an informal agreement with Applied Preventative
                  Maintenance, LLC company, located in Seattle, Washington as a Travado
                  representative to represent our products in the Northwest USA.
                  To date there
                  have been several significant RFQ’s generated from this relationship and one
                  significant order.
  Throughout
                  2006 we were successful in having our Travado product specified
                  into several
‘new bus orders’, which had to subsequently be submitted for competitive bid to
                  the bus distributors by the school districts, as such we have had
                  an increasing
                  presence in the bus distributor market.
  In
                  May of
                  2005, we began to work with SAP on developing a specialized version
                  of our
                  Mini-TTM product targeted at large-footprint Wi-Fi networks. Our initial
                  goal was
                  to develop a version of our Mini-TTM product for a pilot in Corpus Christi,
                  Texas, in August of 2005. SAP’s primary interest was in developing an
                  application solution that could extract data from our Mini-TTM, and present
                  powerful reports and mapping information to prospective SAP customers.
                  In August
                  of 2005, Michael Grollman and David Mandala of our staff participated,
                  along
                  with SAP, IBM, Intel, Verizon, and others, in a presentation of
                  the capabilities
                  of our systems to the City of Corpus Christi. The presentation
                  included tracking
                  police vehicles using a large Wi-Fi network (with redundant cellular
                  capabilities). Our presenters believe the demonstration was exciting
                  and
                  successful, SAP, the City of Corpus Christi and the City of Palo
                  Alto have both
                  purchased from us small quantities of our Mini-TTM product for further testing,
                  and we expect to work with these parties and new pilots, as well
                  as more
                  expansive systems, during calendar year 2007.
  In
                  the
                  early part of 2005 we began working with Auto Safety House (ASH),
                  a recognized
                  leading distributor of Thomas Built Buses in Arizona and Nevada,
                  to develop
                  channel sales for our Travado IBUSTM product in the local area. As of the date of
                  this report, ASH submitted four purchase orders for IBUSTM systems to be
                  installed on their clients’ buses. Our product is now listed on the Mohave
                  Educational Services Co-operative through our Arizona and Nevada
                  distribution
                  partner, ASH. This Co-operative allows us to sell our products
                  directly to the
                  school districts in Arizona without going through a formal bid
                  process. 
 19
 **Table
                          of Contents**
 **Index
                          to Financial
                          Statements**
  In
                  December 2004 we signed an agreement with LDL Enterprises in Palm
                  Springs,
                  California. Under this agreement Dr. Marcile Wright, EDD, CEO of
                  LDL
                  Enterprises, is to provide marketing services in California for
                  various NSC
                  products, especially Travado IBUSTM technology. This is a commission-only
                  agreement, with a one-year term, and is nonexclusive. This agreement
                  was not
                  extended in 2006.
 In
                  November 2004, we entered into a distributor agreement with Ingram
                  Micro of
                  Canada. The material terms of this agreement required us to pay
                  regular fees to
                  Ingram Micro based on the number of products we stock with them
                  in Canada, in
                  exchange for their promotion and distribution of our products with
                  their
                  Canadian resellers, which include firms such as Radio Shack and
                  Wal-Mart of
                  Canada. Either party with 30 days notice can cancel the agreement.
                  We plan to
                  distribute Gotcha!® as well as potentially other products, including some new
                  video-related products we may acquire as part of a developing strategic
                  relationship with Aethra of Italy, a leader in video technology,
                  and UR Group of
                  Italy. In November 2004, we shipped an initial quantity of Gotchas
                  to Ingram
                  Micro in Canada on consignment. We believe Ingram Micro and others
                  have been
                  unable to deliver on their end of the distribution agreement, in
                  part perhaps
                  due to turnover of some key managers there. The product is still
                  located in
                  Canada, and has been fully marked down in our inventory.
  In
                  October 2004, we commenced a new strategic working relationship
                  with TurboWorx,
                  Inc. (“Turbo”) regarding joint technology development and cooperative marketing.
                  The relationship was first memorialized in a Memorandum of Understanding
                  (“MOU”)
                  in early November 2004. The two companies see benefit in connecting
                  NSC’s
                  location sensor technology to the computing engines developed by
                  TurboWorx. In
                  November 2004, we entered into a Letter of Intent (“LOI”) with Turbo regarding a
                  stock exchange transaction with Turbo, for an amount of stock equal
                  to less than
                  10% of the outstanding common stock of each company and the payment
                  of cash by
                  Turbo to NSC. The LOI contemplated a due diligence process prior
                  to the share
                  exchange, as well as a Securities Exchange Agreement (the “Share Exchange
                  Agreement”) to memorialize the proposed exchange. A Share Exchange Agreement
                  was
                  entered into on January 28, 2005 and the transaction was closed
                  on February 1,
                  2005. We have exchanged 7,150,000 shares of our restricted common
                  stock for
                  360,000 shares of Turbo common stock plus $240,000. We have agreed
                  to distribute
                  at least 50% of the Turbo shares to our shareholders after Turbo
                  registers such
                  shares on Form SB-2. Both Turbo and NSC granted each other “piggyback”
registration rights with regard to the exchanged shares. In conjunction
                  with the
                  transaction, the Company agreed to pay the placement agent, Casimir
                  Capital
                  $25,000 and issued warrants to purchase 800,000 of the Company’s common stock on
                  February 3, 2005 at an exercise price of $0.11 per share. The fair
                  value of the
                  warrants and the cash consideration of $240,000, was taken into
                  consideration
                  when recording the investment, however the consideration paid to
                  Casimir did not
                  increase the fair value of the investment and therefore, was impaired.
                  The
                  agreement provides the Company to receive reimbursement from Turbo
                  for all our
                  legal and accounting expenses associated with this transaction,
                  up to a maximum
                  of $150,000. Our claims to date for reimbursement of expenses totaling
                  approximately $38,200 were paid in May 2005. On July 7, 2005, TurboWorx
                  received
                  a comment letter from the U.S. Securities and Exchange Commission
                  in response to
                  its first June 6, 2005 filing of Form SB-2. TurboWorx filed an
                  amended
                  registration statement or Form SB-2/A. TurboWorx addressed the
                  SEC’s comments
                  fully and filed an amended registration statement or Form SB-2/A
                  on October 12,
                  2005. This filing was subsequently withdrawn by TurboWorx, which
                  we believe puts
                  TurboWorx in breach of their Share Exchange Agreement with us.
                  We are pursuing
                  legal action as a result of this breach, and have stopped any distributions
                  of
                  their stock from us until this matter is settled. On September
                  30, 2006, we took
                  an impairment charge of $289,100 against our investment in TurboWorx,
                  Inc. The
                  Company’s investment in these equity securities was carried as $289,100
                  at
                  September 30, 2005, which included an impairment charge of $91,344
                  in fiscal
                  2005. The Company regularly monitored this investment for impairment
                  in the
                  carrying value, and as a result of this monitoring, we determined
                  in September
                  2006 that is was appropriate to impair this investment up to its
                  full value, due
                  to serious financial distress we believe is happening at TurboWorx. 
 20
 **Table
                          of Contents**
 **Index
                          to Financial
                          Statements**
  On
                  October 1, 2004, we changed our stock transfer agent from Corporate
                  Stock
                  Transfer (“CST”) of Colorado, to Computershare Investor Services of Illinois
                  (“Computershare”). The new contact information for our stock transfer agent is
                  Computershare Investor Services, 2 North LaSalle Street, Chicago,
                  IL, 60602, and
                  their telephone number is 312-588-4753. The principle reason for
                  the change was
                  to improve shareholder services, particularly online services,
                  which in our
                  opinion are much more developed at Computershare than they were
                  at
                  CST.
  In
                  late
                  summer of 2004 we began working with BearCom Wireless Worldwide
                  in regards to
                  the sale and distribution of our Travado IBUSTM product. Currently the only
                  formal agreement between NSC and BearCom is a Non-Disclosure Agreement
                  (NDA).
                  BearCom is focused on marketing our TravadoTM products in Florida.
 In
                  May of
                  2003, we commenced an informal strategic co-development and co-marketing
                  program
                  with Ekahau, Inc. of Finland (“Ekahau”). The purpose of the program is to
                  develop and co-market tracking products based on Wi-Fi technology,
                  where we
                  would make tracking hardware that would work cooperatively with
                  tracking
                  software made by Ekahau. Ekahau has developed a software application
                  called the
                  Ekahau Positioning EngineTM that can be used to determine location of Wi-Fi
                  devices in a standard Wi-Fi network. We are developing a hardware
                  product to
                  interface with Ekahau’s software that can be attached to people or objects that
                  are moving within Wi-Fi networks, to establish the real-time location
                  of those
                  people or objects. In December of 2003, we completed our first
                  prototype of this
                  Wi-Fi product, and displayed it with Ekahau at the Wi-Fi Planet
                  Conference and
                  Exposition in San Jose, California. Additional development of this
                  product
                  occurred during the spring of 2004, resulting in a new generation
                  of products
                  being introduced in August 2004. Customer feedback highlighted
                  the need for
                  extended battery life and Wi-Fi is not the ideal platform to maximize
                  battery
                  life. Therefore we redefined our product offering and amalgamated
                  it into the
                  Mini-TTM. For this aspect of technology, our relationship with Ekahau is
                  documented by a source code licensing and non-disclosure agreement.
                  Ekahau is a
                  small privately held technology development company with a limited
                  customer
                  base.
 In
                  May
                  2003, we entered into a six-month agreement with New York-based
                  Stanton, Walker
& Company (“Stanton Walker”) for business advisory and consulting services.
                  Stanton Walker agreed to assist us in expanding our existing strategies
                  for
                  business growth as well as developing new strategies, such as merger
                  and
                  acquisition planning. We paid for the services of Stanton Walker
                  using our
                  common stock, valued at approximately $100,000 at the time of issue.
                  We did not
                  procure any services from Stanton Walker since calendar year 2004
                  and have not
                  yet determined what additional services, if any, we may procure
                  in the
                  future.
  In
                  March
                  of 2003, we received a blanket purchase order for $250,000 of IBUSTM technology
                  from Verify Systems of Connecticut, originally planned for delivery
                  before June
                  of 2004. Shipments began against this order in May of 2003, for
                  pilot testing
                  during the summer of 2003. Testing was continued through two pilot
                  programs. A
                  third pilot program was conducted in Arizona starting in November
                  of 2003.
                  Verify Systems was a small privately held technology development
                  company with a
                  limited customer base, very small operations, and limited assets.
                  In May 2004,
                  partially in response to Verify System’s failure to timely market our products,
                  we agreed to license the marketing materials and software tools
                  of Verify
                  Systems and assume the primary sales effort for these products
                  ourselves. The
                  material terms of this agreement require that Verify Systems give
                  us an
                  unlimited and indefinite license to use their software products,
                  in exchange for
                  a cash payment of $6,000 and a royalty of 5% of sales of their
                  software products
                  over the next two years. In the fall of 2004 Verify Systems ceased
                  operations.
                  Subsequently we have developed our own proprietary software for
                  use in our
                  TravadoTM systems and now no longer rely upon Verify Systems for this component. 
 21
 **Table
                          of Contents**
 **Index
                          to Financial
                          Statements**
  In
                  December 2002, we entered into a development and co-marketing agreement
                  with
                  Geotechnolgies, Inc., a privately held small firm headquartered
                  in Castle Rock,
                  CO. Geotechnologies is a software development firm that specializes
                  in making
                  mapping software that we believe complements our location tools
                  products. To
                  date our activities with Geotechnolgies have been jointly developing
                  and
                  presenting solutions that involve our location tools products and
                  their mapping
                  products to various private sector and government prospective clients.
                  March
                  6-9, 2005, together with strategic partner Geotechnologies, Inc.,
                  we exhibited
                  our TravadoTM technology platform at the Geospatial Information and Technology
                  Association (GITA) Annual Conference and Exhibition held in Denver,
                  CO. This is
                  a highly regarded educational event for geospatial professionals.
                  No sales have
                  resulted from these efforts to date, although we completed a demonstration
                  project with them at the Army Proving Grounds, Yuma, Arizona, in
                  the summer of
                  2006, and we have done preliminary work on projects in Georgia
                  and Kuwait with
                  them as well.
 Other
                  key
                  suppliers over the last three years also include Digi-Key Corporation
                  of
                  Minnesota for electronic components, Solar PC of Las Vegas, Nevada
                  for circuit
                  boards, Hyperlink for WiFi antennas, Hyperlink Technologies for
                  Wi-Fi
                  connectors, and Coridium Corporation of California for board controllers.
                  We
                  purchase most of our GPS chipsets and GPS modules from distributors
                  of US Global
                  Sat. Our primary video camera supplier is Security Labs, Inc. We
                  are not
                  dependant on these particular suppliers, as there are alternative
                  sources in the
                  market for the kinds of component materials we use in our products.
                  However, in
                  the event we needed to change over suppliers, we may experience
                  some small
                  delays in time to market for certain products, or small increases
                  in supply
                  costs due to small design changes that may be required in our products
                  because
                  of such a change*.*
  **Personnel**
  As
                  of the
                  date of this report, we have three full time employees, two part
                  time employees,
                  as well as a number of part time relationships with contractors
                  for certain
                  services. All employees work in the Scottsdale, Arizona corporate
                  office.
                  Management believes employee relations are good. None of our personnel
                  are
                  covered by collective bargaining agreements.
  **Subsequent
                  Events**
 
 On
                  November 14, 2007, Michael Grollman agreed to convert approximately
                  $5,000 of
                  his back pay to our restricted common stock, at the average market
                  price per
                  share of $0.02.
  On
                  November 14, 2007, pursuant to the Company's 2000 Stock Option
                  Plan effective
                  January 1, 2001, the Company canceled 450,000 NSCT stock options
                  issued to
                  Michael Grollman on December 1, 2000 with an expiry date of December
                  1, 2010 at
                  a strike price of $1.84. Concurrently, on November 14, 2007 the
                  Company issued
                  Michael Grollman a replacement award of an equal number of stock
                  options, at
                  $0.03 per share, approximately 150% of current market price. The
                  new option
                  grant expires on November 14, 2017. Total recognized compensation
                  cost was
                  $5,125.
  On
                  November 14, 2007, the Company granted 100,000 incentive stock
                  options to Greg
                  Szabo, enabling the option holder to purchase 100,000 shares of
                  common stock,
                  pursuant to the Company's 2000 Stock Option Plan effective January
                  1, 2001, with
                  an exercise price of $0.03 per share, immediate vesting and expiration
                  on
                  November 14, 2017. The fair value of the options was estimated
                  at $1,866 on the
                  issue date using the Black-Scholes option-pricing model. The following
                  assumptions were made in estimating fair value: risk free interest
                  of 3.86%;
                  volatility of 167.96%; dividend rate of 0%; and expected life of
                  5 years. The
                  fair value was expensed on the issue date. 
 22
 **Table
                          of Contents**
 **Index
                          to Financial
                          Statements**
  On
                  November 14, 2007, the Company granted 100,000 incentive stock
                  options to
                  Michael Grollman, enabling the option holder to purchase 100,000
                  shares of
                  common stock, pursuant to the Company's 2000 Stock Option Plan
                  effective January
                  1, 2001, with an exercise price of $0.03 per share, immediate vesting
                  and
                  expiration on November 14, 2017. The fair value of the options
                  was estimated at
                  $1,866 on the issue date using the Black-Scholes option-pricing
                  model. The
                  following assumptions were made in estimating fair value: risk
                  free interest of
                  3.86%; volatility of 167.96%; dividend rate of 0%; and expected
                  life of 5 years.
                  The fair value was expensed on the issue date.
  On
                  November 14, 2007, the Company granted 225,000 incentive stock
                  options to Graham
                  Clark, enabling the option holder to purchase 225,000 shares of
                  common stock,
                  pursuant to the Company's 2000 Stock Option Plan effective January
                  1, 2001, with
                  an exercise price of $0.03 per share, immediate vesting and expiration
                  on
                  November 14, 2017. The fair value of the options was estimated
                  at $4,198 on the
                  issue date using the Black-Scholes option-pricing model. The following
                  assumptions were made in estimating fair value: risk free interest
                  of 3.86%;
                  volatility of 167.96%; dividend rate of 0%; and expected life of
                  5 years. The
                  fair value was expensed on the issue date.
 **Item
                    2.**
                  **Properties**
 NSC
              leases 1,601 square feet of office space at 8361 E Evans Rd, Suite
              106,
              Scottsdale, Arizona 85260-6951. The lease for the Scottsdale facility
              expires October 31, 2008 and is at a rental rate of $2,028 per month
              for the
              remainder of the lease.
 Currently,
              the Company does not have a policy regarding investments in real estate,
              interests in real estate, real estate mortgages, or securities of or
              interests
              in persons primarily engaged in real estate activities.
 **Item
                    3.**
                  **Legal
                      Proceedin****gs**
  We
              are
              currently a plaintiff in one lawsuit, and a defendant in none.
  In
              January 2002, we initiated legal proceedings in Maricopa County Superior
              Court
              against Phoenix Semiconductor, Inc. (“PSI”) for breach of contract. We engaged
              PSI, and advanced approximately $400,000 to PSI, to build thyristors
              (an
              electronic component) for us to sell. When we engaged PSI, we obtained
              a
              security interest in a portion of PSI’s equipment assets. Before we initiated
              legal action, both PSI and its principal shareholder Chongkook John
              Rhee filed
              for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code.
              In
              December 2002, PSI and the NSC agreed to a settlement of the secured
              claim
              against PSI in the form of a cash payment of approximately $100,000
              to NSC
              together with certain other unsecured claims remaining. The cash payment
              is
              subject to a contracted sale of substantially all fixed assets of PSI
              and formal
              approval of the bankruptcy court. In late 2005, we received word that
              the
              bankruptcy court was likely to dismiss the PSI bankruptcy claim, due
              to a
              failure by the debtor in possession to timely file a reorganization
              plan.
              Although this may improve slightly our chances of collection in this
              suit, we
              are unsure of the current value of any PSI assets; therefore we are
              unable to
              determine the final outcome of the lawsuit. Since our collection of
              this
              judgment is uncertain, it is not reflected in our current financial
              statements.
  We
              filed
              a complaint in Maricopa County Superior Court in August 2002, seeking
              $155,550
              plus interest from E4World Corporation for breach of contract. We were
              awarded a
              judgment of $179,000 in May 2003 against E4World Corporation. We are
              now in the
              collection phase of this judgment, and, there is no assurance that
              we will
              collect any of this judgment. Since our collection of this judgment
              is
              uncertain, it is not reflected in our current financial statements.
              We continue
              to assert our claim to secure assets held by E4World in a separate
              legal matter. 
 23
 **Table
                      of Contents**
 **Index
                      to Financial
                      Statements**
  From
              time
              to time in the normal course of business operations, we are involved
              in other
              legal proceedings, none of which are expected to have a material adverse
              affect
              on business operations.
 **Item
                    4.**
                  **Submission
                      of Matters to Vote of Security
                      Holders**
  None.
   **PART
            II**
  **Item
                    5.**
                  **Market
                      for Common Equity and Related Stockholder
                      Matters**
  Our
              common stock is quoted and traded on a limited and sporadic basis on
              the OTC
              Bulletin Board operated by The NASDAQ Stock Market, Inc. under the
              trading
              symbol “NSCT.” The limited and sporadic trading does not constitute, nor should
              it be considered, an established public trading market for our common
              stock. We
              have 866 shareholders of record, also known as “registered shareholders,” of our
              common stock as December 24, 2007. The company also has more than 8,000
              unregistered shareholders, also known as “beneficial shareholders,” of our
              common stock. The following table sets forth the high and low sale
              prices for
              our common stock for the periods indicated, as reported by the OTC
              Bulletin
              Board, NASDAQ Trading and Market Services.
  National
              Scientific Corporation - Market for Common Equity:
 
 **High**
                    
                    
                    **Low****Fiscal
                          2007**Fourth
                          Quarter (through September 30, 2007)
                    
                    $
                    0.028
                    
                    
                    $
                    0.010Third
                          Quarter (through June 30, 2007)
                    
                    $
                    0.050
                    
                    
                    $
                    0.020Second
                          Quarter (through March 31, 2007)
                    
                    $
                    0.061
                    
                    
                    $
                    0.024First
                          Quarter (through December 31, 2006)
                    
                    $
                    0.035
                    
                    
                    $
                    0.020**Fiscal
                          2006**Fourth
                          Quarter (through September 30, 2006)
                    
                    $
                    0.055
                    
                    
                    $
                    0.026Third
                          Quarter (through June 30, 2006)
                    
                    $
                    0.060
                    
                    
                    $
                    0.030Second
                          Quarter (through March 31, 2006)
                    
                    $
                    0.060
                    
                    
                    $
                    0.030First
                          Quarter (through December 31, 2005)
                    
                    $
                    0.060
                    
                    
                    $
                    0.032**Fiscal
                          2005**Fourth
                          Quarter (through September 30, 2005)
                    
                    $
                    0.070
                    
                    
                    $
                    0.034Third
                          Quarter (through June 30, 2005)
                    
                    $
                    0.090
                    
                    
                    $
                    0.060Second
                          Quarter (through March 31, 2005)
                    
                    $
                    0.135
                    
                    
                    $
                    0.055First
                          Quarter (through December 31, 2004)
                    
                    $
                    0.011
                    
                    
                    $
                    0.050
 24
 **Table
                      of Contents**
 **Index
                      to Financial
                      Statements**
 **Dividends**
 
 As
              of
              September 30, 2007, we have never declared or paid any cash dividends
              on our
              common stock. Our board of directors has sole discretion to pay cash
              dividends
              or other dividends or other distributions with respect to our common
              stock based
              on our financial condition, results of operations, capital requirements,
              contractual obligations and other relevant factors.
  **Impact
              of the “Penny Stock” Rules on Buying or Selling our Common
              Stock**
 
 Trading
              in our common stock is subject to the “penny stock” rules. The SEC has adopted
              regulations that generally define a penny stock to be any equity security
              that
              has a market price of less than $5.00 per share. These rules require
              that any
              broker-dealer who recommends our securities to persons other than prior
              customers and accredited investors, must, before the sale, make a special
              written suitability determination for the purchaser and receive the
              purchaser’s
              written agreement to execute the transaction. In addition, unless an
              exception
              is available, the broker-dealer must deliver a disclosure schedule
              explaining
              the penny stock market and the risks associated with trading in the
              penny stock
              market prior to any transaction. Further, broker-dealers must disclose
              commissions payable to both the broker-dealer and the registered representative
              and current quotations for the securities they offer. The additional
              burdens
              imposed upon broker-dealers by such requirements may discourage them
              from
              transactions in our common stock, which could severely limit the market
              price
              and liquidity of our securities.
  **Description
              of Securities**
 
 **Common
              Stock**
 
 As
              of
              September 30, 2007 we are authorized to issue up to 187,000,000 shares
              of common
              stock, par value $0.01 per share. As of September 30, 2007, there were
              121,995,835 shares of common stock outstanding. We had 868 shareholders
              of
              record of common stock on September 30, 2007. Each holder of common
              stock is
              entitled to one vote for each share held on all matters. Our articles
              of
              incorporation and bylaws do not provide for cumulative voting in elections
              of
              directors or any other matters brought before shareholder meetings.
  The
              holders of our common stock are entitled to receive such dividends,
              if any, as
              may be declared by our board of directors from time to time out of
              legally
              available funds. The dividend rights of our common stock are junior
              to any
              preferential dividend rights of any outstanding shares of preferred
              stock. The
              holders of our common stock also are entitled to receive distributions
              upon our
              liquidation, dissolution or winding up of our assets that are legally
              available
              for distribution, after payment of all debt and other liabilities and
              distribution in full of preferential amounts, if any, to be distributed
              to
              holders of our preferred stock.
  The
              holders of our common stock are not entitled to preemptive, subscription,
              redemption or conversion rights. The rights, preferences and privileges
              of
              holders of our common stock are subject to, and may be adversely affected
              by,
              the rights of any series of preferred stock that we may designate and
              issue in
              the future. 
 25
 **Table
                      of Contents**
 **Index
                      to Financial
                      Statements**
  **Preferred
              Stock**
 
 Our
              board
              of directors is authorized by our articles of incorporation to issue
              up to
              4,000,000 shares of one or more series of preferred stock, par value
              $0.10 per
              share. No shares of such preferred stock have been authorized for issuance
              by
              our board of directors, and we have no present plans to issue any such
              shares.
              In the event that the board of directors issues shares of serial preferred
              stock, it may exercise its discretion in establishing the terms of
              such
              preferred stock.
  Our
              board
              of directors may determine the voting rights, if any, of the series
              of preferred
              stock being issued, including the right to:
  ·
                          vote
                                    separately or as a single class with the common
                                    stock and/or other series
                                    of preferred
                                    stock;
 ·
                          have
                                  more or less voting power per share than that possessed
                                  by the common
                                  stock or other series of preferred stock;
                                  and
 ·
                          vote
                                    on specified matters presented to the shareholders
                                    or on all of such
                                    matters or upon the occurrence of any specified
                                    event or
                                    condition.
 If
              our
              company liquidates, dissolves or winds up, the holders of our preferred
              stock
              may be entitled to receive preferential cash distributions fixed by
              our board of
              directors when creating the particular preferred stock series before
              the holders
              of our common stock are entitled to receive anything. Preferred stock
              authorized
              by our board of directors could be redeemable or convertible into shares
              of any
              other class or series of our stock.
  The
              issuance of preferred stock by our board of directors could adversely
              affect the
              rights of holders of the common stock by, among other things, establishing
              preferential dividends, liquidation rights or voting powers. See “Risk Factors”
above.
  **Stock
              Option Plan**
 
 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.
  **Summary
              of 2000 Plan**
 
 The
              following is a summary of certain provisions of the 2000 Stock Option
              Plan:
  *Administration*
 
 Either
              our board of directors or a committee appointed by our board of directors
              may
              administer the 2000 Stock Option Plan.
 *Eligibility*
 
 *Nonqualified
              Options*. Nonqualified options may be granted only to our officers,
              directors, including our non-employee directors, employees and advisors
              who, in
              the judgment of the committee, are responsible for our management or
              our success
              and who, at the time of the granting of the nonqualified options, are
              our
              officers, directors, employees or advisors. 
 26
 **Table
                      of Contents**
 **Index
                      to Financial
                      Statements**
  *Incentive
              Options*. Incentive stock options may be granted only to our employees
              who,
              in the judgment of the committee or our board of directors, are responsible
              for
              our management or our success and who, at the time of the granting
              of the
              incentive stock option, are also our employees. No incentive stock
              option may be
              granted under the 2000 Stock Option Plan to any individual who would,
              immediately before the grant of such incentive stock option, directly
              or
              indirectly, own more than 10% of the total combined voting power of
              all classes
              of our capital stock unless: such incentive stock option is granted
              at an option
              price not less than 110% of the fair market value of the shares on
              the date the
              incentive stock option is granted; and such incentive stock option
              expires on a
              date not later than five years from the date the incentive stock option
              is
              granted.
  *Option
              Price*
 
 The
              purchase price as represented by our common stock offered under the
              2000 Stock
              Option Plan 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 option), or such higher purchase price as may be determined
              by the
              committee or our board of directors at the time of grant. If, however,
              we grant
              an incentive stock option to an individual who would, immediately before
              the
              grant, directly or indirectly own more than 10% of the total combined
              voting
              power of all of our classes of stock, the purchase price of the shares
              of our
              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 our common stock is currently quoted on the
              OTC
              Bulletin Board, the fair market value of our common stock underlying
              options
              granted under the 2000 Stock Option Plan would be the last closing
              sale price of
              our common stock on the day the options are granted. If there is no
              market price
              for our common stock, then our board of directors and the committee
              may, after
              taking all relevant facts into consideration, determine the fair market
              value of
              our common stock.
  *Exercise
              of Options*
 
 An
              option
              holder under the 2000 Stock Option Plan may exercise his or her option
              in whole
              or in part as provided under the terms of the grant, but in no event
              shall an
              option be exercisable after the expiration of ten years from the grant
              date. An
              option holder may not exercise any option after the option holder ceases
              to be
              one of our employees except in the case of disability or death. Our
              committee
              may, however, extend the right of exercise up to three months after
              the date of
              termination of the option holder’s employment with us. If we terminate an option
              holder’s employment by reason of disability, the committee or our board of
              directors may extend the exercise period for a specified period, generally
              one
              year, following the date of termination of the option holder’s employment. If an
              option holder dies while in our employ and the option holder has not
              fully
              exercised his or her options, the options may be exercised in whole
              or in part
              at any time within one year after the option holder’s death by the executors or
              administrators of the option holder’s estate or by any person or persons who
              acquired the option directly from the option holder by bequest or
              inheritance.
  In
              the
              event of the death of an employee or consultant while in our employ,
              the
              committee or our board of directors is authorized to accelerate the
              exercisability of all outstanding options under the 2000 Stock Option
              Plan.
  Under
              the
              2000 Stock Option Plan, we may grant one or more options to an individual,
              as
              long as the aggregate fair market value of the shares covered by incentive
              options exercisable for the first time during any calendar year shall
              not exceed
              $100,000.
 *Acceleration
              and Exercise upon Change of Control*
 
 All
              option holders’ unvested options automatically will become exercisable in the
              event of a change of control of our company as defined in the 2000
              Stock Option
              Plan. 
 27
 **Table
                      of Contents**
 **Index
                      to Financial
                      Statements**
  *Payment
              for Option Shares*
 
 An
              option
              holder may exercise his or her options by delivering written notice
              to us at our
              principal office setting forth the number of shares with respect to
              which the
              option is to be exercised, together with cash or certified check payable
              to us
              for an amount equal to the option price of such shares. We may not
              issue any
              shares underlying an option grant until full payment has been made
              of all
              amounts due. We will deliver a certificate or certificates representing
              the
              number of shares purchased as soon as practicable after payment is
              received. Our
              board of directors or the committee may, in its discretion, permit
              the holder of
              an option to pay all or a portion of the exercise price by a simultaneous
              sale
              of our common stock to be issued upon exercise of an option pursuant
              to a
              brokerage or similar arrangement.
  *Termination
              of the 2000 Stock Option Plan*
 
 The
              2000
              Stock Option Plan will terminate on December 1, 2010, unless our board
              of
              directors terminates the 2000 Stock Option Plan prior to its expiration
              date.
              Any option outstanding under the 2000 Stock Option Plan at the time
              of
              termination shall remain in effect until the option is exercised or
              expires.
  *Amendment
              of the 2000 Stock Option Plan*
 
 Our
              board
              of directors may at any time modify or amend the 2000 Stock Option
              Plan without
              obtaining the approval of our shareholders as it shall deem advisable
              to comply
              with Section 422 of the Internal Revenue Code or Rule 16b-3 of the
              Securities
              and Exchange Act of 1934, as amended, or in any other respect.
  *Transferability
              of Options*
 
 An
              option
              holder may not assign any option under the 2000 Stock Option Plan other
              than by
              will or the laws of descent and distribution or if our board of directors
              or the
              committee agrees otherwise.
  *Issuance
              and Reservation of Shares*
 
 As
              of
              September 30, 2007, we have issued options to purchase an aggregate
              of 4,786,756
              shares of our common stock. 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.
 **Item
                    6.**
                  **Management’s
                      Discussion and Analysis of Financial Condition and Results
                      of
                      Operation**
  **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. 
 28
 **Table
                      of Contents**
 **Index
                      to Financial
                      Statements**
  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.
  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 and during fiscal year 2007, we have generally seen a steady
              increase
              in the sales of our its Travado IBUS. During fiscal 2007 our sales
              have
              consisted entirely of Travado IBUSTM products.
  **Patents
              and Proprietary Rights**
  We
              currently hold U.S. patents on nine devices and designs and have several
              domestic patent applications pending. Most of our patent work is focused
              on
              protection in the United States today, due to the high cost of acquiring
              and
              maintaining patents in other markets. We also hold copyrights to software
              associated with our iBus product lines, and other product lines. We
              plan to
              continue to develop our existing patented technologies as well as develop
              new
              performance-enhancing devices and designs for use in the semiconductor,
              electronics and location industries. Our business plan contemplates
              that we will
              generate revenue by entering into strategic joint venture licensing
              agreements,
              manufacturing agreements, development agreements, distribution and
              marketing
              agreements and other arrangements with firms and/or entities that will
              either
              incorporate our technologies into their product offerings or sell them
              directly
              to their customers.
  **Critical
              Accounting Estimates**
  Management’s
              Discussion and Analysis of Financial Condition and Results of Operations
              discusses our financial statements which have been prepared in accordance
              with
              accounting principles generally accepted in the United States of America,
              or
“GAAP.” We base our estimates on historical experience and on various other
              assumptions that are believed to be reasonable under the circumstances,
              the
              results of which form the basis for making judgments about the carrying
              values
              of assets and liabilities that are not readily apparent from other
              sources.
              Actual results may materially differ from these estimates under different
              assumptions or conditions.
 An
              accounting policy is deemed to be critical if it requires an accounting
              estimate
              to be made based on assumptions about matters that are highly uncertain
              at the
              time the estimate is made, and if different estimates that reasonably
              could have
              been used, or changes in the accounting estimates that are reasonably
              likely to
              occur periodically, could materially impact our financial statements.
              We believe
              the following critical accounting policies reflect our more significant
              estimates and assumptions used in the preparation of our financial
              statements.
              Our significant accounting policies are described below and in Note
              1 to our
              financial statements included in Item 7. 
 29
 **Table
                      of Contents**
 **Index
                      to Financial
                      Statements**
  **Impact
              of Inflation**
  The
              Company believes that inflation has not had a material effect on its
              results of
              operations during the period covered by this report.
 **Seasonality
              of Business**
 
 We
              believe the commercial location and
              tracking product segment, in general, has limited seasonality. To a
              small extent
              within the K-12 education market, the segment's business follows the
              seasonal
              trends of its customers' business. Historically, we believe the segment
              has
              experienced lower revenues in the first calendar quarter, with revenues
              accelerating during the second and third quarters, and then starting
              to slow
              again during the fourth calendar quarter.
  **Results
              of Operations**
 
 **Years
              Ended September 30, 2007 and 2006**
 
 **Revenues**.
              We generated $624,793 and $227,251 of revenue for the fiscal years
              ending
              September 30, 2007 and 2006, respectively. During the year ended September
              30,
              2007, the Company’s increased focus on business-oriented products, such as
              Travado IBUSTM, generated all of the revenues of $624,793, while our
              consumer-oriented Gotcha!® products did not generate any revenues. The initial
              deliveries of its business-oriented products, such as Travado IBUSTM, generated
              sales of $226,252 in the fiscal year ended September 30, 2006 while
              sales from
              our consumer-oriented products such as Gotcha!® declined to $999 for entire
              fiscal 2006.
  **Gross
              Profit****.**Gross
              profit increased to $307,187 in
              fiscal 2007 from $103,562 in fiscal 2006 mainly due to the higher sales
              volume
              in fiscal 2007, and an increase in the gross profit margin from 46%
              to 49%
              resulting from higher average unit selling prices.
  **Total
              Costs and Expenses.***Total costs and expenses* decreased to
              $607,124 in fiscal 2007 from $661,114 in fiscal 2006.
  **Salaries
              and Benefits.**  Salaries and benefits, of administration and
              marketing personnel decreased to $248,659 in fiscal 2007, from $258,977
              in
              fiscal 2006. This decrease is mainly attributable to staff reductions
              and the
              reduction of hours worked by part-time employees.
  **Research
              and Development.** Research and development expenditures decreased to
              $169,960 for the fiscal year ended September 30, 2007, from $185,638
              for the
              previous fiscal year mainly because two engineers took a leave of absence
              in
              January 2006 and were not replaced. During the year ended September
              30, 2006, a
              liability for research and development work carried out for us by a
              foreign
              consultant during fiscal years 2001 and 2002 was reversed in accordance
              with our
              policy to void invoices unclaimed for between 24 and 36 months.  The
              Company has focused an increasingly significant amount of its time
              and energy on
              development of new sources of revenue through the building of new customer
              relationships. The Company has also spent and plans to spend resources
              on the
              development of strategic partnerships with other technology firms to
              assist us
              in taking products to market faster. The Company will continue to explore
              innovative ways to take its technology expertise and products to market,
              across
              its entire portfolio of semiconductor and location electronics related
              devices. 
 30
 **Table
                      of Contents**
 **Index
                      to Financial
                      Statements**
  **Stock
              Compensation**. Stock compensation totaled $22,371 in fiscal 2007
              compared to $14,946 in fiscal 2006. Included in the total of $22,371
              was the
              fair value of warrants that had expiry dates extended by one year to
              June 30,
              2008.
  **Other
              Expenses**. Other expenses decreased to $166,134 in fiscal 2007
              from  $183,726 in fiscal 2006 as a result of reductions in
              depreciation, insurance costs, telephone, rent,  marketing, selling,
              telephone, insurance, statutory filing fees, travel and office costs.
              The
              expense reductions were somewhat offset by increases in expenses such
              as
              financing origination fees,  factor’s fees, accountant’s fees, selling
              expenses, warranty, and travel expenses.
  **Inventory
              Obsolescence Charge.**We marked down our inventory of Gotcha!® products,
              during fiscal 2006 by $17,827, for estimated obsolescence based on
              assumptions
              about age of the inventory and current demand. There was no markdown
              of
              inventory in fiscal 2007.Our inventory of Gotcha!® products was fully written
              off against the reserve in fiscal 2007.
  **Other
              Income**. Other income of $25,740 in fiscal 2007, consisted primarily
              of
              the reversal to revenue of unclaimed accrued expense related to a fully
              amortized investment. There was no other income in fiscal 2006.
  **Interest
              Expense.**Interest expenses increased to $166,725 during fiscal 2007
              from $94,241 in fiscal 2006. The increase primarily reflects the value
              of stock
              issued to settle a dispute regarding payment timing of interest on
              a
              note.
  **Amortization
              of Deferred Financing Costs.**During
              fiscal 2007, amortization of deferred offering costs, amounted to $4,800
              compared to $4,400 in fiscal 2006.
  **Impairment
              of Investment.** On
              September 30, 2006, we took an impairment
              charge of $289,100 against our investment in TurboWorx,Inc.
              The
              Company's investment in these equity securities wascarriedas
              $289,100 at September 30, 2005, which included an impairmentcharge
              of
              $91,344 in fiscal 2005. The Company regularly monitoredthis
              investment for impairment in the carrying value, and as aresult
              of this monitoring; we determined in September 2006 that itwas
              appropriate to impair this investment up to its full value,dueto
              serious financial distress we believe is happening atTurboWorx.As of
              the date of this report, we have seen no reasonable basis torevise
              this impairment judgment.
  **Liquidity
              and Capital Resources**
 
 NSC
              has
              not been profitable and has experienced a cash flow deficit from operations
              due
              to its development stage and substantial on-going investment in research
              and
              development efforts. We have financed our operations primarily through
              the sale
              of common stock, through personal loans from officers and directors,
              some debt
              financing, and to a very limited extent and only just recently, through
              the sale
              of our products.
  As
              of
              September 30, 2007, NSC’s cash and cash equivalents totaled $85,887 and total
              current assets were $115,071. NSC 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 September
              30,
              2007, NSC has total liabilities of $1,460,655 including notes payable
              of
              $379,230, accounts payable of $195,423, accrued expenses of $883,400
              and amounts
              due to factors of $2,602. The accounts payables total of $195,423 includes
              invoices of approximately $75,000 that are aged over three years. The
              accrued
              expenses total of $883,400 includes $466,198 of unpaid wages. 
 31
 **Table
                      of Contents**
 **Index
                      to Financial
                      Statements**
  We
              have
              an accumulated deficit of approximately $25.2 million as of September
              30, 2007
              which includes approximately $10 million of non-cash transactions,
              in fiscal
              years 2000 and 2001, for restricted common stock issued as payment
              for research,
              consulting and capital formation expenses. A substantial portion of
              the
              consulting expenses related to the issuance of one million shares of
              common
              stock to Dr. Hashemi, our former Group President, as a signing bonus
              on
              September 1, 2000. These shares were later returned to us. We expect
              operating
              losses in the foreseeable future as we continue our efforts to commercially
              exploit our portfolio of patents and develop commercial products. Accumulated
              cash used in operating services from the Company’s inception to September 30,
              2007 totaled approximately $8.7 million.
  Our
              operation activities resulted in net cash inflows of approximately
              $24,000 for
              fiscal year 2007, compared to net cash outflows of approximately $306,000
              for
              fiscal 2006. The increase in net operating cash flow for the current
              fiscal year
              was primarily the result of net loss (adjusted for non cash items),
              salary
              deferrals and lower accounts receivable. Net operating cash flow for
              fiscal year
              2006 reflects net loss (adjusted for non cash items) and the increased
              level of
              deferrals of salaries and reimbursement of expenses to officers and
              employees
              for production supplies acquired on behalf of the Company.
  Our
              financing activities in fiscal 2007 included the issuance of common
              stock of
              $109,800, net debt financing of $10,000 and a decrease in net proceeds
              from
              factors of $101,798.  Comparatively, during fiscal 2006, the Company
              received proceeds of $20,000, $248,225 and $104,400 from the issuance
              of common
              stock; net debt financing and net proceeds from factors
              respectively.  Fiscal 2007 activities resulted in an overall net
              increase in cash of $41,988.
  We
              have
              financed our operations primarily through the sale of common stock,
              granting of
              options and warrants, and through some debt financing. On February
              24, 2005,
              March 28, 2005, May 2, 2005, and May 27, 2005 our Chairman Michael
              Grollman made
              new personal loans to the Company totaling $159,000 to assist us with
              working
              capital needs. The loans are evidenced by a demand note that provides
              for
              repayment within five business days of a demand notice from Mr. Grollman,
              with
              interest of 6% compounded annually from June 1, 2005. During the quarter
              to
              September 30, 2007, these loans were paid down by $11,000. As of September
              30,
              2007, these loans had a balance outstanding of $148,000 and the interest
              rate
              going forward was adjusted to 8% compounded annually from October 1,
              2007.
  In
              June
              and August 2005 we secured short-term loans in the aggregate principal
              amount of
              $18,000. The interest rate on the loans was less than 10%. These loans
              were
              repaid in full in September and November 2005.
  In
              June
              2005 the Company entered into a financing program with an unrelated
              party to
              assist us with working capital needs. The program, evidenced by a promissory
              note, allows the Company to borrow in two traunches, each of $22,500
              payable in
              seventy-five days. The transaction provides the note holder with a
              security
              interest prior to delivery in any assets purchased for the fulfillment
              of Auto
              Safety House (ASH) and Scottsdale Unified School District orders and a
              security interest in any receivable from the fulfillment of such orders.
              The
              program also required support from Mr. Grollman. Interest at 13% APR
              is payable
              if payment is extended past maturity. The agreement also required the
              Company to
              grant the note holder a warrant to purchase 135,000 shares of the Company’s
              common stock at an exercise price of $0.062. The Company received the
              first
              traunch on June 24, 2005. This loan was paid in full on September 20,
              2005.
  On
              September 7, 2005, we entered into a one-year factoring agreement with
              United
              Capital Funding of Florida. The agreement provides for a maximum amount
              of
              funding of $100,000. The initial and periodic factoring fee is .45%.
              The
              factoring period is five days and the purchase price is 80% of the
              face amount.
              United Capital Funding is a specialized financial services firm offering
              Accounts Receivable Management and working capital funding via factoring.
              We
              expect to increase our cash flow with this arrangement. The agreement
              is
              annually extended automatically. 
 32
 **Table
                      of Contents**
 **Index
                      to Financial
                      Statements**
  On
              November 1, 2005, as an important phase in the current years financing
              plan, we
              entered into a financing program with a U.S. investment fund. The terms
              of this
              program include a five-year Note payable at maturity in November 2010
              for
              $175,000, at a stated annual interest rate of 8%, which under certain
              conditions
              can be paid prior to maturity. Interest is due and payable semi-annually
              on May
              1st and November
              1st for each year
              in which the
              note is outstanding. The transaction also included 1,200,000 restricted
              common
              shares and a conversion/exchange option to convert the principal amount
              and any
              unpaid interest of the Note into common shares at a per share conversion
              price
              of $0.0525. These shares include weighted average anti-dilution provisions,
              as
              well as piggyback registration rights. Additionally, the Note has various
              put
              and call rights. The 1,200,000 restricted common shares were recorded
              at $0.043,
              which was the five-day average market closing price of our stock. The
              note and
              common stock were issued with a debt discount of $51,600 and a beneficial
              conversion feature of $9,933. The discount and beneficial conversion
              feature are
              being amortized to interest expense over the term of the note, which
              is
              approximately 60 months. The issuance of the shares resulted in deferred
              financing costs of $24,000. The deferred financing costs are being
              amortized
              over term of the note, which is approximately 60 months, and are included
              in the
              statement of operations as offering costs.
  In
              2006
              we entered into an agreement with Aleron to provide additional equity
              funding
              and M&A direction.  Due to the increasing sales activity during
              the second half of calendar year 2006, management has temporarily withdrawn
              from
              this activity.
  On
              April
              27, 2006, we secured a short-term loan of $16,625 from a shareholder.
              The loan
              carries an origination/placement fee of $500 and has a perfectible
              security
              interest a) prior to delivery in any assets purchased for the fulfillment
              of
              SAP’s order dated March 16, 2006, and b) in any receivable resulting from
              the
              fulfillment of the SAP purchase order.  The interest rate on the loan
              is 12%. The transaction also included 100,000 warrants to purchase
              our common
              stock at $0.036 at any time before April 27, 2009. As of September
              30, 2007
              $11,625 of this loan was outstanding.
  On
              May
              31, 2006, we secured a short-term loan of $20,000 from a shareholder.
              The loan
              carries an origination/placement fee of $500 and has a perfectible
              security
              interest a) prior to delivery in any assets purchased for the fulfillment
              of
              Clover Park, WA’s order and b) in any receivable resulting from the fulfillment
              of the Clover Park purchase order.  The interest rate on the loan
              is 12%. The transaction also included 100,000 warrants to purchase
              our common
              stock at $0.036 at any time before May 31, 2009. As of September 30,
              2007 this
              loan was outstanding.
  On
              June
              17, 2006, we raised $10,000 from a private placement and issued 571,429
              shares
              of common stock at an average market price per share of $0.0175. In
              connection
              with this private placement, we issued a warrant to purchase 200,000
              shares of
              our common stock exercisable at $0.050 per share through June 30, 2009.
              No
              underwriters were involved in connection with this private placement.
              The sales
              and issuances of the securities issued pursuant to the foregoing private
              placement are exempt from registration under the Securities Act of
              1933, as
              amended, pursuant to Section 4(2) thereof, and Rule 506 of Regulation
              D.3.
  On
              August
              8, 2006, we raised $10,000 from a private placement and issued 571,429
              shares of
              common stock at an average market price per share of $0.0175. In connection
              with
              this private placement, we issued a warrant to purchase 250,000 shares
              of our
              common stock exercisable at $0.050 per share through August 30, 2009.
              No
              underwriters were involved in connection with this private placement.
              The sales
              and issuances of the securities issued pursuant to the foregoing private
              placement are exempt from registration under the Securities Act of
              1933, as
              amended, pursuant to Section 4(2) thereof, and Rule 506 of Regulation
              D.3. 
 33
 **Table
                      of Contents**
 **Index
                      to Financial
                      Statements**
  On
              August
              8, 2006, we secured a short-term loan of $50,000 from a shareholder.
              The loan
              carries an origination/placement fee of 4% of the loan amount, and
              has a
              perfectible security interest a) prior to delivery in any assets purchased
              for
              the fulfillment of orders from Gilbert School District and
              Jefferson County School District and b) a lien in property owned by
              Graham Clark.  The interest rate on the loan is 12%. The transaction
              also included 500,000 warrants to purchase our common stock at $0.035
              at any
              time before August 8, 2011. On December 20, 2006, the loan term was
              extended to
              March 31, 2007. The extension agreement included 500,000 warrants to
              purchase
              our common stock at $0.035 at any time before August 8, 2011 with the
              return of
              250,000 warrants if the loan balance including all principal, and interest
              to
              date and fees are paid in full by March 31, 2007. On March 9, 2007
              the Lender,
              converted the outstanding balance of $50,000 to restricted common stock
              and
              common stock purchase warrants as offered in the Company’s private placement
              offering of February 2007, and returned 250,000 warrants in accordance
              with the
              loan extension agreement. All interest and fees due on the loan were
              paid in
              full.
 During
              the year ended September 30, 2006, the Company issued 2,580,000 of
              our
              restricted common shares to management, at closing prices ranging from
              $0.032 to
              $0.036 in exchange for their partial forgiveness of the Company’s back pay
              indebtedness of $89,300 to them.
  In
              February 2007, we commenced a private offering of restricted common
              stock and
              common stock purchase warrants. During the period ended March 31, 2007,
              the
              Company raised $170,000 consisting of $109,800 in cash and $60,200
              in debt
              forgiveness and issued 8,333,360 shares of restricted common stock
              and granted
              2,720,000 warrants to purchase common stock at an exercise price of
              between
              $0.08 and $0.30 per share. 8,000,000 shares were issued at an average
              market
              price of $0.02 per share and 333,360 shares were issued at an average
              market
              price of $0.02 per share. No underwriters were involved in connection
              with this
              private placement. The sales and issuances of the securities issued
              pursuant to
              the foregoing private placement are exempt from registration under
              the
              Securities Act of 1933, as amended, pursuant to Section 4(2) thereof,
              and Rule
              506 of Regulation D.
  On
              September 30, 2007, the Company converted unpaid interest of $13,300
              on demand
              notes payable to Michael Grollman into a new demand note of $13,300,
              with
              interest of 8% compounded annually on October 1st.
              The note provides
              for repayment within five business days of a demand notice from Mr.
              Grollman.
  During
              the year ended September 30, 2007, the Company issued 12,215,000 of
              our
              restricted common shares to management and staff, at closing prices
              ranging from
              $0.015 to $0.035 in exchange for their partial forgiveness of the Company’s back
              pay indebtedness of $258,180 to them.
  At
              September 30, 2007 there were 17,714,197 outstanding warrants to purchase
              17,714,197 shares of common stock, at prices ranging from $0.035 to
              $0.75, with
              expiration dates from June 2008 to August 2011. There were 15,384,197outstanding
              warrants at September 30, 2006. 
 34
 **Table
                      of Contents**
 **Index
                      to Financial
                      Statements**
  We
              believe that our current cash position as of September 30, 2007, including
              cash
              funds arising from the exercise of outstanding options, from equity
              placement
              sales and other capital raising efforts, loans from officers, product
              sales, and
              continued aggressive expense management to be sufficient to continue
              operations
              for the next twelve months. We also believe that we may be able to
              reduce
              outstanding liabilities through negotiations with our creditors, or
              possibly
              negotiate to extend the payment schedule for these debts. In the event
              these
              approaches do not provide us with adequate working capital, we may
              be required
              to further curtail or reduce our development activities, seek alternative
              funding sources, or seek protection under reorganization laws. The
              Company’s
              ability to continue as a going concern is contingent upon its ability
              to attain
              profitable operations and secure financing. There can be no assurance
              that
              additional financing will be available to us when needed or, if available,
              that
              it can be obtained on commercially reasonable terms. If we are not
              able to
              continue as a going concern, we would likely be unable to realize the
              carrying
              value of our assets reflected in the balances set out in our financial
              statements. Our auditors have expressed substantial doubt about the
              Company’s
              ability to continue as a going concern.
  **Off-Balance
              Sheet Arrangements**
 
 The
              company did not have any off-balance sheet arrangements as of September
              30,
              2007.
  
 **ADDITIONAL
              FACTORS THAT MAY AFFECT OUR FUTURE OPERATING RESULTS**
  **In
              addition to the other information contained in this Annual Report on
              Form
              10-KSB, the following important factors should be carefully considered
              in
              evaluating NSC and its business because such factors currently have
              a
              significant impact on NSC’s business, prospects, financial condition and results
              of operation.**
  **An
              investment in our common stock is very risky. You may lose the entire
              amount of
              your investment.**
  Before
              you invest in shares of our common stock, you should be aware of various
              risks,
              including those described below. You should carefully consider these
              risk
              factors, together with all of the other information included in this
              annual
              report, before you decide whether to purchase the shares of our common
              stock.
              The risks set out below are not the only risks we face.
  If
              any of
              the following risks occur, our business, financial condition and results
              of
              operation could be materially and adversely affected. In such a case,
              the
              trading price of our common stock could decline, and you may lose all
              or part of
              your investment.
  Keep
              these risk factors in mind when you read “forward-looking” statements elsewhere
              in this annual report. These are statements that relate to our expectations
              for
              future events and time periods. Generally, the words, “anticipate,” “expect,”
“intend,” and similar expressions identify forward-looking statements.
              Forward-looking statements involve risks and uncertainties, and future
              events
              and circumstances could differ significantly from those anticipated
              in the
              forward-looking statements. 
 35
 **Table
                      of Contents**
 **Index
                      to Financial
                      Statements**
  **Risks
              Relating to our Business**
  **We
              have experienced significant losses and we may never be
              profitable.**
  We
              have
              generated nominal revenue and significant losses and negative cash
              flows from
              our research and development endeavors since we began these activities
              in 1996.
              As of September 30, 2007, we had an accumulated deficit of $25,241,477.
              We had
              revenues for the fiscal year ended September 30, 2007 of $624,793 and
              a net loss
              for the same fiscal year of $445,722. The future profitability of our
              business
              will depend primarily on our ability to generate revenues from the
              sale of our
              products and the licensing of our technology. If our revenue grows
              at a slower
              rate than we anticipate or if our expenditures exceed our expectations
              or cannot
              be adjusted to reflect slower revenue growth, we may not achieve or
              sustain
              profitability. Our auditors have issued going concern opinions on our
              financial
              statements for the fiscal years ending September 30, 2007 and 2006.
  **Our
              future success is highly dependent on the continued availability of
              key
              employees and consultants including Michael Grollman and Graham
              Clark.**
  Our
              success depends substantially on the continued services of our two
              executive
              officers, Michael Grollman and Graham Clark. The loss of the services
              of any of
              our executive officers or key employees could harm our business. Mr.
              Grollman
              and Mr. Clark have entered into employment and non-compete agreements
              with us,
              but the loss of their services would have a material adverse effect
              on our
              business. In addition to Mr. Grollman and Mr. Clark, we employ or contract
              with
              other engineers and scientists who may be also critical to our success,
              especially Dr. El-Badawy El-Sharawy, who developed the majority of
              our
              semiconductor patented products. Both Mr. Clark and Dr. El-Sharawy
              are foreign
              nationals, and there is a risk that the Immigration and Customs Enforcement
              (ICE) may at any time withdraw their permission to work for us in the
              United
              States. Although our scientists and engineers have entered into confidentiality
              agreements with us, most have not entered into non-compete agreements
              with us.
              The loss of one or more of our research personnel could prevent or
              delay the
              ongoing development of our products and services, which would materially
              and
              adversely affect our business.
  **We
              have a limited operating history on which to evaluate our business
              or
              prospects.**
  We
              are
              company with limited revenue that just recently emerged from a development
              stage. Our business focus changed in 2002 from semiconductor product
              licensing
              to development of location tools and we have only a limited operating
              history on
              which you can base an evaluation of our business and prospects, with
              only
              approximately $852,044 in net revenue generated from this line of business
              for
              the two-years ending September 30, 2007. Accordingly, our business
              prospects
              must be considered in light of the risks, uncertainties, expenses and
              difficulties frequently encountered by companies in their early stages
              of
              development, particularly companies in new and rapidly evolving markets,
              such as
              the electronics and wireless location tools services markets.
  **We
              will require additional financing in order to complete the development
              of our
              products and services and otherwise develop our business operations.
              Such
              financing may not be available on acceptable terms, if at
              all.**
  We
              changed our business emphasis in 2002 and we do not know if our products
              will
              achieve significant levels of market acceptance. We may encounter unforeseen
              difficulties that may deplete our limited capital resources more rapidly
              than
              anticipated. 
 36
 **Table
                      of Contents**
 **Index
                      to Financial
                      Statements**
  We
              will
              likely be required to make significant product development expenditures
              and
              spend additional money to maintain and expand our marketing efforts.
              Although we
              completed a private offering in June 2004 and a Stock Exchange Agreement
              in
              February 2005 that provided us with capital, we have used much of it
              through
              September 30, 2005. We will need to seek additional equity financing
              in the
              future if our products do not generate revenue or if our expenses are
              greater
              than expected. The timing and amount of any capital requirements cannot
              be
              predicted at this time. We cannot be sure that any financing will be
              develop or
              expand our business, develop new products or penetrate existing markets
              at the
              rate desired and our ability to continue in business may be jeopardized.
              If
              adequate financing is not available, we may be required to terminate
              or
              significantly curtail our operations, or enter into arrangements with
              collaborative partners or others that may require us to relinquish
              rights to
              certain of our technologies, or potential markets that we would not
              otherwise
              relinquish. This would have a negative impact on the value of your
              shares.
  **We
              rely heavily on
              international third parties to manufacture subsystems of our**available on acceptable terms, if at all. If such financing
              is
              not available on satisfactory terms, we may be unable to continue,
**products.**
  We
              currently rely on international third-party contractors to manufacture
              key sub
              assemblies to satisfy the needs of such customers. Reliance on one
              or more
              international third-party manufacturers exposes us to the risk that
              delivery
              schedules cannot be met, and that we cannot fulfill orders for some
              of our
              products in a timely way at the right price in U.S. dollars. This risk
              includes
              the concern that:
  ·
                          Third-party
                                    manufacturers might be unable to manufacture
                                    our products in the volume
                                    and of the quality required to meet customers’
                                    needs;
 ·
                          Our
                                  existing and future contract manufacturers may
                                  not perform as agreed or
                                  may not remain in the contract manufacturing business
                                  for the time
                                  required to supply our
                                  customers;
 ·
                          If
                                    any third-party manufacturer makes improvements
                                    in the manufacturing
                                    process for our products, we may not own, or
                                    may have to share, the
                                    intellectual property rights to the
                                    innovation.
 Each
              of
              these conditions could delay the shipments to our customers, approvals
              required
              by regulatory authorities, and the commercialization of some of our
              customers’
products. These risks could also result in higher costs to the customer
              or could
              deprive us of potential product revenues.
  **We
              have a small number of customers, and the loss of these customers would
              have a
              material adverse effect on our business.**
  During
              the year ended September 30, 2007, we derived approximately 82% of
              our total
              revenue from four customers. The loss of any of these customers would
              have a
              material adverse effect on our business, financial condition and results
              of
              operations. We are working to diversify our customer base in order
              to reduce our
              dependence on a small number of customers. We may not be able to succeed
              in
              these efforts. 
 37
 **Table
                      of Contents**
 **Index
                      to Financial
                      Statements**
  **We
              will need to significantly increase our sales and support
              operations.**
  We
              will
              need to create and substantially grow our direct and indirect sales
              operations,
              both domestically and internationally, in order to create and increase
              market
              awareness and sales of our products and services. For example, our
              Travado IBUSTM
products will require us to gain significant new sales skills in the
              education
              market. The sale of our products and services will require the engagement
              of
              sophisticated and highly knowledgeable sales personnel. Similarly,
              the
              anticipated complexity of our products and services and the difficulty
              of
              customizing them will require us to hire research and development personnel
              and
              customer service and support personnel, highly trained in hardware
              and software
              engineering. Competition between us and others to retain qualified
              sales
              personnel, engineers, and scientists is intense due to the limited
              number of
              available qualified candidates for such positions. Because of our limited
              resources, many of our competitors are in a financial position to offer
              potential employees greater compensation and benefits than those that
              we may be
              able offer them.
 **Risks
              Relating To Our Industry**
  **We
              may be held liable for harm caused by products that our customers
              use.**
  Often
              times, our products are used to enhance the safety and security of
              individuals
              and organizations because they provide real time information on location.
              For
              example, our IBUS® is used to help monitor children on school buses, and keep
              them safe in public places. Should these products fail to perform as
              intended,
              or should these products directly or indirectly cause injuries or illness
              to
              people, we may be required to incur substantial costs in defending
              against
              claims and may be required to pay damages arising from these actions.
              Although
              we have liability insurance and will try to limit our liability for
              improper use
              of our products, such protections may not be sufficient to protect
              us from the
              cost of such claims. Damages awarded in a product liability action
              could be
              substantial and if damages exceed our insurance coverage, our financial
              condition would be negatively affected.
  **Since
              many of our prospective business partners and suppliers are small electronics
              and software companies, we are and will be subject to risks, uncertainties
              and
              trends that affect these small companies in these
              industries.**
  For
              the
              foreseeable future, we will derive a substantial portion of our revenue
              from
              selling our products in combination with software and hardware products
              developed by other companies in areas complementary to our line of
              business.
              These are sometimes other small technology companies. As a result,
              we will be
              subject to risks and uncertainties that affect the electronic and software
              industries and possible reduction and delays in research and development
              expenditures by companies in these industries. For example, our GPS
              products
              produce coordinates that are usually displayed on a map to be meaningful.
              As a
              result, we have developed partnerships with mapping software companies
              to help
              us display this data in ways useful to our customers. For special mapping
              services such as this, we often deal with small privately held technology
              firms,
              such as Geotechnologies, Inc. for military and related applications.
              Although we
              take certain steps to locate secondary suppliers and partners in each
              market
              where we depend on such small suppliers, we are often dependant on
              these firms
              to supply our customers and us with key products in a timely way. High
              costs and
              delays in product delivery by us to our customers could be experienced
              as a
              result of supplier changeover if these suppliers do not perform as
              we expect
              them to perform. These factors could negatively affect our delivery
              schedules
              and potentially our financial results. 
 38
 **Table
                      of Contents**
 **Index
                      to Financial
                      Statements**
  **The
              semiconductor and electronics markets experience wider demand and pricing
              fluctuations than most other industries.**
  We
              may
              experience extreme cyclical fluctuations in the demand and supply for
              our
              products, which may cause a decline in our sales or the prices of our
              products
              and a corresponding decline in our revenues and profitability. For
              example, our
              TMOS® memory products fall into a class of computer memory products that
              often
              see annual price swings of over 50% or more in particular lines of
              products,
              according to the reports issued by the Semiconductor Industry Association
              over
              the last 10 years. We believe, based on reports from the Semiconductor
              Industry
              Association and on the rate at which technologies in these markets
              become
              popular, and then rapidly obsolete, that year-to-year price swings
              in the
              semiconductor industry can be more extreme than in many other industries.
              Should
              we be successful in licensing our patented semiconductor designs at
              all, these
              kinds of extreme price swings could delay by several years the development
              of
              revenue from these patented semiconductor products.
  **Risks
              Relating to Our Technology**
  **Some
              of our wireless technology is subject to substantial government
              regulation.**
  The
              wireless electronics industry faces significant regulation by governmental
              entities in the United States and other countries. The nature and the
              extent to
              which these regulations apply to our customers will vary depending
              on the nature
              of any of our customer’s products. Most of the wireless products developed by us
              will require regulatory approval by governmental agencies prior to
              sale. In
              particular, radios we include in our products will require testing
              and other
              approval procedures by the Federal Communications Commission (“FCC”) and by
              foreign regulatory authorities. Some of this work has been completed,
              such as
              FCC approval of our Gotcha!® child safety product. In some cases, we purchase
              pre-approved assemblies for use in our products that have existing
              FCC approval
              for their radios, such as with our Travado IBUSTM products. Other work remains to
              be done for other products with the FCC before the products can be
              sold to
              consumers, such as with the next version of our WiFi TrackerTM product. The
              process of obtaining these approvals and the subsequent compliance
              with
              appropriate federal and foreign statutes and regulations can be costly
              and time
              consuming, and can cause significant delays in the sale of some of
              our
              products.
  **We
              may not be able to license or maintain access to the technologies that
              we need
              to conduct our business, such as GPS.**
  In
              addition to the technologies that we develop, we will rely heavily
              on
              technologies that we license from other companies or institutions.
              We may not be
              able to license technologies that we need in the future or we may be
              unable to
              license such technologies on a commercially reasonable basis. In particular,
              we
              depend on wireless technologies such as GPS that have been developed
              and are
              owned by others. If we are unable to license the technologies we need
              in the
              future, or to license or otherwise acquire such technologies on commercially
              reasonable terms, we may experience increased costs (and, therefore,
              reduced
              profits) or be unable to engage in certain activities that require
              those
              technologies. In the case of GPS, we are dependant on the U.S. Department
              of
              Defense to operate a large network of GPS satellites safely and at
              a low cost to
              consumers into the future, without degrading the signal accuracy. Prior
              to the
              year 2000, the Department of Defense degraded GPS accuracy for civilian
              uses on
              a regular basis, and has reserved the right to do so again in the future,
              without warning. Such an action by the Department of Defense could
              make our GPS
              based products less accurate, and thus potentially less desirable to
              our
              customers, and have a negative effect on our sales. 
 39
 **Table
                      of Contents**
 **Index
                      to Financial
                      Statements**
 **Our
              success will depend on our ability to protect our proprietary technology,
              especially our location tools product designs.**
  Our
              rights to a substantial portion of our components products technology
              are as the
              assignee of several United States patents and patent applications.
              We also
              protect our intellectual property, especially for our location tools,
              through
              the use of confidentiality agreements and other trade secret management
              practices. We also hold U.S. trademarks, such as TMOS® and Gotcha!®. In the case
              of most of our patented electronic component products, we have a contractual
              obligation to pay royalties to Dr. El-Badawy El-Sharawy in the event
              that these
              products generate any royalties to us, in order to maintain these rights
              of
              assignment. Our success will depend largely on our ability to protect
              and
              exploit our intellectual property, to obtain additional patents for
              other
              technologies and products, to defend patents once obtained, and maintain
              trade
              secrets over time. Failure to do so may introduce domestic or foreign
              competition that could significantly reduce our ability to generate
              sales at
              acceptable margins.
 **Risks
              Related to Our Securities**
  **Our
              stock price has been volatile and we expect it to remain volatile,
              which could
              limit investors’ ability to sell stock at a profit at the time of the investors’
choosing.**
  We
              have a
              limited trading market for our common stock, and our common stock has
              experienced price volatility in that market. In and in fiscal 2006
              our stock
              price ranged from a high of $0.060 to a low of $0.026 per share, and
              in fiscal
              2007 our stock price ranged from a high of $0.061 to a low of $0.010.
              This price
              volatility may substantially increase your risk of loss.
  The
              volatile price of our stock makes it difficult for investors to predict
              the
              value of their investment, to sell shares at a profit at any given
              time, or to
              plan purchases and sales in advance. A variety of factors may affect
              the market
              price of our common stock. These include, but are not limited to:
  ·
                          announcements
                                    of technological innovations or new commercial
                                    products by our competitors
                                    or us;
 ·
                          developments
                                  concerning proprietary rights, including
                                  patents;
 ·
                          regulatory
                                    developments in the United States and foreign
                                    countries;
 ·
                          economic
                                    or other crises and other external
                                    factors;
 ·
                          period-to-period
                                    fluctuations in our revenues and other results
                                    of
                                    operations;
 ·
                          changes
                                  in financial estimates by securities analysts;
                                  and
 ·
                          sales
                                    of our common
                                    stock.
  We
              will
              not be able to control many of these factors, and we believe that
              period-to-period comparisons of our financial results will not necessarily
              be
              indicative of our future performance.
  In
              addition, the stock market in general, and the market for electronics
              companies
              in particular, has experienced extreme price and volume fluctuations
              that may
              have been unrelated or disproportionate to the operating performance
              of
              individual companies. These broad market and industry factors may seriously
              harm
              the market price of our common stock, regardless of our operating performance,
              and may have a negative impact on your ability to sell shares of our
              stock. 
 40
 **Table
                      of Contents**
 **Index
                      to Financial
                      Statements**
  **Our
              Articles of Incorporation allow us to sell preferred stock without
              shareholder
              approval.**
  Our
              Board
              of Directors has the authority to issue up to 4,000,000 shares of preferred
              stock and to determine the price, rights, preferences, privileges and
              restrictions, including voting rights, of those shares without any
              additional
              vote or action by our shareholders. The rights of the holders of the
              common
              stock will be subject to, and could be materially adversely affected
              by, the
              rights of the holders of any preferred stock that may be issued in
              the future.
              For example we could issue preferred stock that has superior rights
              to dividends
              or is convertible into shares of common stock. This might adversely
              affect the
              market price of the common stock.
  **Trading
              of our common stock is limited.**
  Trading
              of our common stock is conducted on the National Association of Securities
              Dealers’ Over-the-Counter Bulletin Board, or “OTC Bulletin Board.” This
              adversely affects the liquidity of our common stock, not only in terms
              of the
              number of shares that can be bought and sold at a given price, but
              also through
              delays in the timing of transactions and reduction in security analysts’ and the
              media’s coverage of us. This may result in lower prices for our common stock
              than might otherwise be obtained and could also result in a larger
              spread
              between the bid and ask prices for our common stock.
 **Item
                    7.**
                  **Financial
                      Statements**
 
 The
                financial statements of NSC are included (with an index listing all
                such
                statements) in a separate financial section at the end of the Annual
                Report on
                Form 10-KSB.
 **Item
                    8.**
                  **Changes
                      In and Disagreements with Accountants on Accounting and Financial
                      Disclosure**
  None.
  
 **Item
                    8a.**
                  **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 September
              30,
              2007, of the design and operation of the Company’s disclosure controls and
              procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation,
              the
              Chief Executive Officer and Acting Chief Financial Officer concluded
              that the
              Company’s disclosure controls and procedures are effective. 
 41
 **Table
                      of Contents**
 **Index
                      to Financial
                      Statements**
  There
              have been no changes in our internal control over financial reporting
              during the
              year ended September 30, 2007 that have materially affected, or are
              reasonably
              likely to materially affect, the Company’s internal control over financial
              reporting.
  Our
              management believes that upon significant future growth in the number
              of
              accounting transactions we process, perhaps within the next year, additional
              review and enhancement of internal controls will be required. Our management
              is
              planning to assign additional staff resources to assist with support
              for growth
              in the internal controls area when the increase in transaction velocity
              dictates
              this as a prudent step in order to maintain our effective level of
              internal
              controls.
  Our
              external auditors, for the year ended September 30, 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.”
  **Item
                        8b.**
                      **Other
                          Information**
 
 Not
            Applicable.
  **PART
            III**
  **Item
                    9.**
                  **Directors,
                      Executive Officers, Promoters and Control Persons; Compliance
                      with Section
                      16(a) of the Exchange Act**
  Directors
              hold office until the next succeeding annual meeting of shareholders,
              and until
              their successors have been elected and qualified.
  The
              directors, executive officers, significant employees and consultants
              of National
              Scientific, their respective ages and positions with us are as
              follows:
 
 **Name**
                    
                    **Age**
                    
                    **Position**Michael
                          A. Grollman
                    
                    46
                    
                    CEO,
                          Chairman of the Board of DirectorsGraham
                          L. Clark
                    
                    52
                    
                    President,
                          Director, SecretaryGregory
                          Szabo
                    
                    54
                    
                    Director
                          (Outside)
 
 **Directors
              and Executive Officers**
  *Michael
              A. Grollman*. Michael Grollman first became Chief Operation Officer in
              October 2000. Mr. Grollman was named President in April 2001, Chief
              Executive
              Officer in January of 2002, Chairman of the Board in December 2002,
              and Acting
              Chief Financial Officer in June of 2003. From 1998 to September 2000,
              Mr.
              Grollman served as Regional Service Director of MicroAge, Inc., a company
              that
              provides customer-configured technology solutions to businesses. He
              served as
              General Manager, Executive Vice President and Chief Technology Officer
              for
              Advanced Information Systems from 1987 to 1998. Mr. Grollman received
              his
              Bachelor of Science degree in chemistry from the State University of
              New York.
              He received his MBA from Arizona State University. 
 42
 **Table
                      of Contents**
 **Index
                      to Financial
                      Statements**
  *Graham
              L. Clark.*Graham Clark joined National Scientific in early 2001 as general
              manager of the sales organization. He became Vice President of Technology
              Applications & Sales for National Scientific in the spring of 2002, a
              Director in August of 2002, and became Corporate Secretary in January
              of 2003.
              Mr. Clark was named President of National Scientific in September of
              2003. For
              the two years immediately before joining National Scientific, Mr. Clark
              was the
              General Manager of the Billet Precision Engineering Group, a privately
              held
              manufacturing company providing custom engineering and manufacturing
              solutions
              to the semiconductor industry and other related industries. Prior to
              his tenure
              with Billet, he worked as Corporate General Manager for Amtech Systems,
              Inc. a
              semiconductor equipment manufacturer. Six years prior, he was a founder
              and
              senior partner of GC Technology, a private representative organization
              for
              semiconductor capital equipment. Mr. Clark has a Bachelor of Science
              degree in
              mechanical engineering from Paisley University in Scotland.
  *Gregory
              Szabo* joined National Scientific’s board on October 1, 2003 as an outside
              Director. Mr. Szabo serves on the Board’s Audit and Compensation Committees. Mr.
              Szabo served in various executive positions at Exten Corporation, including
              President of Exten Corp. and CEO of MultiCell Technologies, Inc. from
              approximately May 2000 to April 2004, where he was responsible for
              public
              reporting, fund-raising for the corporation and overall accountability
              for its
              subsidiaries, including revenue generation, intellectual property protection
              and
              organizational development. Mr. Szabo was also a director at Exten,
              a publicly
              traded company (OTC: MUCL.OB). Immediately before joining Exten, Mr.
              Szabo was
              for a number of years President and CEO of Titan Scan Corporation,
              a division of
              Titan Corporation, with subsidiaries in sterilization, defense, software
              and
              communications. Mr. Szabo has held several executive positions with
              Sunrise
              Medical Inc., a manufacturer and distributor of numerous institutional
              and
              retail products. Mr. Szabo earned a BA in Psychology from the University
              of
              Toledo and a MA in Management from the Drucker Graduate School at
              Claremont University.
  **Significant
              Advisors and Key Employees**
  *El-Badawy
              El-Sharawy, Ph.D.*Dr. El-Sharawy is a Senior Scientific Consultant to us,
              starting with us in 1996. Dr. El-Sharawy is currently Assistant Professor
              of
              Electrical Engineering at Arizona State University’s
              Telecommunications Research Center, Department of Electrical
              Engineering, and has been there for over ten years. His expertise includes,
              but
              is not limited to, microwave circuits, anistropic devices and applied
              electromagnetics. He is a senior member of IEEE and is a recipient
              of the 1980
              Egyptian Engineering Syndicate Medal of Honor.
  *Oscar
              Quadros, Chartered Accountant*. Mr. Quadros is our controller, and works for
              us on a part-time basis. He joined us in late 2002. He is a Fellow
              of the
              Institute of Chartered Accountants in Ireland, and is a graduate of
              University
              College Dublin, Ireland, with a Bachelor of Commerce, major in Accounting
              and
              Economics. From August 1998 to June 2002, he was CFO/Controller at
              A3T
              Incorporated & Axxis 3T Inc. of Scottsdale, Arizona. His 40 years of
              experience in international accounting and finance include senior auditor
              roles
              at Alexander MacLennan Trundell & Co., Public Accountants; Atkinson &
Boyd, Public Accountants; and as an audit manager at Coopers & Lybrand,
              Public Accountants. He has also worked as a Director of Accounting
              at Canadelle
              Inc. (Subsidiary of Sara Lee Corporation), Canada, and as Vice President
              Finance/Controller at Jeno Neuman & Sons of Montreal, Canada.
  *Rhonda
              Jobe*. Rhonda Jobe has been part-time marketing manager for us since
              2003.
              Ms. Jobe has extensive experience in the wireless communications and
              computing
              fields. Prior to working for NSC Ms. Jobe was Vice President of Marketing
              for
              Geoworks Corporation, a public company specializing in wireless data
              applications within the field service and field force industries. Ms.
              Jobe
              headed the wireless data division for US West Cellular, introducing
              wireless
              data products and services to large and medium-sized businesses. Ms.
              Jobe also
              worked for Motorola for over 20 years in managerial, product management
              and
              marketing positions. She was responsible for product development and
              marketing
              of wireless data products and applications within the public safety
              and
              utilities industries. Mr. Jobe attended Arizona State University,
              Motorola University and the University of Michigan, focusing on marketing
              and technical product management. 
 43
 **Table
                      of Contents**
 **Index
                      to Financial
                      Statements**
  *Susan
              L. Regan, Esq.*Ms. Regan has been part-time legal counsel for us since
              2002, although her role has largely ended as of the date of this report,
              due to
              other commitments. Ms. Regan holds a Bachelor of Science degree from
              Heidelberg College in Ohio, a Master’s Degree in Planning and Resource
              Management from the University of Alaska, and a Juris Doctorate from
              the
              Thomas M. Cooley School of Law in Michigan. She is admitted to
              practice law in both Washington State and the State of Arizona. She was in
              part-time private practice for the three years prior to joining us.
              Previously
              she was employed with Standard Insurance Company group legal department
              as in
              house counsel.
  **Board
              of Directors**
  Our
              business is managed under the direction of the Board of Directors.
              The Board
              meets on a regularly scheduled basis to review significant developments
              affecting us and to act on matters requiring Board approval. It also
              holds
              special meetings when an important matter requires Board action between
              scheduled meetings. The Board met four (4) times during fiscal 2007.
              Each
              serving director attended 100% of the meetings held in 2007 by the
              Board and the
              committees of the Board on which such director served. The Board of
              Directors
              was made up of three members during fiscal 2007. Michael A. Grollman
              has been a
              director since November of 2000. Graham L. Clark has been a director
              since
              August of 2002**.**Mr. Szabo joined the board on October 1, 2003.
              Currently, our Board of Directors consists of three members, Michael
              A.
              Grollman, Chairman, Graham L. Clark, Secretary, and Gregory Szabo.
              These Board
              members were re-elected by shareholder vote in April 2006.
  **Audit
              Committee**
  Our
              Board’s audit committee was established in December 2000. The audit committee
              met four (4) times during calendar year 2007. Mr. Greg Szabo is chairman
              of our
              audit committee as an outside director and financial expert, and is
              currently
              its sole member. The audit committee has reviewed our financial statements
              for
              the fiscal year ended September 30, 2007, as audited by Semple, Marchal
&
Cooper, LLP, National Scientific’s independent auditors. Semple, Marchal &
Cooper, LLP, has discussed these financial statements with management
              and the
              audit committee.
  **Compensation
              Committee and Board Compensation**
  Our
              board’s Compensation Committee was established in March 2003. The Compensation
              Committee met once during each of calendar years 2006 and 2007. Mr.
              Greg Szabo
              currently heads our Compensation Committee as an outside director,
              and is
              currently its sole member. The Compensation Committee approved the
              executive
              compensation plan for the fiscal years ending September 30, 2006 and
              2007,
              respectively.
  Our
              board
              as a whole approves board member compensation. This plan was approved
              by the
              Board originally in 2000, and was amended in the summer of 2003. Currently,
              employees of National Scientific who also serve on the board receive
              no
              additional compensation for board service. All newly appointed non-employee
              directors appointed after the end of fiscal year 2002 will be provided
              with a
              one-time grant of 20,000 shares of National Scientific restricted common
              stock
              upon original appointment to the board. This stock will be subject
              to forfeiture
              back to us should the Director for any reason not serve a full term
              on the board
              at least up to the next annual meeting of shareholders. 
 44
 **Table
                      of Contents**
 **Index
                      to Financial
                      Statements**
  Additionally,
              non-employee directors will also be paid $1,250 per board meeting,
              which
              includes telephonic board meetings as well as face-to-face board meetings.
              The
              $1,250 fee will be in the form of $250 cash and $1,000 of National
              Scientific
              restricted common stock. The restricted common stock will be at risk
              of
              forfeiture if the director does not serve his complete term. The fee
              will not be
              paid for telephone conversations involving Board members or others
              where no
              formal board meeting has been declared, or for normal committee meetings.
              Non-employee directors will also be paid retrospectively a quarterly
              retainer of
              10,000 options (as defined in the 2000 NSC Stock Option Plan) to purchase
              free
              trading National Scientific common stock at the end of each fiscal
              quarter they
              have served. The options will be immediately vested at point of grant,
              and will
              be issued at an exercise price equal to the average closing price for
              our common
              stock for that quarter. Non-employee directors who serve on a board
              committee,
              such as the audit or compensation committees, will also be paid retrospectively
              a quarterly additional retainer of 10,000 options, as defined in the
              2000
              National Scientific Stock Option Plan, to purchase free trading common
              stock.
              The options will be immediately vested at point of grant, and will
              be issued at
              an exercise price equal to the average closing price for National Scientific’s
              common stock for that quarter. Non-employee directors who serve on
              multiple
              committees will be paid this bonus only once for general committee
              service,
              however, as it is not paid for each committee of service. All directors
              are paid
              any reasonable out of pocket expenses required to attend board meetings,
              such as
              travel, if any.
 **Compliance
              with Section 16(a) of the Securities Exchange Act of 1934**
  Section
              16(a) of the Securities Exchange Act of 1934, as amended, requires
              our directors
              and executive officers, as well as persons beneficially owning more
              than 10% of
              the our outstanding Common Stock, to file certain reports of ownership
              with the
              Commission within specified time periods. Such officers, directors,
              and
              shareholders are also required by Commission’s rules to furnish the Company with
              copies of all Section 16(a) forms they file.
  Based
              solely on our review of such forms, all requirements received by it,
              or written
              representations from certain reporting persons, we believe that between
              October
              1, 2002 and September 30, 2007, all Section 16(a) filing requirements
              applicable
              to its officers, directors and 10% shareholders were met.
  **Code
              of Ethics**
  Our
              board
              adopted on July 28, 2004, a code of ethical conduct that applies to
              our
              principal executive officers and principal financial officer. Its purpose
              is to
              promote honest and ethical conduct, including the ethical handling
              of actual or
              apparent conflicts of interest between personal and professional relationships,
              full, fair, accurate, timely, and understandable disclosure in reports
              and
              documents that a small business issuer files with, or submits to, the
              Commission
              and in other public communications made by the small business issuer,
              compliance
              with applicable governmental laws, rules and regulations; the prompt
              internal
              reporting of violations of the code to an appropriate person or persons
              identified in the code; and accountability for adherence to the code.
              A copy of
              this code has been filed with the Securities and Exchange Commission.
              An
              additional copy can be found on our website at http://www.nsct.info
              or by
              writing to the Company and requesting one.
 **Item
                      10.**
                  **Executive
                      Compensation**
  The
              following table provides information regarding total compensation earned
              in
              fiscal years ended September 30, 2007 and 2006 by the named executive
              officers,
              who include our Chief Executive Officer/Acting Chief Financial Officer
              and
              President of National Scientific, and other named executive officers
              whose total
              salary and non-cash compensation exceeded $100,000. 
 45
 **Table
                      of Contents**
 **Index
                      to Financial
                      Statements**
  **Summary
              Compensation Table for 2007 and 2006**
 
 **Name
                        and principal position**
                    **Year**
                    **Salary**
                    
                    **Bonus**
                    **Stock
                        awards**
                    **Option
                        awards**
                    **Nonequity
                        incentive plan compensation ($)**
                    **Nonqualified
                        deferred compensation earnings**
                    **All
                        other compensation**
                    **Total****($)**
                    
                    **($)**
                    **($)**
                    **($)**
                    **($)**
                    **($)**
                    **($)****(a)**
                    **(b)**
                    **(c)**
                    
                    **(d)**
                    **(e)**
                    **(f)**
                    **(g)**
                    **(h)**
                    **(i)**
                    **(j)**Michael
                        A. Grollman
                    2007
                    180,000
                    (1)
                    –
                    –
                    –
                    –
                    –
                    –
                    180,000Chairman,
                        CEO and Acting CFO
                    2006
                    180,000
                    (2)
                    –
                    –
                    –
                    –
                    –
                    –
                    180,000Graham
                        L. Clark
                    2007
                    150,000
                    (3)
                    –
                    –
                    –
                    –
                    –
                    –
                    150,000President,
                        Director
                    2006
                    150,000
                    (4)
                    –
                    –
                    –
                    –
                    –
                    –
                    150,000______________(1)
                    In
                        2007, $9,000 was actually paid and $171,000 was accrued for
                        future
                        payment(2)
                    In
                        2006, $100 was actually paid and $179,900 was accrued for
                        future
                        payment(3)
                    In
                        2007, $51,500 was actually paid and $98,500 was accrued for
                        future
                        payment(4)
                    In
                        2006, $25,750 was actually paid and $124,250 was accrued
                        for future
                        payment
 
 **Outstanding
              Equity Awards.**The table below summarizes the outstanding
              equity awards to our executive officers at fiscal year end:
  **Name**
                    
                    **Number
                        of Securities Underlying Unexercised Options (#)
                        Exercisable**
                    
                    **Number
                        of Securities Underlying Unexercised Options (#)
                        Unexercisable**
                    
                    **Equity
                        Incentive Plan Awards:Number of Securities Underlying Unexercised
                        Unearned
                        Options #**
                    
                    **Option**
                      **Exercise**
                      **Price**
                      **($)**
                    
                    **Option**
                      **Expiration**
                      **Date**
                    
                    **Number
                        of Shares or Units of Stock That Have Not Vested
                        #**
                    
                    **Market
                        Value of Shares or Units of Stock That Have Not
                        Vested  ($)**
                    
                    **Equity
                        Incentive Plan Awards: Number of Unearned Shares, Units or
                        Other rights
                        That Have Not Vested  (#)**
                    
                    **Equity
                        Incentive Plan Awards: Market or Payout Value of Unearned
                        Shares, Units or
                        Other Rights That Have Not Vested ($)**Michael
                        A. Grollman
                    
                    50,000
                    
                    –
                    
                    –
                    
                    1.84
                    
                    12/1/2010
                    
                    –
                    
                    –
                    
                    –
                    
                    –Michael
                        A. Grollman
                    
                    450,000
                    
                    –
                    
                    –
                    
                    1.84
                    
                    12/1/2010
                    
                    –
                    
                    –
                    
                    –
                    
                    –Michael
                        A. Grollman
                    
                    75,000
                    
                    –
                    
                    –
                    
                    2.00
                    
                    1/12/2011
                    
                    –
                    
                    –
                    
                    –
                    
                    –Michael
                        A. Grollman
                    
                    75,000
                    
                    –
                    
                    –
                    
                    3.00
                    
                    1/24/2011
                    
                    –
                    
                    –
                    
                    –
                    
                    –Michael
                        A. Grollman
                    
                    300,000
                    
                    –
                    
                    –
                    
                    0.25
                    
                    1/16/2012
                    
                    –
                    
                    –
                    
                    –
                    
                    –Graham
                        L. Clark
                    
                    26,667
                    
                    –
                    
                    –
                    
                    0.46
                    
                    12/1/2010
                    
                    –
                    
                    –
                    
                    –
                    
                    –Graham
                        L. Clark
                    
                    200,000
                    
                    –
                    
                    –
                    
                    0.25
                    
                    1/16/2012
                    
                    –
                    
                    –
                    
                    –
                    
                    –Graham
                        L. Clark
                    
                    –
                    
                    –
                    
                    –
                    
                    –
                    
                    –
                    
                    1,000,000
                    
                    11,000
                    
                    –
                    
                    –
 46
 **Table
                      of Contents**
 **Index
                      to Financial
                      Statements**
 **Long
              Term Incentive Plans - Awards in the Last Two Fiscal Years**
 
 **Performance
                        or**
                    
                    **Estimated
                        Future Payouts Under Non-****Other
                        Period**
                    
                    **Stock
                        Priced-Based Plans****Number
                        of**
                    
                    **Until****Shares**
                    
                    **Maturation
                        or**
                    
                    **Threshold**
                    
                    **Target**
                    
                    **Maximum****Name**
                    
                    **(#)
                        (1)**
                    
                    **Payout**
                    
                    **($
                        or #)**
                    
                    **($
                        or #)**
                    
                    **($
                        or #)**Michael
                          A. Grollman (2)
                    
                    1,250,000
                    
                    Dec
                        2008Graham
                          L. Clark (3)
                    
                    1,000,000
                    
                    Dec
                        2008
 ____________
 (1)
                    All
                        grants in this table are based on our fiscal year 2002 Employee
                        Stock
                        Retainage Plan. (See Employee Stock Retainage Plan
                        below).(2)
                    Mr.
                        Grollman was granted 750,000 shares of stock from this Employee
                        Stock
                        Retainage Plan pool of shares, subject to National Scientific
                        achieving in
                        excess of $400,000 in sales in calendar year 2004. Mr. Grollman
                        was
                        granted an additional 500,000 shares of stock under this
                        program, subject
                        to sales exceeding $1,500,000 for calendar year 2004. In
                        July of 2005, the
                        board indicated that it may waive Mr. Grollman’s risk of forfeiture on
                        these shares in 2006, based on his forbearance on collecting
                        of the
                        various Notes due to him at the end of fiscal 2005 – On September 28,
                        2007, our board extended this program into calendar year
                        2008 with a sales
                        goal of $1M and removed the risk of forfeiture.  As of the date
                        of this report none of these grants have been fully
                        earned.(3)
                    Mr.
                        Clark was granted 500,000 shares of stock from our Employee
                        Stock
                        Retainage Plan pool of shares discussed above, subject to
                        National
                        Scientific achieving in excess of $400,000 in sales in calendar
                        year 2004.
                        Mr. Clark was granted an additional 500,000 shares of stock
                        under this
                        program, subject to sales exceeding $1,500,000 for calendar
                        year 2004. On
                        September 28, 2007, our board extended this program into
                        calendar year
                        2008 with a sales goal of $1M and removed the risk of
                        forfeiture.  As of the date of this report none of these grants
                        have been fully earned.
  **Director
                Compensation Table for fiscal year ended September 30,
                2007:**
 **Name**
                    **Fees
                        Earned or Paid in Cash**
                      **($)**
                    **Stock
                        Awards**
                      **($)
                        (1)**
                    **Option
                        Awards**
                      **($)
                        (1)**
                    **Non
                        Incentive Plan**
                      **Compensation**
                      **($)**
                    **Non-
                        Qualified**
                      **Deferred**
                      **Compensation**
                      **Earnings**
                      **($)**
                    **All
                        Other**
                      **Compensation**
                      **($)**
                    **Total**
                      **($)****(a)**
                    **(b)**
                    **(c)**
                    **(d)**
                    **(e)**
                    **(f)**
                    **(g)**
                    **(j)**Gregory
                        Szabo (2)
                    1,250
                    4,000
                    2,178
                    –
                    –
                    –
                    7,428____________(1)
                    Reflects
                        the dollar amount recognized for financial statement reporting
                        purposes
                        for the year endedSeptember
                        30, 2007 in accordance with FAS 123R.(2)
                    80,000
                        options outstanding at fiscal year end.
  **Option/SAR
              Grants and Exercises of Options/SAR Grants during Last Fiscal
              Year**
 
 No
              individual grants of stock options (whether or not in tandem with SARs),
              or
              freestanding SARs (including options and SARs that subsequently have
              been
              transferred) were made during the fiscal year ending September 30,
              2007, to any
              of the named executive officers, nor did any of the named executive
              officers
              exercise any options or SAR grants during that period. 
 47
 **Table
                      of Contents**
 **Index
                      to Financial
                      Statements**
  **Employee
              Stock Retainage Plan**
 
 In
              September 2002, by unanimous vote, our board initiated a restricted
              Employee
              Stock Retainage Plan or plan (“Employee Stock Retainage Plan”) to retain key
              staff during a period of financial difficulty in calendar year 2002.
              The board
              allocated approximately $150,000 in restricted common stock from this
              Employee
              Stock Retainage Plan as a pool of shares of our restricted common stock,
              to be
              granted to key employees at the direction of the board for the year
              and the
              next, subject to National Scientific exceeding sales growth objectives
              and
              expense control objectives in 2003. Failure to meet these objectives
              under the
              plan would result in serious risk of forfeiture by staff of some or
              all of these
              stock grants by all participants. All goals set were team goals. The
              plan has
              been used as a tool to achieve salary deferral and other salary concessions
              from
              the staff during this period of fiscal hardship, in order to retain
              key
              employees during this period The plan’s sales goals were not met in calendar
              year 2003, although the plan was nonetheless largely successful in
              assisting to
              retain key staff, even during this period of deferred or reduced salary.
              In
              January of 2004, our board extended this program into 2005, and set
              new sales
              growth objectives for the year at a level 50% higher than the previous
              year’s
              program, giving plan participants an additional year to fully earn
              these
              previously outstanding restricted stock grants. No new shares were
              added to the
              plan, although plan participants were able to convert some long-term
              back pay
              into restricted stock at that time, if desired. In February of 2005,
              the plan
              was extended by the board into 2006, with goals set at the same level
              as 2005.
              As of the date of this report, the plan currently covers officers Michael
              Grollman and Graham Clark, and employees who are not officers including
              Oscar
              Quadros, and David Mandala. The plan has not been submitted to our
              shareholders
              for approval. All of the stock under this program is restricted under
              SEC
              Section 144. On September 28, 2007, our board extended this program
              into
              calendar year 2008 with a sales goal of $1M and removed the risk of
              forfeiture.  As of the date of this report this goal had not yet been
              met.
  **Employment
              Agreements**
 
 We
              engaged Mr. Grollman as an independent contractor from October 7, 2000
              until
              November 30, 2000. He was paid $15,000 monthly for his services as
              an
              independent contractor. Effective December 1, 2000, Mr. Grollman became
              an
              employee of National Scientific under a one-year contract to serve
              as our Chief
              Operating Officer. Mr. Grollman was named President in April 2001.
              The contract
              automatically renews for additional one-year terms unless either party
              chooses
              to terminate, and it remains in force through the date of this report.
              Mr.
              Grollman’s contract calls for an annual gross salary of $180,000, payable
              semi-monthly. Also in accordance with the contract, on December 1,
              2000, we
              granted Mr. Grollman 100,000 shares of common stock, subject to risk
              of
              forfeiture should Mr. Grollman not fulfill the terms of his employment
              agreement. Also on December 1, 2000, we granted Mr. Grollman 500,000
              vested
              options to purchase common stock at the closing sales price of the
              common stock
              on December 1, 2000. Additional option grants are included in Mr. Grollman’s
              employment contract for each whole dollar amount increase in the market
              value of
              our Common Stock. The whole dollar amount increase is measured over
              a moving
              two-week average. For each whole dollar amount attained between $1
              and $15
              inclusive, Mr. Grollman will receive 75,000 options at the whole dollar
              amount
              option price. Mr. Grollman is also entitled to additional options at
              various but
              declining levels for increases in stock value up to $50 per Common
              Share. In the
              event of a change in control or sale of substantially all the assets
              of National
              Scientific, the employment agreement between Mr. Grollman and us automatically
              terminates, and Mr. Grollman is to receive one hundred fifty percent
              (150%) of
              the then current year’s annual salary.
  In
              January of 2002 Mr. Grollman agreed to defer 20% of his salary until
              such a time
              as cash was more available, reducing his immediately payable cash salary
              to
              $12,000 per month. For September, October, and November of 2002, Mr.
              Grollman
              deferred 100% of his payable salary, reducing his immediately payable
              cash
              salary to $0 per month. Mr. Grollman agreed from January 2003 through
              December
              2003 to reduce his total payable salary for the 2003 year to $120,000
              per year.
              In addition to this reduction, during the year ended September 30,
              2003 Mr.
              Grollman deferred $70,360 of his salary and was paid $64,640 in cash.
              During the
              year ended September 30, 2004 Mr. Grollman deferred $70,800 of his
              salary and
              was paid $94,200 in cash. For calendar year 2004, Mr. Grollman agreed
              to defer
              up to $30,000 of his contracted pay as needed. During the year ended
              September
              30, 2005 Mr. Grollman deferred $110,800 of his salary and was paid
              $69,200 in
              cash. During the year ended September 30, 2006 Mr. Grollman deferred
              $179,900 of
              his salary and was paid $100 in cash. During the year ended September
              30, 2007
              Mr. Grollman deferred $171,000 of his salary and was paid $9,000 in
              cash. Also
              subsequent to fiscal 2007 year-end, Mr. Grollman deferred all of his
              October and
              November salary of $15,000 to a future period, leaving as of the end
              of November
              2007, unpaid wages of $314,221 accrued vacation pay of $57,345 and
              accrued
              interest on deferred salary of approximately $70,841 for a combined
              total of
              approximately $442,047. 
 48
 **Table
                      of Contents**
 **Index
                      to Financial
                      Statements**
  In
              January 2003, under our Stock Retainage Plan ( See Stock Retainage
              Plan above)
              initiated in September 2002, we issued 2,550,000 shares of common stock
              at an
              average price of $0.06 or 90% of the price on the grant date of September
              30,
              2002. These grants were provided originally to Michael Grollman, Graham
              Clark,
              David Mandala, and Karen Fuhre. Mr. Mandala left the firm in mid-2003,
              and his
              shares under the plan were reallocated to Oscar Quadros and Paul Davidson.
              These
              stock grants were contingent upon National Scientific achieving sales
              targets
              for calendar year 2003. Should these targets not be met, these shares
              would be
              forfeited, or we and the employees involved in the program would elect
              to
              establish new goals for calendar year 2004, in order to motivate the
              staff to
              perform and simultaneously conserve cash resources during the next
              calendar
              year, using the same stock grants, as yet unearned, as long term incentive.
              In
              January of 2004, our Board extended this program into 2004, and set
              new sales
              growth objectives for the year at a level 50% higher than the previous
              year’s
              program, giving plan participants an additional year to fully earn
              this stock
              grant. On August 19, 2003, a participant of the plan left us and his
              grant of
              800,000 shares were forfeited at the average market price per share
              of $0.15. On
              September 30, 2003 the 800,000 shares of common stock resulting from
              the
              forfeiture was allocated to the plan. We issued this stock under the
              terms of
              the plan to several employees in 2004 who are not officers or directors
              of
              National Scientific. . In February of 2005, the plan was extended by
              the board
              into 2006, with goals set at the same level as 2005.  On September 28,
              2007, our board extended this program into calendar year 2008 with
              a sales goal
              of $1M and removed the risk of forfeiture.  As of the date of this
              report none of these grants have been fully earned, other than those
              of Mr.
              Grollman, which have been declared earned in order to induce his continued
              loan
              extensions for Company operations.
  Mr.
              Grollman was granted 750,000 shares of stock from this Employee Stock
              Retainage
              Plan pool of shares, subject to National Scientific achieving in excess
              of
              $400,000 in sales in calendar year 2004. Mr. Grollman was granted an
              additional
              500,000 shares of stock under this program, subject to sales exceeding
              $1,500,000 for calendar year 2004.
  In
              December 2003 Mr. Grollman agreed to convert approximately $150,000
              of his back
              pay and accrued vacation pay to our restricted common stock, at a rate
              equal to
              the then currently available private placement share price of $0.10
              per share.
              Mr. Grollman received this stock in January of 2004.
  On
              August
              31, 2005, Mr. Grollman agreed to convert approximately $15,190 of his
              back pay
              to our restricted common stock, the rate of the average market price
              per share
              of $0.035. Mr. Grollman received this stock in September of 2005.
  On
              November 23, 2005, Mr. Grollman agreed to convert approximately $18,000
              of our
              accounts payable and accrued expense indebtedness to him to our restricted
              common stock, the rate of the average market price per share of
              $0.036.
  On
              April
              7, 2006, Mr. Grollman agreed to convert approximately $16,000 of his
              back pay to
              our restricted common stock, the rate of the average market price per
              share of
              $0.032.
  On
              March
              19, 2007, Mr. Grollman agreed to convert approximately $25,000 of his
              back pay
              to our restricted common stock, the rate of the average market price
              per share
              of $0.035.
  On
              June
              19, 2007, Mr. Grollman agreed to convert approximately $31,700 of his
              back pay
              to our restricted common stock, the rate of the average market price
              per share
              of $0.020.
  On
              August
              20, 2007, Mr. Grollman agreed to convert approximately $60,000 of his
              back pay
              to our restricted common stock, the rate of the average market price
              per share
              of $0.020. 
 49
 **Table
                      of Contents**
 **Index
                      to Financial
                      Statements**
  Mr.
              Clark
              was hired in December 2000 as manager of the sales organization. His
              salary was
              $120,000 per year base salary, plus commission on sales. He became
              Vice
              President of Technology Applications & Sales for us in September 2001, and a
              director and a corporate officer in August of 2002. In January of 2003,
              Mr.
              Clark entered into a one-year employment agreement with National Scientific
              to
              serve as Vice President of Technology Applications & Sales. In June of 2003
              Mr. Clark was named President of National Scientific. The contract
              automatically
              renews for additional one-year terms unless either party chooses to
              terminate.
              Mr. Clark’s contract provides for an annual gross salary of $150,000, payable
              monthly. In the event of a change in control or sale of substantially
              all our
              assets, the employment agreement between Mr. Clark and National Scientific
              automatically terminates, and Mr. Clark is to receive fifty percent
              (50%) of the
              then current year’s annual salary.
  For
              September, October, and November of 2002, Mr. Clark deferred 100% of
              his payable
              salary, reducing his immediately payable cash salary to $0 per month.
              During the
              year ended September 30, 2003 Mr. Clark deferred $50,360 of his salary
              and was
              paid $69,640 in cash. During the year ended September 30, 2004 Mr.
              Clark
              deferred $41,400 of his salary and was paid $101,100 in cash. During
              the year
              ended September 30, 2005 Mr. Clark deferred $63,000 of his salary and
              was paid
              $87,000 in cash. During the year ended September 30, 2006 Mr. Clark
              deferred
              $124,250 of his salary and was paid $24,750 in cash. During the year
              ended
              September 30, 2007 Mr. Clark deferred $98,500 of his salary and was
              paid $51,500
              in cash. Also subsequent to September 30, 2007 year-end, Mr. Clark
              deferred all
              of his October and November monthly salary of $12,500 to a future period
              leaving
              as of the end of November 2007, unpaid wages of $102,173, accrued vacation
              pay
              of $45,917 and accrued interest on deferred salary of $46,457 for a
              combined
              total of approximately $194,547.
  Mr.
              Clark
              was granted 500,000 shares of stock from our Employee Stock Retainage
              Plan pool
              of shares discussed above, subject to National Scientific achieving
              in excess of
              $400,000 in sales in calendar year 2004. Mr. Clark was granted an additional
              500,000 shares of stock under this program, subject to sales exceeding
              $1,500,000 for calendar year 2004.
  On
              August
              31, 2005, Mr. Clark agreed to convert approximately $9,500 of his back
              pay to
              our restricted common stock, the rate of the average market price per
              share of
              $0.035. Mr. Clark received this stock in September of 2005.
  On
              March
              15, 2006, Mr. Clark agreed to convert approximately $15,050 of his
              back pay to
              our restricted common stock, the rate of the average market price per
              share of
              $0.035.
  On
              May
              25, 2006, Mr. Clark agreed to convert approximately $40,250 of his
              back pay to
              our restricted common stock, the rate of the average market price per
              share of
              $0.035.
  On
              March
              23, 2007, Mr. Clark agreed to convert approximately $20,000 of his
              back pay to
              our restricted common stock, the rate of the average market price per
              share of
              $0.035.
  On
              June
              14, 2007,  Mr. Clark agreed to convert approximately $20,000 of his
              back pay to our restricted common stock, the rate of the average market
              price
              per share of $0.020.
  On
              June
              19, 2007, Mr. Clark agreed to convert approximately $7,566 of his back
              pay to
              our restricted common stock, the rate of the average market price per
              share of
              $0.020.
  On
              August
              20, 2007, , Mr. Clark agreed to convert approximately $60,000 of his
              back pay to
              our restricted common stock, the rate of the average market price per
              share of
              $0.020.
  On
              September 20, 2007, , Mr. Clark agreed to convert approximately $10,500
              of his
              back pay to our restricted common stock, the rate of the average market
              price
              per share of $0.015. 
 50
 **Table
                      of Contents**
 **Index
                      to Financial
                      Statements**
  During
              the fiscal year ended September 30, 2004, we issued 160,084 shares,
              of our
              common stock to our consultants in lieu of cash compensation. During
              the fiscal
              year ended September 30, 2005 we generally did not use the services
              of
              consultants, therefore, we did not issue shares of our common stock
              to our
              consultants in lieu of cash compensation to them. During fiscal 2004,
              we granted
              790,000 options to our consultants and employees to purchase shares
              of our
              common stock. The options granted had exercise prices ranging from
              $0.09 per
              share to $0.16 per share. The exercise prices were generally below
              market on the
              date of grant, and vested. We granted these options as a means of compensation
              to consultants to conserve operating cash. During fiscal 2005, no options
              were
              granted to consultants or employees. The only options granted were
              issued to an
              outside director for board fees.
  During
              fiscal 2006, in order to conserve cash, 310,681 stock options were
              granted to
              William Sklar, a consultant, for investor relations services. 152,358
              stock
              options were granted to Mr. Sklar on June 26, 2006. The weighted average
              grant
              date fair value of these options was $0.0376. 158,323 stock options
              were granted
              to Mr. Sklar on September 20, 2006. The weighted average grant date
              fair value
              of these options was $0.0259. Stock based compensation of $9,816 was
              recognized
              in the financial statements for the year ended September 30, 2006 using
              the
              Black-Scholes option pricing model value on the grant date. The options
              have a
              life of ten years. Also, during fiscal 2006, 60,000 options granted
              were issued
              to an outside director for board fees. During fiscal 2006, no options
              were
              granted to employees.
  During
              fiscal 2007, we granted 550,000 options to our contractors and employees
              to
              purchase shares of our common stock. The options granted have exercise
              prices of
              $0.030 per share, a life of ten years and vested immediately.
 
 **Item
                    11.**
                  **Security
                      Ownership of Certain Beneficial Owners and
                      Management**
  The
              table
              below sets forth certain information, as of December 3, 2007, concerning
              the
              beneficial ownership by (i) all current directors, (ii) each of our
              named
              executive officers, (iii) each person known to us to be the beneficial
              owner of
              more than five percent (5%) of our outstanding common stock, and (iv)
              all of our
              directors and executive officers as a group. To our knowledge, all
              persons
              listed in the table have sole voting and investment power with respect
              to their
              shares, except to the extent that their respective spouses share authority
              under
              applicable law.
 
 **Number
                        of****Common
                        Shares**
                    
                    
                    **Percent
                        of****Beneficially**
                    
                    
                    **Outstanding****Name
                        and Address of Beneficial Owner (1)**
                    
                    
                    **Owned
                        (2)**
                    
                    
                    **Shares**Michael
                          A. Grollman
                    
                    
                    11,900,000
                    (3)
                    
                    9.7%Graham
                          L. Clark
                    
                    
                    9,751,667
                    (4)
                    
                    8.0%Gregory
                          Szabo
                    
                    
                    756,922
                    (5)
                    
                    0.6%All
                          executive officers and directors as a group
                      (3
                          persons)
                    
                    
                    22,408,589
                    
                    
                    18.3%
 __________
 (1)
                    The
                        business address for all directors and officers is c/o National
                        Scientific
                        Corporation, 8361 E. Evans Road, Suite 106, Scottsdale,
                        Arizona 85260-3617.(2)
                    A
                        person is deemed to be the beneficial owner of securities
                        that can be
                        acquired within 60 days from the date set forth above through
                        the exercise
                        of any option, warrant or right. Shares of Common Stock subject
                        to
                        options, warrants or rights that are currently exercisable
                        or exercisable
                        within 60 days are deemed outstanding for computing the percentage
                        of the
                        person holding such options, warrants or rights, but are
                        not deemed
                        outstanding for computing the percentage of any other person.
                        The amounts
                        and percentages are based upon the approximately 122,280,557
                        shares of
                        Common Stock outstanding as December 24, 2007.(3)
                    Includes
                        1,150,000 shares underlying currently exercisable stock options
                        and
                        warrants, and 10,750,000 shares of restricted Common Stock
                        including
                        1,250,000 shares subject to substantial risk of
                        forfeiture.(4)
                    Includes
                        551,667 shares underlying currently exercisable stock options
                        and warrants
                        and 9,200,000 shares of restricted Common Stock including
                        1,000,000 shares
                        subject to substantial risk of forfeiture.(5)
                    Includes
                        380,000 shares underlying currently exercisable stock options
                        and warrants
                        and 376,922 shares of restricted Common Stock subject to
                        substantial risk
                        of forfeiture.
 51
 **Table
                      of Contents**
 **Index
                      to Financial
                      Statements**
 **Item
                    12.**
                  **Certain
                      Relationships and Related
                      Transactions**
  On
              September 30, 2002, we started a restricted Employee Stock Retainage
              Plan (See
              Employee Stock Retainage Plan above) to retain key staff during a period
              of
              financial difficulty with significant periods of cash wage deferrals.
              We
              allocated approximately 3,350,000 shares with a current market value
              of $150,000
              from this Employee Stock Retainage Plan pool of shares in fiscal 2002,
              to be
              granted to key personnel. Grants from this pool of shares were made
              to Michael
              Grollman, Graham Clark, Karen Fuhre, Oscar Quadros, and Paul Davidson.
              On
              September 28, 2007, our board extended this program into calendar year
              2008 with
              a sales goal of $1M and removed the risk of forfeiture.
  In
              December 2004, our Chairman Michael Grollman made personal loans to
              the Company
              in the amount of $65,000 to assist us with short-term cash requirements.
              The
              loan is evidenced by an unsecured promissory note that provides for
              repayment
              within 90 days or less, at no interest. The promissory note also provides
              that
              if repayment takes longer than 90 days, then interest accrues at a
              rate of 6
              percent per year until paid in full. We paid this Note in full in February
              of
              2005.
  On
              February 24, 2005, March 28, 2005, May 2, 2005, and May 27, 2005 our
              Chairman
              Michael Grollman made new personal loans to the Company totaling $159,000
              to
              assist us with working capital needs. The loans are evidenced by a
              demand note
              that provides for repayment within five business days of a demand notice
              from
              Mr. Grollman, with interest of 6% compounded annually from June 1,
              2005. These
              loans were secured by an interest in the copyrights in the Company’s iBus
              software and designs.  During the quarter to September 30, 2007, these
              loans were paid down by $11,000. As of September 30, 2007, these loans
              had a
              balance outstanding of $148,000 and the interest rate going forward
              was adjusted
              to 8% compounded annually from October 1, 2007.
  On
              March
              19, 2007, we issued 714,286 of our restricted common shares to Michael
              Grollman,
              at the closing price of $0.035 in lieu of his partial forgiveness of
              the
              Company’s back pay indebtedness to him.
  On
              March
              23, 2007, we issued 666,667 of our restricted common shares to Graham
              Clark, at
              the closing price of $0.035 in lieu of his partial forgiveness of the
              Company’s
              back pay indebtedness to him.
  On
              June
              14, 2007, we issued 1,000,000 of our restricted common shares to Graham
              Clark,
              at the closing price of $0.02 in exchange for his partial forgiveness
              of the
              Company’s back pay indebtedness to him.
  On
              June
              19, 2007, we issued 378,333 of our restricted common shares to Graham
              Clark, at
              the closing price of $0.02 in exchange for his partial forgiveness
              of the
              Company’s back pay indebtedness to him.
  On
              June
              19, 2007, the Company issued 1,585,714 of our restricted common shares
              to
              Michael Grollman, at the closing price of $0.02 in exchange for his
              partial
              forgiveness of the Company’s back pay indebtedness to him.
  On
              August
              20, 2007, the Company issued 3,000,000 of our restricted common shares
              to
              Michael Grollman, at the closing price of $0.02 in exchange for his
              partial
              forgiveness of the Company’s back pay indebtedness to him.
  On
              August
              20, 2007, the Company issued 3,000,000 of our restricted common shares
              to Graham
              Clark, at the closing price of $0.02 in exchange for his partial forgiveness
              of
              the Company’s back pay indebtedness to him.
  On
              September 20, 2007, the Company issued 700,000 of our restricted common
              shares
              to Graham Clark, at the closing price of $0.015 in exchange for his
              partial
              forgiveness of the Company’s back pay indebtedness to him.
  On
              September 30, 2007, the Company converted unpaid interest of $13,300
              on demand
              notes payable to Michael Grollman into a new demand note of $13,300,
              with
              interest of 8% compounded annually on October 1st.
              The note provides
              for repayment within five business days of a demand notice from Mr.
              Grollman. 
 52
 **Table
                      of Contents**
 **Index
                      to Financial
                      Statements**
 
 **Where
              You Can Find More Information**
 
 We
              file
              reports and other information with the U.S. Securities and Exchange
              Commission.
              You may read and copy any document that we file at the SEC’s public reference
              facilities at 450 Fifth Street N.W., Room 1024, Washington, D.C. 20549.
              Please call the SEC at 1-800-732-0330 for more information about its
              public
              reference facilities. Our SEC filings are also available to you free
              of charge
              at the SEC’s website at www.sec.gov.
  Copies
              of
              publicly available documents that we have filed with the SEC can also
              be
              inspected and copied at the offices of the National Association of
              Securities
              Dealers, Inc., 1735 K. Street, N.W., Washington, D.C. 20006.
  You
              should only rely upon the information included in or incorporated by
              reference
              into this annual report and the exhibits to the annual report. We have
              not
              authorized anyone to provide you with additional or different information.
              You
              should not assume that the information included in or incorporated
              by reference
              into this annual report is accurate as of any date later than the date
              on the
              front of the annual report.
   **Item
                    13.**
                  **Exhibits**
  **Exhibit
                        Number**
                    
                    **Description**3.1
                    
                    Articles
                          of Incorporation(1)3.2
                    
                    Bylaws(2)10.1
                    
                    Employment
                          Agreement between National Scientific Corporation and Michael
                          A. Grollman
                          dated January 2001(4)10.2
                    
                    Employment
                          Agreement between National Scientific Corporation and Graham
                          L. Clark
                          dated January 2003(6)10.3
                    
                    NSC
                          Consulting Agreement dated August 2001, and Amendments
                          dated August 2002
                          and July 2003, with Dr. El-Badawy El-Sharawy(6)10.4
                    
                    Amended
                          and Restated 2000 Stock Option Plan(3)10.5
                    
                    Form
                          of 2004 Stock Retainage Plan Agreement(6)10.6
                    
                    Agreement
                          Regarding Management Consulting Services with Stanton Walker
                          of New York
                          dated May 2003(6)10.7
                    
                    Agreement
                          Regarding Distribution and Marketing of Gotcha!® Child Safety Product and
                          other products dated December 2002 with FutureCom Global,
                          Inc.(6)10.8
                    
                    Purchase
                          Order from Verify Systems, Inc, dated March 2003 for IBUSTM School Child
                          Tracking Systems(5)10.9
                    
                    Letter
                          of Understanding and Agreement dated April 2004 Regarding
                          Sales and
                          Distribution of Verify School safety products, and an Unlimited
                          Software
                          License with Anthony Grosso and CIS Services, LLC(6)10.10
                    
                    Letter
                          of Intent from Positus, Inc. dba Bike & Cycle Trak, dated February
                          2003 for Design of Power Sports Tracking System(6)10.11
                    
                    Purchase
                          Order from Positus, Inc. dba Bike & Cycle Trak, for Design of Power
                          Sports Tracking System dated March 2003(6)14
                    
                    Code
                          of Ethics(7)31
                    
                    Certification
                          Pursuant to Section 302 of the Sarbanes-Oxley Act32
                    
                    Certification
                          Pursuant to Section 906 of the Sarbanes-Oxley
                          Act
 ____________
 (1)
                    Incorporated
                        by reference to the Registrant’s Form 10-SB filed on or about January 3,
                        2000.
 (2)
                    Incorporated
                        by reference to the Registrant’s Form 10-QSB for the quarter ended March
                        31, 2001 and filed on or about May 15,
                        2001. 
 53
 **Table
                      of Contents**
 **Index
                      to Financial
                      Statements**
 (3)
                    Incorporated
                        by reference to the Registrant’s Form 10-QSB for the quarter ended
                        December 31, 2000 and filed on or about February 14,
                        2001.
 (4)
                    Incorporated
                        by reference to the Registrant’s Form 10-KSB for the year ended September
                        30, 2000 and filed on or about December 19,
                        2000.
 (5)
                    Incorporated
                        by reference to the Registrant’s Form S-8 filed on or around June 3,
                        2003.
 (6)
                    Incorporated
                        by reference to the Registrant’s Form SB2 filed on or around June 24,
                        2004.
 (7)
                    Incorporated
                        by reference to the Registrant’s Form 10-QSB for the quarter ended June
                        30, 2004 and filed on or about August 16,
                        2004.
 
 **Item
                    14.**
                  **Principal
                      Accountant Fees And
                      Services**
  **Audit
              Fees**
 
 Fees
              paid
              or accrued due, for services performed by our principal accountants,
              during the
              years ended September 30, 2006 and 2005 were as follows:
 
 **2007**
                    
                    
                    **2006**Audit
                          fees - audit of annual financial statements and review
                          of financial
                          statements included in our 10-QSB, services normally provided
                          by the
                          accountant in connection with statutory and regulatory
                          filings.
                    
                    $
                    30,705
                    
                    
                    $
                    27,850Audit-related
                          fees - related to the performance of audit or review of
                          financial
                          statements not reported under “audit fees” above
                    
                    
                    –
                    
                    
                    
                    –Tax
                          fees - tax compliance, tax advice and tax planning
                    
                    
                    –
                    
                    
                    
                    –All
                          other fees - services provided by our principal accountants
                          other than
                          those identified above
                    
                    
                    –
                    
                    
                    
                    –Total
                          fees paid or accrued to our principal accountants Semple,
                          Marchal &
                          Cooper, LLP in 2007 and Epstein Weber & Conover, PLC in
                          2006
                    
                    $
                    30,705
                    
                    
                    $
                    27,850
 
 Fees
              paid
              to the principal accountants were approved by the Audit Committee.
 
 **All
              other Fees**
 
 None.
 
 Epstein
              Weber & Conover, PLC, Certified Public Accountants, were our principal
              auditors for fiscal year 2006. During fiscal year 2006, Epstein Weber
&
Conover, PLC reviewed our unaudited financial statements as filed in
              our form
              10-QSB for the quarters ended December 31, 2005, March 31, 2006 and
              June 30,
              2006.
  During
              the Company’s two most recent fiscal years and any subsequent interim period
              preceding the departure of Epstein Weber & Conover, PLC, there were no
              unresolved disagreements with Epstein Weber & Conover, PLC on any matter
              concerning accounting principles or practices, financial statement
              disclosure,
              or auditing scope or procedure; which disagreements, if not resolved
              to the
              satisfaction of Epstein Weber & Conover, PLC would have caused Epstein Weber
& Conover, PLC to make reference to the subject matter of the disagreements
              in connection with its reports. Epstein Weber & Conover, PLC as the
              Company’s principal independent accountant, did not provide an adverse opinion
              or disclaimer of opinion to the Company’s financial statements, nor modify its
              opinion as to uncertainty, audit scope or accounting principles. 
 54
 **Table
                      of Contents**
 **Index
                      to Financial
                      Statements**
 
 **Review
              of Audited Financial Statements & Report of the Audit
              Committee**
 
 The
              audit
              committee has reviewed and discussed the audited financial statements
              with
              management. The audit committee has discussed with the independent
              auditors the
              matters required to be discussed by SAS 61. The audit committee has
              received the
              written disclosures and the letter from the independent accountants
              required by
              Independence Standards Board Standard No. 1 (Independence Standards
              Board
              Standard No. 1, Independence Discussions with Audit Committees) and
              has
              discussed with the independent accountant the independent accountant’s
              independence. Based on the review and these discussions, the audit
              committee
              recommended to the Board of Directors that the audited financial statements
              be
              included in the company’s Annual Report on Form 10-KSB for the last fiscal year
              for filing with the Commission.
  **Financial
              Information Systems Design and Implementation Fees and Other
              Services**
 
 We
              did
              not engage Semple, Marchal & Cooper, LLP, to provide services to us
              regarding financial information systems design and implementation during
              the
              fiscal year ended September 30, 2006. The Board of Directors has considered
              whether the provision of non-audit services is compatible with maintaining
              Semple, Marchal & Cooper, LLP’s, independence, and has decided not to secure
              such services from Semple, Marchal & Cooper, LLP, at this time in that
              area.
 55
 **Table
                  of Contents**
 **Index
                  to Financial
                  Statements**
 
 **SIGNATURES**
 
 Pursuant
              to the requirements of Section 13 or 15(d) of the Securities Exchange
              Act of
              1934, the Registrant caused this report to be signed on its behalf
              by the
              undersigned, thereunto duly authorized.
 **NATIONAL
                        SCIENTIFIC CORPORATION**Date: 
December
                        29, 2007
                      By:
                      /s/ 
Michael
                        A.
                        GrollmanMichael
                          A. Grollman
                        Director,
                          Chief Executive Officer,Acting
                          Chief
                        Financial
                          Officer and Chairman
 By:
                        /s/ 
Graham
                          L.
                          ClarkGraham
                              L. Clark
                            Director,
                              President, and
                              Secretary
 By:
                        /s/ 
Gregory
                          SzaboGregory
                              Szabo
                            Director
  56
 **Table
                          of Contents**
 **Index
                          to Financial
                          Statements**
 **NATIONAL
                    SCIENTIFIC CORPORATION**
 
 **AUDITED
                    FINANCIAL STATEMENTS**
 **For
                    the Years Ended September 30, 2007 and 2006**
 
 **INDEX**
 
 **Page**Report
                              of Semple, Marchal & Cooper, LLP,
                              Independent Registered Public Accounting Firm
                          F-2Report
                              of Epstein Weber & Conover, PLC,
                              Independent Registered Public Accounting Firm
                          F-3Balance
                              Sheets (September 30, 2007 and
                              2006)
                          F-4Statements
                              of Operations (Years Ended September 30, 2007 and 2006)
                          F-5Statements
                              of Changes in Shareholders’
                              Deficit (Years Ended September 30, 2007 and 2006)
                          F-6Statements
                              of Cash Flows (Years Ended September 30, 2007
                              and 2006)
                          F-8Notes
                              to Financial Statements (Years Ended September 30,
                              2007 and
                              2006)
                          F-10
 F-1
 **Table
                              of Contents**
 **Index
                              to Financial
                              Statements**
 **Report
                        of Independent Registered Public Accounting
                        Firm**
 Board
                      of
                      Directors and Stockholders of
 National
                      Scientific Corporation
 Scottsdale,
                      Arizona
 
 We
                      have
                      audited the accompanying balance sheet of National Scientific
                      Corporation (the
“Company”) as of September 30, 2007 and the related statement of operations,
                      changes in stockholders’ equity (deficit) and cash flow for the year ended
                      September 30, 2007.  These financial statements are the responsibility
                      of the Company’s management. Our responsibility is to express an opinion on
                      these financial statements based on our audit.
 
 We
                      conducted our audit in accordance with the standards of the
                      Public Company
                      Accounting Oversight Board (United States).  Those standards require
                      that we plan and perform the audit to obtain reasonable assurance
                      about whether
                      the financial statements are free of material misstatement.  The
                      Company is not required to have, nor were we engaged to perform,
                      an audit of its
                      internal controls over financial reporting.  Our audit includes
                      consideration of internal control over financial reporting
                      as a basis for
                      designing audit procedures that are appropriate in the circumstances,
                      but not
                      for the purpose of expressing an opinion on the effectiveness
                      of the Company’s
                      internal control over financial reporting. Accordingly, we
                      express no such
                      opinion. An audit also includes examining, on a test basis,
                      evidence supporting
                      the amounts and disclosures in the financial statements, assessing
                      the
                      accounting principles used and significant estimates made by
                      management, as well
                      as evaluating the overall financial statement presentation.  We
                      believe that our audit provides a reasonable basis for our
                      opinion.
 
 In
                      our
                      opinion, the consolidated financial statements referred to
                      above present fairly,
                      in all material respects, the financial position of National
                      Scientific
                      Corporation as of September 30, 2007 in conformity with accounting
                      principles
                      generally accepted in the United States of America.
 
 The
                      accompanying consolidated financial statements have been prepared
                      assuming that
                      the Company will continue as a going concern. As discussed
                      in Note 1 to the
                      consolidated financial statements, the Company has suffered
                      recurring losses
                      from operations and has a working capital deficit as of September
                      30, 2007.
                      These matters raise substantial doubt about the Company’s ability to continue as
                      a going concern.  Management’s plans in regard to these matters are
                      also described in Note 1. The consolidated financial statements
                      do not include
                      any adjustments that might result from the outcome of this
                      uncertainty.
 
 /s/
                      SEMPLE, MARCHAL & COOPER, LLP
 
 Phoenix,
                      Arizona
 December
                      19, 2007
 F-2
 **Table
                                  of Contents**
 **Index
                                  to Financial
                                  Statements**
  **REPORT
                    OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
                    FIRM**
  
 Board
                      of
                      Directors,
 National
                      Scientific Corporation
 
 We
                      have
                      audited the accompanying balance sheet of National Scientific
                      Corporation as of
                      September 30, 2006 and the related statements of operations,
                      changes in
                      shareholders’ deficit and cash flows for the year then ended.  These
                      financial statements are the responsibility of National Scientific
                      Corporation’s
                      management. Our responsibility is to express an opinion on
                      these financial
                      statements based on our audit.
 
 We
                      conducted our audit in accordance with auditing standards of
                      the Public Company
                      Accounting Oversight Board (United States). Those standards
                      require that we plan
                      and perform the audit to obtain reasonable assurance about
                      whether the financial
                      statements are free of material misstatement. An audit includes
                      examining, on a
                      test basis, evidence supporting the amounts and disclosures
                      in the financial
                      statements. An audit also includes assessing the accounting
                      principles used and
                      significant estimates made by management, as well as evaluating
                      the overall
                      financial statement presentation. We believe that our audit
                      provide a reasonable
                      basis for our opinion.
 
 In
                      our
                      opinion, the financial statements referred to above present
                      fairly, in all
                      material respects, the financial position of National Scientific
                      Corporation as
                      of September 30, 2006 and the results of its operations and
                      its cash flows for
                      the year then ended, in conformity with accounting principles
                      generally accepted
                      in the United States of America.
 
 The
                      accompanying financial statements have been prepared assuming
                      that National
                      Scientific Corporation will continue as a going concern. As
                      discussed in Note 1
                      to the financial statements, National Scientific Corporation
                      has not yet
                      generated significant revenues, and is dependent upon raising
                      capital from
                      investors. Additionally, National Scientific Corporation has
                      incurred aggregate
                      losses during the two years ended September 30, 2006 of over
                      $2,086,000 and had
                      a total shareholders’ deficit of approximately $1,400,000 at September 30, 2006.
                      These matters raise substantial doubt about the Company’s ability to continue as
                      a going concern. Management’s plans concerning these matters are also described
                      in Note 1. The financial statements do not include any adjustments
                      that might
                      result from the outcome of this uncertainty.
  /s/
                      EPSTEIN WEBER & CONOVER, PLC
 
 Scottsdale,
                      Arizona
 January
                      11, 2007
 F-3
 **Table
                              of Contents**
 **Index
                              to Financial
                              Statements**
 **NATIONAL
                    SCIENTIFIC CORPORATION**


**BALANCE
          SHEETS**
 **September
          30, 2007 and 2006**
 
 **2007**
                
                
                **2006****ASSETS**Current
                      Assets:Cash
                      and cash equivalents
                
                $
                85,887
                
                
                $
                43,899Trade
                      receivables, net
                
                
                6,216
                
                
                
                141,498Inventory,
                      net
                
                
                22,900
                
                
                
                6,020Other
                      assets
                
                
                68
                
                
                
                5,570Total
                      current assets
                
                
                115,071
                
                
                
                196,987Property
                      and equipment, net
                
                
                622
                
                
                
                1,037Deposits
                
                
                2,340
                
                
                
                2,000Deferred
                      offering costs, net
                
                
                14,800
                
                
                
                19,600Total
                      current
                      assets
                
                $
                132,833
                
                
                $
                219,624**LIABILITIES
                      AND SHAREHOLDERS’ DEFICIT**Current
                      Liabilities:Accounts
                      payable - related party
                
                $
                419
                
                
                $
                83,584Accounts
                      payable - other
                
                
                195,004
                
                
                
                165,593Accrued
                      expenses
                
                
                883,400
                
                
                
                848,446Due
                      to factors
                
                
                2,602
                
                
                
                104,400Notes
                      payable - related party
                
                
                161,300
                
                
                
                159,000Notes
                      payable – current portion
                
                
                80,875
                
                
                
                133,375Total
                      current liabilities
                
                
                1,323,600
                
                
                
                1,494,398Notes
                      payable, less current portion, net of discount and beneficial
                      conversion
                      feature of $37,945 at September 30, 2007 and $50,252 at September
                      30,
                      2006
                
                
                137,055
                
                
                
                124,748Total
                      liabilities
                
                
                1,460,655
                
                
                
                1,619,146Commitments
                      and contingencies
                
                
                –
                
                
                
                –Shareholders’  deficit:Preferred
                      stock, par value $0.10; 4,000,000 shares authorized, and no
                      shares issued
                      and outstanding
                
                
                –
                
                
                
                –Common
                      stock, par value $0.01; 187,000,000 shares authorized, and
                      shares issued
                      and outstanding 121,995,835 and 99,108,039 at September 30,
                      2007 and 2006,
                      respectively
                
                
                1,219,959
                
                
                
                991,081Additional
                      paid-in capital
                
                
                22,693,696
                
                
                
                22,405,152Accumulated
                      deficit
                
                
                (25,241,477
                )
                
                
                (24,795,755
                )Total
                      shareholders’ deficit
                
                
                (1,327,822
                )
                
                
                (1,399,522
                )Total
                      liabilities and shareholder’s deficit
                
                $
                132,833
                
                
                $
                219,624
  *See
          accompanying notes to*
 *financial
          statements, which are an integral part of the financial
          statements*
 F-4
 **Table
                of Contents**
 **Index
                to Financial
                Statements**
  **NATIONAL
        SCIENTIFIC CORPORATION**
  **STATEMENTS
          OF OPERATIONS**
 **For
          the Years Ended September
          30, 2007 and 2006**
  **2007**
                
                
                **2006**Revenues
                
                $
                624,793
                
                
                $
                227,251Cost
                      of Sales
                
                
                317,606
                
                
                
                123,689Gross
                      profit
                
                
                307,187
                
                
                
                103,562Costs
                      and expensesSalaries
                      and benefits
                
                
                248,659
                
                
                
                258,977Research
                      and development
                
                
                169,960
                
                
                
                185,638Stock
                      compensation
                
                
                22,371
                
                
                
                14,946Other
                
                
                166,134
                
                
                
                183,726Inventory
                      obsolescence charge
                
                
                –
                
                
                
                17,827Total
                      costs and expenses
                
                
                607,124
                
                
                
                661,114Loss
                      from operations
                
                
                (299,937
                )
                
                
                (557,552
                )Other
                      income (expense)Other
                      income
                
                
                25,740
                
                
                
                –Interest
                      expense
                
                
                (166,725
                )
                
                
                (94,241
                )Amortization
                      of deferred offering costs
                
                
                (4,800
                )
                
                
                (4,400
                )Impairment
                      of investment
                
                
                –
                
                
                
                (289,100
                ))(145,785
                )
                
                
                (387,741
                )Loss
                      before income taxes
                
                
                (445,722
                )
                
                
                (945,293
                )Income
                      tax expense
                
                
                –
                
                
                
                –Net
                      loss
                
                $
                (445,722
                )
                
                $
                (945,293
                )Net
                      loss per common share, basic and diluted
                
                $
                (0.00
                )
                
                $
                (0.01
                )Weighted
                      average number of shares outstanding
                
                
                107,777,861
                
                
                
                96,754,136
  *See
          accompanying notes to*
 *financial
          statements, which are an integral part of the financial
          statements*
 F-5
 **Table
                of Contents**
 **Index
                to Financial
                Statements**
  **NATIONAL
        SCIENTIFIC
        CORPORATION**
  **STATEMENTS
          OF CHANGES IN SHAREHOLDERS’ DEFICIT**
 **For
          the Year Ended September 30, 2007 and 2006**
 **Common
                      Stock****Number
                      of**
                    **Shares**
                  
                  **Par
                      Value**
                  
                  **Additional**
                    **Paid-In**
                    **Capital**
                  
                  **Accumulated**
                    **Deficit**
                  
                  **Total**Balance
                      at September 30, 2006
                  
                  
                  99,108,039
                  
                  $
                  991,081
                  
                  $
                  22,405,152
                  
                  $
                  (24,795,755
                  )
                  $
                  (1,399,522
                  )Stock
                      issued for servicesPrice
                      per share:$0.0385
                  
                  
                  25,974
                  
                  
                  260
                  
                  
                  740
                  
                  
                  –
                  
                  
                  1,000$0.0254
                  
                  
                  78,740
                  
                  
                  787
                  
                  
                  1,213
                  
                  
                  –
                  
                  
                  2,000$0.0288
                  
                  
                  34,722
                  
                  
                  347
                  
                  
                  653
                  
                  
                  –
                  
                  
                  1,000Stock
                      options granted
                  
                  
                  –
                  
                  
                  –
                  
                  
                  11,898
                  
                  
                  –
                  
                  
                  11,898Warrants
                      extended by one year
                  
                  
                  –
                  
                  
                  –
                  
                  
                  6,473
                  
                  
                  –
                  
                  
                  6,473Warrants
                      issued with debt
                  
                  
                  –
                  
                  
                  –
                  
                  
                  871
                  
                  
                  –
                  
                  
                  871Stock
                      issued in exchange of accrued expenses for:$0.035
                  
                  
                  714,286
                  
                  
                  7,143
                  
                  
                  17,857
                  
                  
                  –
                  
                  
                  25,000$0.030
                  
                  
                  666,667
                  
                  
                  6,667
                  
                  
                  13,333
                  
                  
                  –
                  
                  
                  20,000$0.020
                  
                  
                  10,134,047
                  
                  
                  101,340
                  
                  
                  101,340
                  
                  
                  –
                  
                  
                  202,680$0.015
                  
                  
                  700,000
                  
                  
                  7,000
                  
                  
                  3,500
                  
                  
                  –
                  
                  
                  10,500Private
                      placement of stockShares
                      issued for:$0.02
                  
                  
                  8,000,000
                  
                  
                  80,000
                  
                  
                  80,000
                  
                  
                  –
                  
                  
                  160,000$0.03
                  
                  
                  333,360
                  
                  
                  3,334
                  
                  
                  6,666
                  
                  
                  –
                  
                  
                  10,000Stock
                      issued to settle dispute regarding timing of interest payment
                      on
                      note
                  
                  
                  2,200,000
                  
                  
                  22,000
                  
                  
                  44,000
                  
                  
                  –
                  
                  
                  66,000Net
                      loss for the year ended September 30, 2007
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  (445,722
                  )
                  
                  (445,722
                  )Balance
                      at  September 30, 2007
                  
                  
                  121,995,835
                  
                  $
                  1,219,959
                  
                  $
                  22,693,696
                  
                  $
                  (25,241,477
                  )
                  $
                  (1,327,822
                  )
  *See
            accompanying notes to*
 *financial
            statements, which are an integral part of the financial
            statements*
 F-6
 **Table
                of Contents**
 **Index
                to Financial
                Statements**
  **NATIONAL
        SCIENTIFIC CORPORATION**
  **STATEMENTS
            OF CHANGES IN SHAREHOLDERS’ DEFICIT**
 **For
            the Year Ended September 30, 2007 and 2006**
 
 **Common
                      Stock**
                  
                  **Preferred
                      Stock****Number
                      of Shares**
                  
                  **Par
                      Value**
                  
                  **Number
                      of Shares**
                  
                  **Par
                      Value**
                  
                  **Additional**
                    **Paid-In**
                    **Capital**
                  
                  **Accumulated
                      Deficit**
                  
                  **Total**Balance,
                      September 30, 2005
                  
                  
                  94,095,459
                  
                  $
                  940,955
                  
                  
                  –
                  
                  $
                  –
                  
                  $
                  22,248,814
                  
                  $
                  (23,850,462
                  )
                  $
                  (660,693
                  )Stock
                      issued for servicesPrice
                      per share ranged:$0.0480
                  
                  
                  18,744
                  
                  
                  187
                  
                  
                  –
                  
                  
                  –
                  
                  
                  712
                  
                  
                  –
                  
                  
                  899$0.0382
                  
                  
                  23,585
                  
                  
                  236
                  
                  
                  –
                  
                  
                  –
                  
                  
                  664
                  
                  
                  –
                  
                  
                  900$0.0380
                  
                  
                  47,393
                  
                  
                  474
                  
                  
                  –
                  
                  
                  –
                  
                  
                  1,326
                  
                  
                  –
                  
                  
                  1,800Issuance
                      of common stock accounted for as debt discount and beneficial
                      conversion
                      feature
                  
                  
                  1,200,000
                  
                  
                  12,000
                  
                  
                  –
                  
                  
                  –
                  
                  
                  49,533
                  
                  
                  –
                  
                  
                  61,533Issuance
                      of common stock in exchange for accounts payable and accrued
                      expensesShares
                      issued for:$0.036
                  
                  
                  500,000
                  
                  
                  5,000
                  
                  
                  –
                  
                  
                  –
                  
                  
                  13,000
                  
                  
                  –
                  
                  
                  18,000$0.035
                  
                  
                  430,000
                  
                  
                  4,300
                  
                  
                  –
                  
                  
                  –
                  
                  
                  10,750
                  
                  
                  –
                  
                  
                  15,050$0.032
                  
                  
                  500,000
                  
                  
                  5,000
                  
                  
                  –
                  
                  
                  –
                  
                  
                  11,000
                  
                  
                  –
                  
                  
                  16,000$0.035
                  
                  
                  1,150,000
                  
                  
                  11,500
                  
                  
                  –
                  
                  
                  –
                  
                  
                  28,750
                  
                  
                  –
                  
                  
                  40,250Private
                      placement of common stockShares
                      issued for:$0.0175
                  
                  
                  1,142,858
                  
                  
                  11,429
                  
                  
                  –
                  
                  
                  –
                  
                  
                  8,571
                  
                  
                  –
                  
                  
                  20,000Common
                      stock options issued, net
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  11,346
                  
                  
                  –
                  
                  
                  11,346Warrants
                      issued with debt
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  20,686
                  
                  
                  –
                  
                  
                  20,686Net
                      loss
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  (945,293
                  )
                  
                  (945,293)Balance,
                      September 30, 2006
                  
                  
                  99,108,039
                  
                  $
                  991,081
                  
                  
                  –
                  
                  $
                  –
                  
                  $
                  22,405,152
                  
                  $
                  (24,795,755
                  )
                  $
                  (1,399,522
                  )
 
 *See
            accompanying notes to*
 *financial
            statements, which are an integral part of the financial
            statements*
 F-7
 **Table
                  of Contents**
 **Index
                  to Financial
                  Statements**
 **NATIONAL
        SCIENTIFIC CORPORATION**
  **STATEMENTS
          OF CASH FLOWS**
 **For
          the Years Ended September 30, 2007 and 2006**
 
 **2007**
                
                
                **2006**Cash
                    flows from operating activities:Net
                      loss
                
                $
                (445,722
                )
                
                $
                (945,293
                )Adjustments
                      to reconcile net loss to net cash used in operating
                      activities:Non
                      cash transactionsDepreciation
                
                
                415
                
                
                
                6,643Stock
                      and options issued for services, net
                
                
                15,898
                
                
                
                14,945Impairment
                      of inventory
                
                
                –
                
                
                
                17,827Impairment
                      of investment
                
                
                –
                
                
                
                289,100Stock
                      issued to settle a dispute
                
                
                66,000
                
                
                
                –Warrant
                      expense
                
                
                7,344
                
                
                
                20,686Amortization
                      of deferred offering costs
                
                
                4,800
                
                
                
                4,400Amortization
                      of debt discount
                
                
                10,320
                
                
                
                9,460Amortization
                      of beneficial conversion feature
                
                
                1,987
                
                
                
                1,821Increase
                      in inventory
                
                
                (16,880
                )
                
                
                (112
                )Decrease
                      (increase) in receivables
                
                
                135,282
                
                
                
                (131,530
                )Decrease  (increase)
                      in other assets and deposits
                
                
                5,162
                
                
                
                (5,502
                )Increase
                      in accounts payable and accrued expenses
                
                
                239,380
                
                
                
                411,213Net
                      cash used in operating activities
                
                
                23,986
                
                
                
                (306,342
                )Cash
                      flows from financing activities:Increase
                      in notes payable
                
                
                34,025
                
                
                
                265,125Repayment
                      of notes payable
                
                
                (24,025
                )
                
                
                (16,900
                )Net
                      proceeds from factors
                
                
                (101,798
                )
                
                
                104,400Payment
                      of financing activities
                
                
                –
                
                
                
                (24,000
                )Proceeds
                      from issuance of common stock
                
                
                109,800
                
                
                
                20,000Net
                      cash provided by financing activities
                
                
                18,002
                
                
                
                348,625
 Net
                      (decrease) increase in cash and cash equivalents
                
                
                41,988
                
                
                
                42,283Cash
                      and cash equivalents, beginning of year
                
                
                43,899
                
                
                
                1,616Cash
                      and cash equivalents, end of year
                
                $
                85,887
                
                
                $
                43,899Supplementary
                      Disclosure of Cash Flow InformationCash
                    paid for interest
                
                $
                33,040
                
                
                $
                8,609Non-cash
                    investing and financing activities:Conversion
                    of accounts payable and accrued payroll to equity
                
                $
                258,180
                
                
                $
                89,300Conversion
                    of debt to equity
                
                $
                60,200
                
                
                $
                –Debt
                    discount and beneficial conversion feature
                
                $
                –
                
                
                $
                61,533
  *See
          accompanying notes to*
 *financial
          statements, which are an integral part of the financial
          statements*
 F-8
 **Table
                of Contents**
 **Index
                to Financial
                Statements**
 **NATIONAL
        SCIENTIFIC CORPORATION**
 **STATEMENTS
            OF CASH FLOWS (Continued)**
 **For
            the Years Ended September 30, 2007 and 2006**
 
 
 **Summary
            of Non-Cash Investing and Financing Activities**
 
 During
            the year ended September 30, 2006, the Company issued 2,580,000 of our
            restricted common shares to management, at closing prices ranging from
            $0.032 to
            $0.036 in exchange for their partial forgiveness of the Company’s back pay
            indebtedness of $89,300 to them.
  In
            February 2007, the Company commenced a private offering of restricted
            common
            stock and common stock purchase warrants. During the period ended March
            31,
            2007, the Company raised $170,000 consisting of $109,800 in cash and
            $60,200 in
            debt forgiveness and issued 8,333,360 shares of restricted common stock
            and
            granted 2,720,000 warrants to purchase common stock at an exercise price
            of
            between $0.08 and $0.30 per share. 8,000,000 shares were issued at an
            average
            market price of $0.02 per share and 333,360 shares were issued at an
            average
            market price of $0.02 per share. No underwriters were involved in connection
            with this private placement. The sales and issuances of the securities
            issued
            pursuant to the foregoing private placement are exempt from registration
            under
            the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof,
            and
            Rule 506 of Regulation D.
 
 During
            the year ended September 30, 2007, the Company issued 12,215,000 of our
            restricted common shares to management and staff, at closing prices ranging
            from
            $0.015 to $0.035 in exchange for their partial forgiveness of the Company’s back
            pay indebtedness of $258,180 to them.
  
 *See
            accompanying notes to*
 *financial
            statements, which are an integral part of the financial
            statements*
 F-9
 **Table
              of Contents**
 **Index
              to Financial
              Statements**
  **NATIONAL
        SCIENTIFIC CORPORATION**
  **NOTES
        TO FINANCIAL STATEMENTS**
 **For
        the Years Ended September 30, 2007 and 2006**
   **1.**
              **Summary
                  of Significant Accounting
                  Policies**
  The
          following is a summary of the significant accounting policies followed
          by
          National Scientific Corporation (the “Company” or “us”). The policies conform to
          accounting principles generally accepted in the United States of America,
          which
          require management to make estimates and assumptions that affect the reported
          amounts of assets and liabilities and disclosure of contingent assets and
          liabilities at the date of the financial statements and the reported amounts
          of
          revenues and expenses during the reporting period. Actual results could
          differ
          from those estimates.
  *Operations:*
 
 The
          Company was incorporated in Texas on June 22, 1953 as American Mortgage
          Company.
          On May 16, 1996, the Company changed its name to National Scientific
          Corporation. During 1996, the Company acquired the operations of Eden Systems,
          Inc. (Eden) as a wholly owned subsidiary. Eden was engaged in water treatment
          and the retailing of cleaning products. Eden’s operations were sold on October
          1, 1997. From September 30, 1997 through the year ended September 30, 2001,
          we
          aimed our efforts in the research and development of semiconductor proprietary
          technology and processes and in raising capital to fund its operations
          and
          research. Beginning in calendar 2002, we focused our efforts on the development,
          acquisition, enhancement and marketing of location device technologies.
          Our
          revenue is derived from sales of electronic devices, recognized as the
          product
          is delivered.
 
 *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 required and 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. 
 F-10
 **Table
                  of Contents**
 **Index
                  to Financial
                  Statements**
 
 **NATIONAL
            SCIENTIFIC CORPORATION**
 
 **NOTES
            TO FINANCIAL STATEMENTS**
 **For
            the Years Ended September 30, 2007 and 2006**
 
 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.
  *Cash
            Equivalents:*
 
 Cash
          equivalents include money market accounts and other short-term investments
          with
          an original maturity of three months or less.
 
 *Trade
          Receivables:*
 
 The
          Company provides for potentially
          uncollectible accounts receivable by use of the allowance method. An allowance
          is provided based upon a review of the individual accounts outstanding
          and the
          Company's prior history of uncollectible accounts. A provision for uncollectible
          accounts receivable was not required at September 30, 2007 and 2006. The
          Company
          does not typically require collateral or accrue interest or fees on past
          due
          amounts.
  *Inventory:*
 
 Inventories,
          primarily parts and finished goods, are stated at the lower of cost or
          market
          values. Cost is primarily determined on a FIFO (first-in, first-out)
          basis.
  *Property
            and Equipment:*
 
 Property
          and equipment are recorded at cost and are being depreciated over estimated
          useful lives of five years using the straight-line method.
 F-11
 **Table
                  of Contents**
 **Index
                  to Financial
                  Statements**
 **NATIONAL
            SCIENTIFIC CORPORATION**
 
 **NOTES
            TO FINANCIAL STATEMENTS**
 **For
            the Years Ended September 30, 2007 and 2006**
 *Advertising
          and Promotion Costs:*
 Advertising
          and promotion costs, which totaled $1,648 in 2007 and $2,290 in 2006, are
          expensed as incurred.
  *Stock
            Based Compensation:*
 
 Effective
          October 1, 2006, the Company adopted the fair value recognition provisions
          of
          Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based
          Payment” (“SFAS 123R”), using the modified prospective transition method and
          therefore the Company has not restated its results for prior periods. Under
          this
          transition method, stock-based compensation expense for the year ended
          September
          30, 2007 includes compensation expense for all stock-based compensation
          awards
          granted subsequent to October 1, 2006, based on the grant date fair value
          estimated in accordance with the original provision of Statement of Financial
          Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS
          123”). All stock based compensation awards were fully vested as of September
          30,
          2006. Stock-based compensation expense for all stock-based compensation
          awards
          granted after October 1, 2006 is based on the grant-date fair value estimated
          in
          accordance with the provisions of SFAS 123R.
  We
          estimate fair value using the Black-Scholes option-pricing model. Assumptions
          used to estimate the compensation expense are determined as
          follows:
 ·
                      Expected
                                term is determined using a weighted average of the
                                contractual term and
                                vesting period of the
                                award;
 ·
                      Expected
                              volatility is measured using the average of historical
                              daily changes in
                              the market price of the Company’s common stock over two years prior to the
                              award.;
 ·
                      Risk-free
                                interest rate is equivalent to the implied yield
                                on U.S. Treasury bills
                                with a remaining maturity equal to the expected term
                                of the awards;
                                and,
 ·
                      Forfeitures
                                are based on the history of cancellations of similar
                                awards granted by the
                                Company and management’s analysis of potential
                                forfeitures.
 For
          the
          year ended September 30, 2006, the Company applied the fair value recognition
          provisions of SFAS 123 to stock-based compensation. In March 2005, the
          SEC
          issued Staff Accounting Bulletin No. 107 (“SAB 107”) regarding the SEC’s
          interpretation of SFAS 123R and the valuation of share-based payments for
          public
          companies. The Company has applied the provisions of SAB 107 in its adoption
          of
          SFAS 123R. See Note 3 to the financial statements for a further discussion
          on
          stock-based compensation.
  *Income
            Taxes:*
 
 Income
          taxes are recorded using the
          asset and liability method. Under the asset and liability method, tax assets
          and
          liabilities are recognized for the tax consequences attributable to differences
          between financial statement carrying amounts of existing assets and liabilities
          and their respective tax bases. Future tax assets and liabilities are measured
          using the enacted tax rates expected to apply when the asset is realized
          or the
          liability settled. The effect on future tax assets and liabilities of change
          in
          tax rates is recognized in income in the period that enactment occurs.
          To the
          extent that the Company does not consider it more likely than not that
          a future
          tax asset will be recovered, it provides a valuation allowance against
          the
          excess.
 F-12
 **Table
                  of Contents**
 **Index
                  to Financial
                  Statements**
  **NATIONAL
            SCIENTIFIC CORPORATION**
 
 **NOTES
            TO FINANCIAL STATEMENTS**
 **For
            the Years Ended September 30, 2007 and 2006**
 *Research
            and Development / Patents:*
 
 Both
          research and development and the costs associated with obtaining patents
          and
          product development have been expensed as incurred. Patent costs are expensed,
          since the Company has not yet developed products, which have gained market
          acceptance.
  *Off-Balance
          Sheet Arrangements:*
  The
          company has no off-balance sheet arrangements that have or are reasonably
          likely
          to have a current or future effect on the Company’s financial condition, changes
          in financial condition, revenues or expenses, results of operations, liquidity,
          capital expenditures or capital resources that is material to
          investors.
 
 *Recent
          Accounting Pronouncements:*
  In
          June 2006, the FASB issued FASB
          Interpretation No. 48, “An Interpretation of FASB Statement No. 109,” which
          clarifies the accounting for uncertainty in income taxes recognized in
          a
          company’s financial statements in accordance with FASB Statement No. 109,
“Accounting for Income Taxes.” This Interpretation prescribes a recognition
          threshold and measurement attribute for the financial statement recognition
          and
          measurement of a tax position taken or expected to be taken in a tax return.
          FIN
          No. 48 reflects the benefit recognition approach, where a tax benefit is
          recognized when it is “more likely than not” to be sustained based on the
          technical merits of the position. This Interpretation is effective for
          fiscal
          years beginning after December 15, 2006. We do not expect FIN No. 48 will
          have a
          material effect on our financial statements.
  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.
  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
          management is in the process of evaluating the impact SFAS 160 will have
          on the
          Company’s financial statements upon adoption. 
 F-13
 **Table
                  of Contents**
 **Index
                  to Financial
                  Statements**
 **NATIONAL
            SCIENTIFIC CORPORATION**
 
 **NOTES
            TO FINANCIAL STATEMENTS**
 **For
            the Years Ended September 30, 2007 and 2006**
  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 management is in the process of evaluating the impact SFAS 141
          (Revised) will have on the Company’s financial statements upon
          adoption.
  
 **2.**
                **Trade
                    Receivables**
 
 Trade
          receivables are net of reserves:
 
 **2007**
                
                
                **2006**Trade
                      receivables
                
                $
                6,216
                
                
                $
                141,498Less:
                      reserves
                
                
                –
                
                
                
                –$
                6,216
                
                
                $
                141,498
 
 On
          September 7, 2005, we entered into a factoring agreement with United Capital
          Funding (UCF) of Florida. UCF is a specialized financial services firm
          offering
          Accounts Receivable Management and working capital funding via factoring.
          We
          expect to improve our cash flow with this arrangement.
 
 Under
          the
          arrangement, we sell to UCF as absolute owner, invoices that we submit
          to UCF to
          be factored. Upon purchase, UCF assumes the risk of non-payment on purchased
          invoices, so long as the cause of non-payment is solely due to the occurrence
          of
          an insolvency event. As collateral securing the obligations, we grant UCF
          a
          continuing first priority security interest in all accounts and related
          inventory. Notwithstanding the creation of the above security interest,
          our
          relationship with UCF is one of Seller and Purchaser of accounts, and not
          that
          of lender and borrower. However, as there is certain recourse for non-payment,
          the accounts receivable are recorded at the estimated realizable value,
          net of
          allowances and the net advanced amount from UCF is recorded as an
 obligation
          at  the end of fiscal 2007 and 2006. The initial and periodic
          factoring fee is .45% of the face amount of factored invoices. The factoring
          period is five days and the purchase price is 80% of the face amount, excluding
          sales tax.
 
 UCF
          typically advances to us 80% of the total amount of invoices factored,
          excluding
          sales tax. UCF retains 20% of the outstanding factored invoices as a reserve,
          which it holds until the customer pays the factored invoice to UCF.
 
 As
          of
          September 30, 2007, Trade Receivables of $6,216 included factored invoices
          totaling $3,470. As of September 30, 2006, Trade Receivables of $141,498
          included factored invoices totaling $140,875.
 F-14
 **Table
                  of Contents**
 **Index
                  to Financial
                  Statements**
 **NATIONAL
            SCIENTIFIC CORPORATION**
 
 **NOTES
            TO FINANCIAL STATEMENTS**
 **For
            the Years Ended September 30, 2007 and 2006**
 **3.**
                **Property
                    and
                    Equipment**
 
 Property
          and equipment consists of the following at September 30, 2007 and
          2006:
 
 **2007**
                
                
                **2006**Computer
                      equipment
                
                $
                2,074
                
                
                $
                2,074Total
                      property and equipment
                
                
                2,074
                
                
                
                2,074Less:
                      accumulated depreciation
                
                
                (1,452
                )
                
                
                (1,037
                )Net
                      property and equipment
                
                $
                622
                
                
                $
                1,037
 
 Fully
          depreciated Computer equipment and Office furniture of $58,806 and $12,507
          respectively, no longer in service were deleted in fiscal 2006.
 
 Depreciation
          expense for the years ended September 30, 2007 and 2006 was $415 and $6,643
          respectively.
 
 **4.**
                **Inventory,
                    net**
 
 Inventory,
          net consists of the following at September 30, 2007 and 2006:
 
 **2007**
                
                
                **2006**Inventory,
                      gross
                
                $
                22,900
                
                
                $
                70,622Less:
                      reserve for obsolescence
                
                
                –
                
                
                
                (64,602
                )Inventory,
                      net
                
                $
                22,900
                
                
                $
                6,020
 
 We
          marked
          down our inventory of Gotcha!® products, during the year ended September 30,
          2006 by $17,627, for estimated obsolescence based on assumptions about
          age of
          the inventory and current demand. Our inventory of Gotcha!® products was fully
          written off against the reserve of $64,602 in fiscal 2007. 
 F-15
 **Table
                  of Contents**
 **Index
                  to Financial
                  Statements**
 **NATIONAL
            SCIENTIFIC CORPORATION**
 
 **NOTES
            TO FINANCIAL STATEMENTS**
 **For
            the Years Ended September 30, 2007 and 2006**
 **5.**
                  **Investment**
  On
            January 28, 2005, the Company entered into a securities exchange agreement
            with
            TurboWorx, Inc., a Delaware corporation (“Turbo”) that provided for the exchange
            of 360,000 shares of the common stock of Turbo plus $240,000 in cash
            in exchange
            for 7,150,000 shares of NSC Common Stock (the “Exchange”). NSC and Turbo
            consummated the Exchange on February 1, 2005. The total value of the
            transaction
            of $620,444 was determined by the $240,000 cash paid to the Company,
            plus the
            then current market price of the Company’s common stock of $.074, plus the total
            fee of $91,344 charged by Casimir Capital, L.P. (“Casimir”) the placement agent.
            Casimir’s fee consisted of cash consideration of $25,000 and $66,344 that was
            determined to be the value of the 800,000 warrants, issued to the placement
            agent, with an exercise price of $0.11 at date of issue. Since Turbo’s common
            stock was not listed on any stock exchange or the Over the Counter Bulletin
            Board, the Company recorded the Investment of 360,000 Turbo shares at
            its net
            cost, the average market price of the 7,150,000 shares issued to Turbo
            less the
            cash received from Turbo. The consideration paid to Casimir did not increase
            the
            fair value of the investment and therefore, resulted in an impairment
            write-down
            of $91,344 in fiscal year 2005. The Company’s investment in these equity
            securities was carried at $289,100 at September 30, 2005, which included
            an
            impairment charge of $91,344 in fiscal 2005. The Company regularly monitored
            this investment for impairment in the carrying value, and as a result
            of this
            monitoring, we determined in September 2006 that it was appropriate to
            impair
            this investment up to its full value, $289,100, due to serious financial
            distress we believe is happening at TurboWorx, which has now entered
            a Chapter
            11 bankruptcy.
  The
            Company intended to distribute at least 180,000 of the shares of Turbo
            stock it
            received in the Exchange to NSC shareholders of record on a pro rata
            basis as
            soon as practicable after the effective date of a registration statement
            on Form
            SB-2 registering the Turbo shares to be distributed to NSC shareholders.
            Turbo
            agreed to file such registration statement, and agreed to use its best
            efforts
            to have such filed registration statement declared effective no later
            than 90
            days following the filing date. Turbo filed the SB-2 registration statement
            with
            the Securities and Exchange Commission on June 6, 2005. Turbo filed an
            amendment
            to the SB-2 registration statement with the Securities and Exchange Commission
            on October 12, 2005. When the registration becomes effective, NSC planned
            to
            announce the distribution. The parties also granted each other certain
            “piggyback” registration rights regarding the exchanged shares. The registration
            rights terminate on December 31, 2007. The exchange is a further development
            resulting from the Memorandum of Understanding entered into between NSC
            and
            Turbo on October 29, 2004 regarding the joint development of technology
            and
            joint marketing. However, TurboWorx withdrew its SB-2 registration statement
            in
            June 2006, and has not re-filed it since that time. We determined that
            as of
            September 30, 2006, TurboWorx is not likely to complete this registration
            statement, and thus may be in breach of its Exchange agreement. As a
            result, we
            do not consider a distribution of Turbo shares at this point to be a
            likely
            result. As of the date of this report, the TurboWorx Chapter 11 bankruptcy
            case
            remains active.
 
 During
          the year ended September 30, 2006, NSC continued discussions with Turbo
          concerning their delinquency in obtaining an effective registration. Turbo
          withdrew their then-current SB-2 filing in May 2006. NSC is uncertain as
          to the
          direction Turbo will take, but now believes that Turbo may be in breach
          of the
          Share Exchange Agreement, and we have therefore started legal proceedings
          to
          recover our shares from them, and return to Turbo its common
          stock.   This action is expected to not advance unless and until
          the Chapter 11 process is completed. 
 F-16
 **Table
                  of Contents**
 **Index
                  to Financial
                  Statements**
 **NATIONAL
            SCIENTIFIC CORPORATION**
 
 **NOTES
            TO FINANCIAL STATEMENTS**
 **For
            the Years Ended September 30, 2007 and 2006**
 **6.**
                  **Accrued
                      Expenses**
 
 Accrued
          Expenses consisted of the following at September 30, 2007and2006**:**
  **2007**
                
                
                **2006**Salaries
                    & vacation pay - current management and staff
                
                $
                575,727
                
                
                $
                585,678Salaries
                    & vacation pay - former employee
                
                
                29,375
                
                
                
                29,375Payroll
                    taxes for back pay
                
                
                40,781
                
                
                
                37,342Interest
                
                
                156,271
                
                
                
                101,698Employee
                    stock retainage pool
                
                
                50,250
                
                
                
                50,250Other
                    liabilities
                
                
                30,996
                
                
                
                44,103$
                883,400
                
                
                $
                848,446
 
 
 **7.**
                **Earnings
                    Per
                    Share**
 
 The
          following table reconciles weighted average shares outstanding to amounts
          used
          to calculate basic and diluted earnings per share for fiscal years 2007
          and
          2006.
 
 **2007**
                
                
                **2006**Net
                      (loss)
                
                $
                (445,722
                )
                
                $
                (945,293
                )Weighted
                      average shares:Average
                      shares outstanding
                
                
                107,777,861
                
                
                
                96,754,136Effect
                      of diluted shares
                
                
                –
                
                
                
                –Average
                      Shares outstanding, adjusted for dilutive effect
                
                
                107,777,861
                
                
                
                96,754,136(Loss)
                      per share – basic
                
                $
                (0.00
                )
                
                $
                (0.01
                )(Loss)
                      per share – diluted
                
                $
                (0.00
                )
                
                $
                (0.01
                )
 F-17
 **Table
                  of Contents**
 **Index
                  to Financial
                  Statements**
 **NATIONAL
            SCIENTIFIC CORPORATION**
 
 **NOTES
            TO FINANCIAL STATEMENTS**
 **For
            the Years Ended September 30, 2007 and 2006**
 Incremental
          common shares (not included in denominator of diluted earnings per share
          because
          of their anti-dilutive nature):
 
 **2007**
                
                
                **2006**Options
                
                
                4,786,756
                
                
                
                4,159,938Warrants
                
                
                17,714,197
                
                
                
                15,384,197Potential
                      common equivalents
                
                
                22,500,953
                
                
                
                19,544,135
  
 **8.**
                **Lease
                    Commitments**
 
 On
          August
          27, 2004 the Company signed a twenty-six month non-cancelable operating
          lease
          agreement for an office in Scottsdale,  Arizona . The lease for the
          Scottsdale facility expired October 31, 2006. On October 20, 2006 NSC executed
          a
          lease for 1,601 square feet of office/warehouse space at 8361 E. Evans
          Road,
          Suite 106 Scottsdale, Arizona 85260. The lease for this Scottsdale
          facility commenced on November 1, 2006 and expires October 31, 2008 and
          is at a
          base rental rate of $1,963 per month for the first twelve months and $
          2,028 per
          month for the final twelve months.
 
 Future
          minimum lease obligations at September 30, 2007 are as follows:
 
 **Year
                    ending September 30,**
                
                **Amount**2008
                
                
                24,2702009
                
                
                2,028$
                26,298
 
 Rent
          expense for the years ended September 30, 2007 and 2006 was approximately
          $25,000 and $39,000, respectively. 
 F-18
 **Table
                  of Contents**
 **Index
                  to Financial
                  Statements**
 **NATIONAL
            SCIENTIFIC CORPORATION**
 
 **NOTES
            TO FINANCIAL STATEMENTS**
 **For
            the Years Ended September 30, 2007 and 2006**
 
 **9.**
                **Income
                    Taxes**
 
 Deferred
          income taxes consist of the following at September 30, 2007 and
          2006:
 
 **2007**
                
                
                **2006**Tax
                      benefit of net operating loss carry-forwards
                
                $
                6,795,000
                
                
                $
                6,600,000Impairment
                      reserve
                
                
                –
                
                
                
                159,000Compensation
                      payable
                
                
                44,000
                
                
                
                36,000Allowance
                      for doubtful accounts
                
                
                –
                
                
                
                -Total
                
                
                6,839,000
                
                
                
                6,795,000Less:
                      Valuation allowance
                
                
                (6,839,000
                )
                
                
                (6,795,000
                )$
                –
                
                
                $
                –
 
 A
          reconciliation of expected to actual taxes follows:
 
 **2007**
                
                
                **2006**Expected
                      federal and state tax recovery at 40%
                
                $
                (178,000
                )
                
                $
                (378,000
                )Non-deductible
                      stock compensation
                
                
                –
                
                
                
                –Other
                
                
                –
                
                
                
                9,000(178,000
                )
                
                
                (369,000
                )Tax
                      benefits not realized - valuation allowance
                
                
                178,000
                
                
                
                369,000Realized
                      tax benefit
                
                $
                –
                
                
                $
                –
 
 The
          Company has recorded valuation allowances to offset the value of deferred
          tax
          assets, since it has recorded losses from operations since 1996 and the
          utilization of those assets is uncertain. During fiscal 2007 and 2006,
          the
          valuation allowance increased by $178,000 and $369,000, respectively.
 The
          Company has the following net operating loss carry-forwards at September
          30,
          2007 and 2006, which may be used to offset future federal taxable income
          through
          2026 and 2025 respectively, and state taxable income through 2012 and 2011
          respectively:
 
 **2007**
                
                
                **2006**Loss
                    carry forwards
                
                $
                16,900,000
                
                
                $
                16,500,000
 F-19
 **Table
                  of Contents**
 **Index
                  to Financial
                  Statements**
 **NATIONAL
          SCIENTIFIC CORPORATION**
 
 **NOTES
          TO FINANCIAL STATEMENTS**
 **For
          the Years Ended September 30, 2007 and 2006**
  
 **10.**
                **Related
                    Party
                    Transactions**
 
 As
          described in the Company’s 10-KSB filing for the year ending September 30, 2003,
          and also in the Company’s Proxy Statement for 2004 filed January 30, 2004, the
          Company’s Board initiated on September 30, 2002 a restricted Employee Stock
          Retainage Plan (See Employee Stock Retainage Plan above) to retain key
          staff
          during a period of financial difficulty. The Company allocated approximately
          $150,000 in restricted Common Stock from this pool of shares in fiscal
          2002, to
          be granted to key employees during the year, subject to the Company exceeding
          sales growth objectives and expense reduction objectives in 2003. Failure
          to
          meet these objectives under the plan would result in the forfeiture by
          staff of
          this entire stock grant by all participants, unless new objectives are
          approved
          by the board for calendar year 2004, in which case the stock grant would
          remain
          with the participants but be subject to forfeiture by participants until
          new
          objectives have been achieved in 2004. All stock grants under this program
          were
          granted in September 2002 but shares were not finally issued until January
          of
          2003. All of the stock under this program is restricted under SEC Section
          144,
          and cannot be traded by the Employee Stock Retainage Plan participants
          for at
          least one year from date of issue. The board extended the program in February
          of
          2005 through to the end of 2006, with targets remaining at the 2005
          levels.  On September 28, 2007, the board extended this program into
          calendar year 2008 with a sales goal of $1M and removed the risk of
          forfeiture.  As of the date of this report this goal had not yet been
          met.
 
 The
          Company CEO, Michael Grollman was granted 750,000 shares of stock from
          the
          Employee Stock Retainage Plan pool of shares, subject to the Company achieving
          in excess of $200,000 in sales in calendar year 2003, and subject to him
          accepting a $60,000 per year pay reduction for the calendar year 2003,
          reducing
          his annual payable salary to $120,000 per year for 2003. Mr. Grollman was
          granted an additional 500,000 shares of stock under this program, subject
          to
          sales exceeding $1,000,000 for calendar year 2003. The Company’s President and
          Director Graham Clark was granted 500,000 shares of stock from the Company’s
          Employee Stock Retainage Plan pool of shares discussed above, subject to
          the
          Company achieving in excess of $200,000 in sales in calendar year 2003.
          Mr.
          Clark was granted an additional 500,000 shares of stock under this program,
          subject to sales exceeding $1,000,000 for calendar year 2003. The plan’s sales
          goals were not met in calendar year 2003, although the plan was nonetheless
          largely successful in assisting to retain key staff, even during this period
          of
          deferred or reduced salary. In January 2004, our board extended this program
          into 2004, and set new sales growth objectives for the year at a level
          50%
          higher than the previous year’s program, giving plan participants an additional
          year to fully earn these previously outstanding restricted stock grants.
          No new
          shares were added to the plan, although plan participants were able to
          convert
          some long-term back pay into restricted stock at that time. The board extended
          the program in February of 2005 through to the end of 2008, with targets
          remaining at the 2005 levels. The majority of the remaining restricted
          stock
          allocated under this program was granted to other Company staff, and is
          subject
          to substantially the same risk of forfeiture as the stock granted to Grollman
          and Clark under the Program.
 
 On
          January 27, 2004, we issued 250,000 shares, from the Employee Stock Retainage
          Plan pool of shares, to our employees Oscar Quadros, our controller, and
          250,000
          shares to Paul Davidson, our embedded systems development engineer. Neither
          of
          these individuals are nor have been officers or directors of the Company.
          The
          500,000 shares were issued from the plan following the forfeiture and return
          to
          the plan on August 19, 2003 of 800,000 shares from a participant of the
          plan who
          left the Company. The shares were issued at 90% of the average market price
          per
          share, on the date of issue, of $0.155.
 
 In
          December 2003 Mr. Grollman agreed to convert approximately $150,000 of
          his back
          pay and accrued vacation pay to our restricted common stock, at a rate
          equal to
          the then currently available private placement share price of $0.10 per
          share.
          Mr. Grollman received this stock in January of 2004. 
 F-20
 **Table
                  of Contents**
 **Index
                  to Financial
                  Statements**
 **NATIONAL
            SCIENTIFIC CORPORATION**
 
 **NOTES
            TO FINANCIAL STATEMENTS**
 **For
            the Years Ended September 30, 2007 and 2006**
 
 In
          December 2004, our Chairman Michael
          Grollman made personal loans to the Company in the amount of $65,000 to
          assist
          us with short-term cash requirements. The loan is evidenced by an unsecured
          promissory note that provides for repayment within 90 days or less, at
          no
          interest. The promissory note also provides that if repayment takes longer
          than
          90 days, then interest accrues at a rate of 6 percent per year until paid
          in
          full. We paid this Note in full in February of 2005.
  On
          February 24, 2005, March 28, 2005, May 2, 2005, and May 27, 2005 our Chairman
          Michael Grollman made new personal loans to the Company totaling $159,000
          to
          assist us with working capital needs. The loans are evidenced by a demand
          note
          that provides for repayment within five business days of a demand notice
          from
          Mr. Grollman, with interest of 6% compounded annually from June 1, 2005.
          During
          the quarter to September 30, 2007, these loans were paid down by $11,000.
          As of
          September 30, 2007, these loans had a balance outstanding of $148,000 and
          the
          interest rate going forward was adjusted to 8% compounded annually from
          October
          1, 2007.
 
 On
          November 23, 2005, Mr. Grollman agreed to convert approximately $18,000
          of our
          accounts payable and accrued expense indebtedness to him to 500,000 shares
          of
          our restricted common stock, at the rate of the average market price per
          share
          of $0.036.
 
 On
          April
          7, 2006, Mr. Grollman agreed to convert approximately $16,000 of his back
          pay to
          500,000 shares of our restricted common stock, at the rate of the average
          market
          price per share of $0.032.
  On
          March
          15, 2006, Mr. Clark agreed to convert approximately $15,050 of his back
          pay to
          430,000 shares of our restricted common stock, at the rate of the average
          market
          price per share of $0.035.
  On
          May
          25, 2006, Mr. Clark agreed to convert approximately $40,250 of his back
          pay to
          1,150,000 shares of our restricted common stock, at the rate of the average
          market price per share of $0.035.
 
 On
          March
          19, 2007, Mr. Grollman agreed to convert approximately $25,000 of his back
          pay
          to 714,286 shares of our restricted common stock, at the rate of the average
          market price per share of $0.035.
 
 On
          March
          23, 2007, Mr. Clark agreed to convert approximately $20,000 of his back
          pay to
          666,667 shares of our restricted common stock, at the rate of the average
          market
          price per share of $0.035.
 
 On
          June
          19, 2007, Mr. Grollman agreed to convert approximately $31,700 of his back
          pay
          to 1,585,714 shares of our restricted common stock, at the rate of the
          average
          market price per share of $0.020.
 
 On
          June
          14, 2007, Mr. Clark agreed to convert approximately $20,000 of his back
          pay to
          1,000,000 share of our restricted common stock, at the rate of the average
          market price per share of $0.020.
  On
          June
          19, 2007, Mr. Clark agreed to convert approximately $7,566 of his back
          pay to
          378,333 shares of our restricted common stock, at the rate of the average
          market
          price per share of $0.020. 
 F-21
 **Table
                  of Contents**
 **Index
                  to Financial
                  Statements**
 **NATIONAL
            SCIENTIFIC CORPORATION**
 
 **NOTES
            TO FINANCIAL STATEMENTS**
 **For
            the Years Ended September 30, 2007 and 2006**
 
 On
          August
          20, 2007, Mr. Grollman agreed to convert approximately $60,000 of his back
          pay
          to 3,000,000 shares of our restricted common stock, at the rate of the
          average
          market price per share of $0.020.
 On
          August
          20, 2007, Mr. Clark agreed to convert approximately $60,000 of his back
          pay to
          3,000,000 shares of our restricted common stock, at the rate of the average
          market price per share of $0.020.
 
 On
          September 20, 2007, ,Mr. Clark agreed to convert approximately $10,500
          of his
          back pay to 700,000 shares of our restricted common stock, at the rate
          of the
          average market price per share of $0.015.
  The
          CEO
          and the President have employment contracts previously filed with the SEC
          that
          include termination clauses that fully vest their ownership of shares.
 
 **11.**
                **Disclosures
                    About Fair Value of
                    Financial
                    Instruments**
 
 Fair
          value estimates are made at a specific point in time and are based on relevant
          market information and information about the financial instrument; they
          are
          subjective in nature and involve uncertainties, matters of judgment and,
          therefore, cannot be determined with precision. These estimates do not
          reflect
          any premium or discount that could result from offering for sale at one
          time the
          Company’s entire holdings of a particular instrument. Changes in assumptions
          could significantly affect the estimates. Since the fair value is estimated
          as
          of September 30, 2007, the amounts that will actually be realized or paid
          at
          settlement of the instruments could be significantly different.
 
 The
          carrying amount of cash and cash equivalents is assumed to be their fair
          value
          because of the liquidity of these instruments. Accounts payable and accrued
          expenses approximate fair value because of the short maturity of these
          instruments. On September 30, 2006, we took an impairment charge of $289,100
          against our investment in TurboWorx, Inc. The Company’s investment in these
          equity securities was carried at $289,100 at September 30, 2005, which
          included
          an impairment charge of $91,344 in fiscal 2005.  The Company regularly
          monitored this investment for impairment in the carrying value, and as
          a result
          of this monitoring; we determined in September 2006 that is was appropriate
          to
          impair this investment up to its full value, due to serious financial distress
          we believe is happening at TurboWorx.
 
 
 **14.**
                **Stock
                    Options and
                    Warrants**
 
 **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. 
 F-22
 **Table
                  of Contents**
 **Index
                  to Financial
                  Statements**
 **NATIONAL
            SCIENTIFIC CORPORATION**
 
 **NOTES
            TO FINANCIAL STATEMENTS**
 **For
            the Years Ended September 30, 2007 and 2006**
 
 The
          Company adopted SFAS 123R using the modified prospective transition method.
          Under this transition method, compensation cost recognized in the year
          ended
          September 30, 2007 includes compensation cost for all share-based payments
          granted subsequent to October 1, 2006, based on the grant-date fair value
          estimated in accordance with the provisions of SFAS 123R. All stock based
          compensation awards were fully vested as of October 1, 2006; therefore,
          the
          results for prior periods have not been restated.
 
 As
          of
          September 30, 2007, we have a stock-based compensation plan initially adopted
          in
          2000 wherein officers and employees were granted stock options. Under the
          2000
          Stock Option Plan, the purchase price must be at least 100% of the fair
          market
          value of our common stock (if the option is an incentive stock option),
          or at
          least 25% of the fair market value of our common stock at the time the
          option is
          granted (if the option is a nonqualified grant), or such higher price as
          may be
          determined by the Board of Directors at the time of grant. If however,
          an
          incentive stock option is granted to an individual who would, immediately
          before
          the grant, directly or indirectly own more than 10% of the total combined
          voting
          power of all our classes of stock, the purchase price of the shares of
          common
          stock covered by such incentive stock option may not be less than 110%
          of the
          fair market value of such shares on the day the incentive stock option
          is
          granted. As the price of the Company’s common stock is currently quoted on the
          OTC Bulletin Board, the fair market value of the common stock underlying
          options
          granted under the 2000 Stock Option Plan shall be the last closing sale
          price of
          the common stock on the day the options are granted. If there is no market
          price
          for the common stock, then our Board of Directors may, after taking all
          relevant
          facts into consideration, determine the fair market value of our common
          stock.
 
 Our
          board
          of directors adopted the 2000 Stock Option Plan effective January 1, 2001.
          Our
          stockholders formally approved the 2000 Stock Option Plan on February 14,
          2001.
 
 As
          of
          September 30, 2007, we have issued options to purchase an aggregate of
          4,786,756
          shares of our common stock, under the plan, leaving a balance of 2,213,244
          available for grant. Also as of September 30, 2007, 4,786,756 options are
          exercisable and, 4,786,756 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. 
 F-23
 **Table
                  of Contents**
 **Index
                  to Financial
                  Statements**
 
 **NATIONAL
          SCIENTIFIC CORPORATION**
 
 **NOTES
          TO FINANCIAL STATEMENTS**
 **For
          the Years Ended September 30, 2007 and 2006**
 
 
 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 years ended September 30, 2007
          and  2006:
 
 **2007**
                
                **2006**Risk
                    - free interest rate
                
                4.23%
                    to 5.16%
                
                4.55%
                    to 5.04%Expected
                    life ( years)
                
                5
                    to 10
                
                10Expected
                    volatility
                
                91.4%
                    to 187.7%
                
                80.7%
                    to 88.7%Expected
                    dividends
                
                None
                
                NoneForfeitures
                    assumed
                
                None
                
                NoneWeighted
                    average grant date fair value
                
                $0.02
                
                $0.03
 
 The
          following table summarizes the stock option activity during fiscal
          2007:
 
 **Weighted**
                
                
                **Weighted
                    Average****Number**
                
                
                **Average**
                
                
                **Remaining**
                
                
                **Aggregate****of**
                
                
                **Exercise**
                
                
                **Contractual**
                
                
                **Intrinsic****Shares**
                
                
                **Price**
                
                
                **Term
                    (1)**
                
                
                **Value
                    (2)**Options
                  Outstanding, September 30, 2006
                
                
                4,159,938
                
                
                $
                0.74
                
                
                5.80Granted
                
                
                776,818
                
                
                
                0.03Exercised
                
                
                –
                
                
                
                –Forfeited
                    or expired
                
                
                (150,000
                )
                
                
                0.15Options
                  Outstanding,  September 30, 2007
                
                
                4,786,756
                
                
                $
                0.64
                
                
                6.16
                
                
                $
                –Options
                  Exercisable September 30, 2007
                
                
                4,786,756
                
                
                $
                0.64
                
                
                6.16
                
                
                $
                –___________(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 September 30, 2007, for those awards that have
                  an
                  exercise price currently below the closing price as of September
                  30, 2007.
                  Awards with an exercise price above the closing price of $0.011
                  as of
                  September 30, 2007 are considered to have no intrinsic value.
 F-24
 **Table
                  of Contents**
 **Index
                  to Financial
                  Statements**
 **NATIONAL
          SCIENTIFIC CORPORATION**
 
 **NOTES
          TO FINANCIAL STATEMENTS**
 **For
          the Years Ended September 30, 2007 and 2006**
  
 **Warrants**
 
 The
          following assumptions were utilized to value warrants during the fiscal
          years
          ended September 30, 2007 and 2006:
 
 **2007**
                
                **2006**Risk
                    - free interest rate
                
                4.60%
                    to 4.91%
                
                4.86%
                    to 5.04%Expected
                    life ( years)
                
                2
                    to5
                
                3
                    to 5Expected
                    volatility
                
                83.5%
                    to 184.8%
                
                97.1%
                    to 116.1%Expected
                    dividends
                
                None
                
                NoneForfeitures
                    assumed
                
                None
                
                NoneWeighted
                    average grant date fair value
                
                $0.02
                
                $0.03
  The
          following table summarizes the warrant activity during fiscal 2007:
 
 **Weighted**
                
                
                **Weighted
                    Average****Number**
                
                
                **Average**
                
                
                **Remaining**
                
                
                **Aggregate****of**
                
                
                **Exercise**
                
                
                **Contractual**
                
                
                **Intrinsic****Shares**
                
                
                **Price**
                
                
                **Term
                    (1)**
                
                
                **Value
                    (2)**Warrants
                  Outstanding, September 30, 2006
                
                
                15,384,197
                
                
                $
                0.15
                
                
                2.36
                
                
                $Granted
                
                
                3,220,000
                
                
                
                0.12Exercised
                
                
                –
                
                
                
                –Cancelled
                
                
                (890,000
                )
                
                
                0.08Warrants
                  Outstanding,  September 30, 2007
                
                
                17,714,197
                
                
                $
                0.17
                
                
                1.56
                
                
                $
                –____________(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 September 30, 2007, for those awards that
                    have an
                    exercise price currently below the closing price as of September
                    30, 2007.
                    Awards with an exercise price above the closing price of $0.011
                    as of
                    September 30, 2007 are considered to have no intrinsic value.
 F-25
 **Table
                  of Contents**
 **Index
                  to Financial
                  Statements**
 **NATIONAL
          SCIENTIFIC CORPORATION**
 
 **NOTES
          TO FINANCIAL STATEMENTS**
 **For
          the Years Ended September 30, 2007 and 2006**
  
 On
          December 20, 2006 a note for $50,000, maturing on November 6, 2006, was
          extended
          to March 31, 2007. The extension agreement included an extension fee of
          $1,000
          and 500,000 warrants to purchase our common stock at $0.035 at any time
          before
          December 8, 2011. The warrants were determined to have a debt discount
          of
          $9,672. The extension fee of $1,000 and debt discount of $9,672 were fully
          amortized to interest expense in the quarter ended December 31, 2006 as
          they
          were incurred in connection with a short-term loan. On March 9, 2007, as
          part of
          our private placement offering of February 2007, the lender requested to
          exchange the principal amount of the loan of $50,000 for 2,500,000 shares
          of
          restricted common stock and 400,000 warrants to purchase common stock at
          an
          exercise price of $0.08 per share and 400,000 warrants to purchase common
          stock
          at an exercise price of $0.15 per share. The 2,500,000 shares were issued
          at an
          average market price of $0.02 per share. The lender returned 250,000 warrants
          of
          the 500,000 warrants issued as part of the extension agreement of December
          20,
          2006. On March 9, 2007  the fair value of $8,801 for the 250,000
          returned warrants was reversed against interest expense. All interest due
          on the
          loan was fully paid.
 
 In
          February 2007, the Company commenced a private offering of restricted common
          stock and common stock purchase warrants. During the period ended March
          31,
          2007, the Company raised $170,000 consisting of $109,800 in cash and $60,200
          in
          debt forgiveness and issued 8,333,360 shares of restricted common stock
          and
          granted 2,720,000 warrants to purchase common stock at an exercise price
          of
          between $0.08 and $0.30 per share. 8,000,000 shares were issued at an average
          market price of $0.02 per share and 333,360 shares were issued at an average
          market price of $0.03 per share. No underwriters were involved in connection
          with this private placement. The sales and issuances of the securities
          issued
          pursuant to the foregoing private placement are exempt from registration under
          the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof,
          and
          Rule 506 of Regulation D.
  On
          June
          30, 2007, 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, 2007,
          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. Management began to provide notice to warrant holders
          of
          this change in August 2007. The fair value of these warrants, on June 30,
          2007,
          determined to be $6,473 was expensed as stock based compensation.
 
 During
          the year ended September 30, 2007, 640,000 warrants with an exercise price
          of
          $0.13 expired.
 
 No
          share
          purchase warrants have been exercised during fiscal year 2007.
  **15.**
                  **Commitments
                        and
                        Contingencies**
 
 In
          January 2002, the Company initiated legal proceedings against Phoenix
          Semiconductor, Inc. (PSI) for breach of contract. The Company was awarded
          a
          judgment of approximately $179,000 in May 2003 against E4World Corporation.
          However, there is no assurance that NSC will collect any of this amount.
          Since
          collection of this judgment by NSC is uncertain, this positive judgment
          is not
          reflected in NSC’s current financial statements. The Company continues to press
          its claim to secure assets held by E4World in a separate legal matter,
          although
          there is no assurance that NSC will collect this claim, and thus this claim
          is
          not shown in the NSC financial statements. The Company is from time to
          time
          subject to claims and suits arising in the ordinary course of operations.
          In the
          opinion of management, the ultimate resolution of such pending legal proceedings
          will not have a material adverse effect on the Company’s financial position,
          results of operation or liquidity. 
 F-26
 **Table
                  of Contents**
 **Index
                  to Financial
                  Statements**
  **NATIONAL
              SCIENTIFIC CORPORATION**
 
 **NOTES
          TO FINANCIAL STATEMENTS**
 **For
          the Years Ended September 30, 2007 and 2006**
 
 **16.**
                    **Notes
                          Payable and Long Term
                          Debt**
 
 As
          of
          September 30, 3007 and 2006, all long-term debt consisted of the following
          notes
          payable:
  **2007**
                
                
                **2006**Non-interest
                    bearing note payable, due June 2006; unsecured; repayment may
                    be made by
                    the Company with either cash or its restricted common stock or
                    a
                    combination of cash and stock
                
                $
                43,250
                
                
                $
                43,2508%
                    ( 6% in 2006)  note payable to an Officer of the Company;
                    principal and interest payable on demand
                
                
                161,300
                
                
                
                159,000Non-
                    interest bearing note payable; unsecured; payable on
                    demand
                
                
                –
                
                
                
                1,000Non-
                    interest bearing note payable; unsecured; payable on
                    demand
                
                
                –
                
                
                
                1,500Non-
                    interest bearing note payable; unsecured; payable on
                    demand
                
                
                –
                
                
                
                1,00012%
                    note payable; secured;  payable on demand
                
                
                11,625
                
                
                
                16,62512%
                    note payable; secured;  payable on demand
                
                
                20,000
                
                
                
                20,0008%
                    note payable; unsecured; principal payable in full in November
                    2010; with
                    semi-annual
                    interest payments in May and November
                
                
                175,000
                
                
                
                175,00012%
                    note payable; secured;  payable on demand
                
                
                –
                
                
                
                50,0006%
                    note payable; unsecured;  payable on demand
                
                
                6,000
                
                
                
                –417,175
                
                
                
                467,375Less:Current
                    portion of long term debt
                
                
                (242,175
                )
                
                
                (292,375
                )Discount
                
                
                (31,820
                )
                
                
                (42,140
                )Beneficial
                    conversion feature
                
                
                (6,125
                )
                
                
                (8,112
                )Long-term
                    debt, net of current portion
                
                $
                137,055
                
                
                $
                124,748
 
 On
          November 1, 2005, as an important
          phase in the current year’s financing plan, we entered into a financing program
          with aU.S.investment fund. The terms of this
          program include a five-year Note payable at maturity in November 2010 for
          $175,000, at an effective annual interest rate of 8%. Interest is due and
          payable semi-annually on May 1st and November 1st for each year in which
          the
          note is outstanding The transaction also included 1,200,000 restricted
          common
          shares and a conversion/exchange option to convert the principal amount
          and any
          unpaid interest of the Note into common shares at a per share conversion
          price
          of $0.0525. These shares include weighted average anti-dilution provisions,
          as
          well as piggyback registration rights. Additionally, the Note has various
          put
          and call rights, and has a right to early payment under certain conditions
          after
          2 years. The 1,200,000 restricted common shares were recorded at $0.043,
          which
          was the five-day average market closing price of our stock. The note and
          common
          stock were issued with a debt discount of $51,600 and a beneficial conversion
          feature of $9,933. The discount and beneficial conversion feature are being
          amortized to interest expense over the term of the note, which is approximately
          60 months. The issuance of the shares resulted in deferred financing costs
          of
          $24,000. The deferred financing costs are being amortized over term of
          the note,
          which is approximately 60 months, and are included in the statement of
          operations as offering costs. 
 F-27
 **Table
                  of Contents**
 **Index
                  to Financial
                  Statements**
 **NATIONAL
          SCIENTIFIC CORPORATION**
 
 **NOTES
          TO FINANCIAL STATEMENTS**
 **For
          the Years Ended September 30, 2007 and 2006**
  
 On
          February 24, 2005, March 28, 2005, May 2, 2005, and May 27, 2005 our Chairman
          Michael Grollman made new personal loans to the Company totaling $159,000
          to
          assist us with working capital needs. The loans are evidenced by a demand
          note
          that provides for repayment within five business days of a demand notice
          from
          Mr. Grollman, with interest of 6% compounded annually from June 1, 2005.
          These
          loans were secured by an interest in the copyrights in the Company’s iBus
          software and designs.  During the quarter to September 30, 2007, these
          loans were paid down by $11,000. As of September 30, 2007, these loans
          had a
          balance outstanding of $148,000 and the interest rate going forward was
          adjusted
          to 8% compounded annually from October 1, 2007. On
          September 30, 2007, the Company converted unpaid interest of $13,300 on
          demand
          notes payable to Michael Grollman into a new demand note of $13,300 that
          provides for repayment within five business days of a demand notice from
          Mr.
          Grollman, with interest of 8% compounded annually on October 1st.
 
 In
          March
          and April 2006 we secured short-term loans in the aggregate principal amount
          of
          $3,500. The loans are unsecured and non-interest bearing and payable on
          demand.
          These loans were repaid in fiscal 2007.
 
 On
          April
          27, 2006, we secured a short-term loan of $16,625 from a shareholder. The
          loan
          carries an origination/placement fee of $500 and has a perfectible security
          interest a) prior to delivery in any assets purchased for the fulfillment
          of a
          customer’s order dated March 16, 2006, and b) in any receivable resulting from
          the fulfillment of the customer’s purchase order. The interest rate on the loan
          is 12%. The transaction also included 100,000 warrants to purchase our
          common
          stock at $0.036 at any time before April 27, 2009. The note had an approximate
          maturity date of June 15, 2006. At September 30, 2006 and September 30,
          2007
          this note was in default. A partial payment towards principal and interest
          of
          $5,258 was made on October 6, 2006. As of September 30, 2007 $11,625 of
          this
          loan was outstanding.
 
 On
          May
          31, 2006, we secured a short-term loan of $20,000 from a shareholder. The
          loan
          carries an origination/placement fee of $500 and has a perfectible security
          interest a) prior to delivery in any assets purchased for the fulfillment
          of
          Clover Park, WA’s order and b) in any receivable resulting from the fulfillment
          of the Clover Park purchase order. The interest rate on the loan is 12%.
          The transaction also included 100,000 warrants to purchase our common stock
          at
          $0.036 at any time before May 31, 2009. The note had a maturity date of
          July 10,
          2006. At September 30, 2006 and September 30, 2007 this note was in default.
          As
          of September 30, 2007 this loan was outstanding.
 
 On
          August
          8, 2006, we secured a short-term loan of $50,000 from a shareholder. The
          loan
          carries an origination/placement fee of 4% of the loan amount, and has
          a
          perfectible security interest a) prior to delivery in any assets purchased
          for
          the fulfillment of orders from Gilbert School District and
          Jefferson County School District and b) a lien in property owned by
          Graham Clark.  The interest rate on the loan is 12%. The transaction
          also included 500,000 warrants to purchase our common stock at $0.035 at
          any
          time before August 31, 2011. On December 20, 2006, the loan term was extended
          to
          March 31, 2007. The extension agreement included 500,000 warrants to purchase
          our common stock at $0.035 at any time before August 31, 2011 with the
          return of
          250,000 warrants if the loan balance including all principal, and interest
          to
          date and fees are paid in full by March 31, 2007. On March 9, 2007 the
          Lender,
          converted the outstanding balance of $50,000 to restricted common stock
          and
          common stock purchase warrants as offered in the Company’s private placement
          offering of February 2007, and returned 250,000 warrants in accordance
          with the
          loan extension agreement. All interest and fees due on the loan were paid
          in
          full. 
 F-28
 **Table
                  of Contents**
 **Index
                  to Financial
                  Statements**
 **NATIONAL
            SCIENTIFIC CORPORATION**
 
 **NOTES
            TO FINANCIAL STATEMENTS**
 **For
            the Years Ended September 30, 2007 and 2006**
 
 On
          December 27, 2006, we signed a loan agreement with an employee for $8,000.
          The
          loan is unsecured and carries an interest rate of 6%. The note is payable
          on
          demand with 30 days prior notice On February 27, 2007 we paid $2,000 towards
          the
          principal amount.
 
 On
          or
          around January 15, 2007 we secured short-term thirty-day loans totaling
          $12,725
          from four shareholders. The loans are unsecured and non-interest bearing
          or
          carry nominal interest only. In February 2007, these loans were repaid
          in cash
          or, at the request of the lenders, were exchanged for equity as part of
          our
          private placement offering of February 2007.
 
 The
          aggregate maturities of long-term debt at September 30, 2007 were as
          follows:
 
 2008
                
                $
                242,1752009
                
                
                –2010
                
                
                175,000$
                417,175


F-29